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Financial Crisis
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Please can anyone answer these two questions
1] Where have all the billions of pounds of profit said to have been made by the banks each year gone? or were the accounts wrong.
2] Why does it matter to the day to day running of a company if the share price goes up or down?
Thanks for any replies
1] Where have all the billions of pounds of profit said to have been made by the banks each year gone? or were the accounts wrong.
2] Why does it matter to the day to day running of a company if the share price goes up or down?
Thanks for any replies
Answers
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Because they are borrowing most of the money on the money market. This action on this occasion shows the seriousness of the current state of affairs in banking and finance. The government can't borrow on this scale everytime a public service wants more money because it has to be repaid. And on this occasion this intervention funding is regarded as an investment/ loan and the governement expects to get its money back within 3 years. Let's hope it works. I expect that over the next two years taxes will rise quite significantly and spending on services will fall .
I would not pretend to understand the world economy or the banking system, but here is my take on it.
The banks get money coming IN from investors, and from people paying back mortgages and loans. That is their INCOME.
So they make a PROFIT on that income.
Much of this money they then lend out to more people in loans and mortgages (which in turn earns them more money).
In the last few years many banks have actually lent out more money than they have in assests, leaving them with a funding negative.
And a lot of this money was lent out to people who were not good risks (sub prime), and those people began to default on their mortgages and hand back the house to the bank.
House prices plummeted, and the banks could not sell the houses, leaving them with bad debts.
This meant the banks had to write off milllions (in some cases billions) in bad debts.
Remember profits are based on your "assets", which in a banks case may be the expected income from loans and mortgages in the future.
If those loans and mortgages are cancelled your "assets" are worth less and your expected profit for the next few years will plummet.
And many banks now have "negative equity" or a "borrowing gap" where their assets dont not cover all their loans, leaving them vulnerable.
The banks get money coming IN from investors, and from people paying back mortgages and loans. That is their INCOME.
So they make a PROFIT on that income.
Much of this money they then lend out to more people in loans and mortgages (which in turn earns them more money).
In the last few years many banks have actually lent out more money than they have in assests, leaving them with a funding negative.
And a lot of this money was lent out to people who were not good risks (sub prime), and those people began to default on their mortgages and hand back the house to the bank.
House prices plummeted, and the banks could not sell the houses, leaving them with bad debts.
This meant the banks had to write off milllions (in some cases billions) in bad debts.
Remember profits are based on your "assets", which in a banks case may be the expected income from loans and mortgages in the future.
If those loans and mortgages are cancelled your "assets" are worth less and your expected profit for the next few years will plummet.
And many banks now have "negative equity" or a "borrowing gap" where their assets dont not cover all their loans, leaving them vulnerable.
Talking of profits, a lot of it of course goes in bosses pockets.
The head of Lehman Brothers (recently bankrupt) has admitted he was paid 300 MILLION DOLLARS in pay and bonuses between 2000 and 2007.
http://www.metro.co.uk/news/article.html?%A317 0m_pay_bonanza_of_Lehman%92s_boss&in_article_i d=341914&in_page_id=34
The head of Lehman Brothers (recently bankrupt) has admitted he was paid 300 MILLION DOLLARS in pay and bonuses between 2000 and 2007.
http://www.metro.co.uk/news/article.html?%A317 0m_pay_bonanza_of_Lehman%92s_boss&in_article_i d=341914&in_page_id=34
Share prices:
If a company is on the stock market it is owned by the people who own shares in the company.
Say there are 1 million shares, and each share is worth �50, the company is then worth 50 million pounds.
If the share price stays at that, or even goes up, people will want to keep the shares, and maybe buy more if possible.
Now suppose the company has a wobble (profit warning, fire at a factory, ships a product that does not sell etc).
Confidence in the company drops, share price drops to �40, and all of a sudden company is only worth 40 million.
People get worried, start selling shares, nobody wants to buy them, price drops even more, now only worth �20. Value of company plummets.
Company needs to borrow money to get over crisis, but nobody will lend them any money (too risky). Share price drops to �10 then �5.
Company is in big trouble.
People cannot sell their shares quickly enough, nobody is buying their shares, company is now worth almost nothing.
Panic sets in, people laid off, parts of company sold off to highest bidder.
Company goes bankrupt and is sold for �1 to anyone who will take on the debts.
If a company is on the stock market it is owned by the people who own shares in the company.
Say there are 1 million shares, and each share is worth �50, the company is then worth 50 million pounds.
If the share price stays at that, or even goes up, people will want to keep the shares, and maybe buy more if possible.
Now suppose the company has a wobble (profit warning, fire at a factory, ships a product that does not sell etc).
Confidence in the company drops, share price drops to �40, and all of a sudden company is only worth 40 million.
People get worried, start selling shares, nobody wants to buy them, price drops even more, now only worth �20. Value of company plummets.
Company needs to borrow money to get over crisis, but nobody will lend them any money (too risky). Share price drops to �10 then �5.
Company is in big trouble.
People cannot sell their shares quickly enough, nobody is buying their shares, company is now worth almost nothing.
Panic sets in, people laid off, parts of company sold off to highest bidder.
Company goes bankrupt and is sold for �1 to anyone who will take on the debts.
My story above is what happened to GEC Marconi a few years ago.
They were managed carefully by Lord Weinstock and were cash rich. Shares were �12 each.
But Weinstock annoyed the "city" by sitting on his cash pile and refusing to expand, so he was forced out.
The new guys who took over began to spend his money very quickly (but very badly), and also borrowed a lot, and the debts grew to 4 billion pounds and soon the share price began to plummet.
In 2001 the new owners addmitted they had "lost" hundreds of millions of pounds in just 3 months and they would have to lay people off.
The share price droped 99% and eventually GEC Marconi was split up and sold off
http://news.bbc.co.uk/1/hi/business/3087333.st m
http://news.bbc.co.uk/1/hi/business/4373934.st m
This is a classic example of why the share price is so important.
They were managed carefully by Lord Weinstock and were cash rich. Shares were �12 each.
But Weinstock annoyed the "city" by sitting on his cash pile and refusing to expand, so he was forced out.
The new guys who took over began to spend his money very quickly (but very badly), and also borrowed a lot, and the debts grew to 4 billion pounds and soon the share price began to plummet.
In 2001 the new owners addmitted they had "lost" hundreds of millions of pounds in just 3 months and they would have to lay people off.
The share price droped 99% and eventually GEC Marconi was split up and sold off
http://news.bbc.co.uk/1/hi/business/3087333.st m
http://news.bbc.co.uk/1/hi/business/4373934.st m
This is a classic example of why the share price is so important.
the answers above seem correct, though I think the subprime lending problem was almost entirely confined to the USA (though its effects have spread abroad of course as US banks lend to and borrow from foreign banks). Money goes to pay staff, reward directors, pay interest to savers, and give more loans to new borrowers. That's the banking business, and there's nothing wrong with it in principle; the problem comes when the distribution gets out of balance (not enough saved, too much paid to directors and so forth). Small movements in the share price don't matter a lot - but shares are subject to inflation like any other price, so you would expect the long-term trend to be upwards. But big swings from day to day scare investors off because it looks as if the directors have lost control.
Banks always start by being in debt.
They convince people that the best place to loan their money to is their particular bank. They borrow your money, then use it to make profits for themselves whilst keeping your own loan amount safe so they can repay it if you suddenly demand it.
Which if you do causes major doo daa.
We're now stuck with banks as most employers pay via bank accounts, most bills are payed via banks, everything and everyone has been conned by seeing them as an easy option as they made it easy for us to loan them our money.
They convince people that the best place to loan their money to is their particular bank. They borrow your money, then use it to make profits for themselves whilst keeping your own loan amount safe so they can repay it if you suddenly demand it.
Which if you do causes major doo daa.
We're now stuck with banks as most employers pay via bank accounts, most bills are payed via banks, everything and everyone has been conned by seeing them as an easy option as they made it easy for us to loan them our money.
Youre missing a major point
Banks do not finance all their loans by the money people save with them.
When you take out a mortgage they nip out the back and borrow the money at a better rate.
It's a bit like wholesale and retail - Tesco buy bananas at a cheaper rate and sell to us - banks borrow money at a cheaper rate and lend to us.
All's fine until people get scared that a bank's leant too much money to people who can't pay it back. They think the bank might go bust. So they satrt selling shares and withdrawing deposits and nobody will lend to them and it becomes a self-fulfilling prophesy.
When you look at a bank's accounts, how many of the loans it's made are bad? how do you know? that's the problem - it's not that the accounts are wrong it's just that what everyone thought was a safe loan last year maybe isn't now.
People think banks deal in money, in effect they deal in trust - they trust you with their money, you trust them with theirs other banks trust them - everybody trusts they will get their money back and make some extra.
What has been happening is the trust has been vanishing
Banks do not finance all their loans by the money people save with them.
When you take out a mortgage they nip out the back and borrow the money at a better rate.
It's a bit like wholesale and retail - Tesco buy bananas at a cheaper rate and sell to us - banks borrow money at a cheaper rate and lend to us.
All's fine until people get scared that a bank's leant too much money to people who can't pay it back. They think the bank might go bust. So they satrt selling shares and withdrawing deposits and nobody will lend to them and it becomes a self-fulfilling prophesy.
When you look at a bank's accounts, how many of the loans it's made are bad? how do you know? that's the problem - it's not that the accounts are wrong it's just that what everyone thought was a safe loan last year maybe isn't now.
People think banks deal in money, in effect they deal in trust - they trust you with their money, you trust them with theirs other banks trust them - everybody trusts they will get their money back and make some extra.
What has been happening is the trust has been vanishing
>People think banks deal in money, in effect they deal in trust
This is why old fashioned banks in historic towns are always impressive buldings with large columns outside and the name of the bank carved in granite.
It shouts out "You can trust us with your money, we are not going to take your money are do a runner"
This was important a few years ago when people were paid in cash, and many ordinairy people did not have a bank account. Many distrusted banks (some old people still do).
I am 59 years old, but did not have a current account or cheque book till I was well into my 20s.
This is why old fashioned banks in historic towns are always impressive buldings with large columns outside and the name of the bank carved in granite.
It shouts out "You can trust us with your money, we are not going to take your money are do a runner"
This was important a few years ago when people were paid in cash, and many ordinairy people did not have a bank account. Many distrusted banks (some old people still do).
I am 59 years old, but did not have a current account or cheque book till I was well into my 20s.
Avatar - no one knows how much of all this is actually going to cost.
What the government is doing is shouldering the risk.
If the Government is shouldering the risks the banks can start trusting each other again, lending each other money so people and businesses can borrow ank make profit and things will continue to work.
There's nut much chance of all this money being lost and likewise there's a chance (albeit slim) of making a profit as happened in Sweden some years back.
One thing though we may or may not end up paying some more tax but it'll cost us a hell of a lot more if half the companies in the country go under and we all lose our jobs and/or savings.
This is not about bailing out fat cats any more this is about preventing another Great depression.
If you have any better ideas (and George Osbourne and the Tories don't ) I'm sure we're all ears
What the government is doing is shouldering the risk.
If the Government is shouldering the risks the banks can start trusting each other again, lending each other money so people and businesses can borrow ank make profit and things will continue to work.
There's nut much chance of all this money being lost and likewise there's a chance (albeit slim) of making a profit as happened in Sweden some years back.
One thing though we may or may not end up paying some more tax but it'll cost us a hell of a lot more if half the companies in the country go under and we all lose our jobs and/or savings.
This is not about bailing out fat cats any more this is about preventing another Great depression.
If you have any better ideas (and George Osbourne and the Tories don't ) I'm sure we're all ears
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