Not only are bank shares out of favour, staff are having a rough time

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The Independent Online
"NEVER underestimate the ability of banks to seek out the next problem to which to lend." This much expressed belief has probably been used by half of the fund managers in the City at some stage.

Just recently it would seem that hedge fund lending has become the new, popular way for banks to lose money. With the demise of Long Term Capital Management - or, more correctly, the swift sweeping up of this hedge fund into a lifeboat consortium of more banks than ought to be necessary - a few culprits have raised their hands and admitted to unrecoverable lending. UBS has demonstrated l998 is not the year to be a Swiss banker, and Merrill Lynch has cancelled its Christmas party and told its executives to fly steerage until they determine the extent of any losses. Still, someone has to make the decisions that send shareholders diving for cover.

Banks are persona non grata in stock markets at present. Lending money to hedge funds followed on some unfortunate loans to emerging countries that are looking particularly "iffy". By and large, you know how much money you are likely to have to write off when a country like Russia decides to restructure its debt - as good a euphemism as you will find in the world of banking. With hedge funds, though, gauging the extent of the liability is not always easy.

Hedge funds (singularly misnamed in my view) are not regulated, so the gearing into which they can enter can be - and clearly was, in the case of LTCM - way above the sort of levels that would be acceptable to the Bank of International Settlements. At the very least, this could produce some very red faces around banking boardroom tables as the extent of exposure to what amounts to an under-capitalised entity becomes clear. Where the imponderables lie, though, is in the counter-party risk that must exist in the market.

Every trade has two sides. Unwinding the positions of LTCM is presumably heavily exercising the consortium of new owners. Information is hard to come by, but no doubt someone in years to come will write a book on how close the Western financial system came to collapse, all because of the machinations of a Wall Street trader and his posse of Nobel prize-winning rocket scientists. It might even be Meriwether. He will probably need the money.

Not only are bank shares out of favour, bank staff themselves are going rough a fairly rough time. Lay-offs are legion, with London and New York bearing the brunt of the retrenchment.

As with all reactions, that against bank shares is almost certainly overdone. Bank of Scotland, arguably one of the most conservative of banks, has been hit just as hard as those where we know of lending problems.

One thing this shake-out will do is to throw out bargains, but the time may not be right to dip your toe in the water yet. In the meantime, there will be many people who will have wry smiles on their faces as a consequence of the discomfiture of the banking fraternity.

Brian Tora is the chairman of the Greig Middleton strategy committee

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