No bail out Lehman vs no deal Brexit

Is there anything SMBs worried about a no deal Brexit can learn from Lehman?

No deal brexit
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Ten years ago I was working for a UBS’ proprietary trading business (a “prop desk”) in London. I was looking after the business strategy, trying to put together a partnership with another prop desk in New York. I still feel the pain of monitoring the share price steady downward trajectory of UBS, Citigroup, Goldman Sachs, Lehman Brothers and other banks during the most critical stage of the Credit Crunch (2007/2008).

Lehman aftermath

On Monday, September 15,  2008, the media reported that Lehman filed for Chapter 11 bankruptcy protection. At that time, I was actually in New York. The moment I heard the news, I knew that the days of prop trading at UBS and others were numbered. In fact, a month later our business was shut down.

But the Lehman collapse meant a lot more than that. When the money system breaks down so does the social system. The cost of bailing out banks and other financial institutions (e.g. AIG) led to the Eurozone sovereign debt crisis, the Brexit vote in the UK, the Trump victory in the US, and the Lega-M5S government in Italy, and many other consequences.

Some of these changes may actually turn out to be positive in the long run. One of them is Fintech. However, in the short and medium run, trillions of dollars of wealth have been destroyed. And a too large number of good businesses have been left with no access to credit, leading to economic insecurity for millions.

No-deal Brexit scenario

Brexit, which is planned to take place in March next year, is entering a critical stage of negotiations. And unfortunately, what we are learning from the media is not promising. No matter what the long-term potential advantages are unless a deal is struck, Brexit has the potential to cause another crisis. Lehman showed how financially linked countries around the world are.

The Lehman collapse taught me a few things. For example, how a pensioner in Italy who bought a “safe” structured product from his local bank could end up losing money, because of a US bank failure. (He did not read the fine print in the contract saying that it was for a note guaranteed by Lehman. Therefore, safe as long as Lehman did not go bust. In fact, he did not even know who Lehman was!)

Right after the Lehman filing, UBS set up a project team tasked to figure out what the Lehman “fine prints” meant for UBS’ contracts and balance sheet. The Swiss bank underwrote lots of notes issued by Lehman. UBS had a huge stock of this kind of notes. Some were sold to clients, some were held. A credit prop desk held lots of them. 

UBS was eventually bailed out by the Swiss government. Its investment bank lost about $50 billion in 2008, wiping out the profits of the previous ten years or so. Citi (the only big bank that lost more than UBS), GS and all other institutions (except Lehman) were bailed out by their governments. Directly or indirectly.

Big banks vs SMBs

If there is no-deal Brexit by March, who is going to bail out the UK/ EU’s big banks and governments as well as those with financial links to the UK/ EU, should a no-deal trigger Lehman-like fine prints globally? Central banks, the IMF or taxpayers? I guess all of them. Bearing in mind that central banks after quantitative easing (QE) may have run out of ammunition. While “too big to fail” banks are bigger than ever. (And P2P lenders and other new sources of credit, besides being unproven in this kind of scenario, are still too small to fund big entities.)

But who is going to save businesses from a new dramatic reduction of credit? Big businesses are likely to survive. For what I know, most of them have plenty of cash and will fire all people needed to match a stock market crash a no-deal may cause. But what about small and mid-sized businesses (SMBs)?

They will need to help themselves.

Business continuity project

A no-deal Brexit is one of those ‘low probability high impact’ risk most businesses may decide to ignore. But many are increasingly worried about what politicians in Westminster are doing. At P27, we are working on a no-deal Brexit business continuity project to have a plan in the event of no deal.

Happy to share what we are doing. Feel free to contact me directly on LinkedIn.


Mauro Tortone

View posts by Mauro Tortone
Mauro helps financial services, technology and mobility businesses manage change and leads the Strategy & Finance practice. His expertise is in strategic change, capital markets and more. Mauro has over 25 years of experience working with banks such as UBS and Deutsche Bank, smaller financials, fintechs and others across Europe, the US and Asia. He sat on the CISI Corporate Finance Forum Committee for ten years and is passionate about sustainability.
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