Meltdown Monday - The Nightmare Continues

What are we to make of the sensational developments in the global financial markets today? The collapse of Lehman Brothers; the firesale of Merrill Lynch; the speculation that global insurance giant AIG is next on the chopping block. Monday 15 September 2008 was truly a significant day in business history, but I just have a feeling that the worst is yet to come.

There is some fantastic coverage of the financial crisis engulfing the global banking and financial services markets. As usual the BBC website does a superb job of bringing the key developments together and putting everything into perspective. So too do all the broadsheets. Interestingly (but not surprisingly), only the Daily Star leads with a story that is not linked to the credit crunch - they focus on the aftermath of Big Brother (which ended recently).

It is easy to feel pretty insecure after reading the business news today. We are witnessing some ground-shaking developments. It is hard to believe that names such as Bear Stearns, Merrill Lynch and Lehman Brothers are no longer dominating the financial services landscape. The headline writers are having a field day and they are bound to overstate the significance of what is going on.

Travelling back from London on the train today I got the chance to read an interesting piece by Anthiny Hilton, the City Editor of the Evening Standard. I found myself agreeing with almost everything he wrote - I recommend the article to you.

To quote Hilton:

“Lehman is the most spectacular victim of the credit crunch which has paralysed markets for a year but here is no great mystery why it folded - it bet too much of its money on sub-prime debt and related property assets of doubtful value.”

In other words, Lehman Brothers folded because it was badly managed - the same reason why Bear Stearns failed, and why tour operator XL failed so spectacularly at the end of last week.

Should we shed so many tears when big businesses fail because they are badly managed? I feel sympathy for the employees who are out of a job - but they will find alternative employment at some stage, and the financial services market will move on.

I’m attracted to the idea that the global (and UK) economy needs to go through a cathatic recession, where the pain of a significant market correction leaves just the well managed and strong businesses to survive and then prosper. The financial services sector is now right in the middle of this painful correction, as is the housing market and all the related market segments that depend on demand from housebuyers and investment bankers with huge bonuses. The pain might last a long time. I suspect there are some major surprises around the corner - household names with weak balance sheets that will struggle to last the rest of 2008.

But we’ll look back on the events of today and the rest of 2008 as a significant period of change in the global economy.