Bottom Line: We’re still picking up the pieces while fresh risks grow

Marc Sidwell
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FIVE years later and the Lehman Brothers collapse retains the power to surprise. Few would have predicted at the time, with the shock of the global financial firm’s downfall fresh, that after so much value apparently disappeared overnight creditors would still end up being paid out in full. Creditors’ claims traded around 10 per cent of their value at the time.

But like so many aspects of the financial crisis, the reality is unexpected. Despite the appearance of total collapse, Lehman still has several hundred staff. They either remained behind or were rehired soon after that fateful day when so many were herded out clutching nothing but a cardboard box. Tireless work by this remnant, in concert with administrators PwC, means £40bn should be paid to creditors, much by the year’s end.

Yet the whole process is still far from complete, another reminder of the importance of resolution mechanisms equal to tasks of this magnitude. By some estimates, after five years, this process may yet be young. It could still drag on for a decade or more.

That could be a metaphor for the necessary changes to the financial system itself. Despite a zealous flurry of regulatory activity, the world’s economies remain addicted to easy money and overreliant on the verdicts of a few rating agencies.

Most alarming of all, to revisit the crisis is to be reminded how for most it emerged as if from nowhere. When we try and learn from what happened, are we fighting the last war while missing today’s battles?

As a case in point, consider the current state of emerging markets, so long held up as the most reliable source of growth around. India, Brazil and China are all slowing. Jesse Colombo, one of the few to call the US housing bubble ahead of time, is now preaching that an even worse bubble has formed in emerging markets.

Interbank lending to the emerging markets is at record levels. In an unprecedented shift, private firms in these countries have now clocked up more debt in the form of offshore bonds than that issued to all the companies of the developed world. This, like so much else, has been buoyed up artificially by cheap money. If the Federal Reserve announces tapering of its money printing this week, as seems likely, the current shudders in the emerging market could turn into something far more devastating.

Five years after Lehman, the challenge remains not just to pick up the pieces, but to keep our eyes open for events that seem impossible until they happen.