Seconds out, round one. In the blue corner, we have the inventor of the golfball typewriter, the company behind the first PC, it’s now into software and consultancy, yes that’s right, it’s Big Blue itself – IBM.
And wow, who said there was an economic downturn? Yesterday, IBM revealed preliminary estimates for its fourth quarter results – and they were good. Earnings were up 24 per cent a share and revenue increased 10 per cent. It was a stonking performance, but then again, the company did have some little help from its friend, the Greenback. The falling dollar led to a lift in revenue – with the company admitting that sales would have increased by just 4 per cent, but for the favourable currency movements.
Big Blue carries out more than 50 per cent of its trade in foreign currencies, so as the dollar tumbles, the value of many contracts, when converted back to dollars, rise.
But now all eyes turn to round two. For there in the other corner, boo, hiss, sit the big US banks.
Today, Citibank will be off the mark with its announcements. Merrill Lynch will reveal its cards later in the week.
It’s been estimated that total losses related to subprime will eventually top $300bn, maybe even as high as $500bn, and so far we have seen credit-related losses of just $60bn from the big banks. Now, not all losses will be incurred by the banks, but even so, it would appear we have only seen a taster so far – so expect a lot more angst and woe over the next few weeks.
Ironically though, the more bad news we bear witness to over the next week or so, the better.
The credit crunch will only end when the full story of the subprime disaster is out in the open. With many banks now headed by new bosses, now should be the time when they try to make a clean break.
Disaster will occur only if there is a whiff that there is more bad news to follow in future quarters.
But, even if all the banks choose to collectively air their dirty linen in public, things will not return to normal straight away. Moving forward, they will all be a lot more circumspect with their lending and rely a lot less heavily on money markets. At least it will be like that for a while.
Memories in the banking world are short – maybe it has something to do with the short period of time individuals in senior management tend to stay at any one investment bank. Maybe it has something to do with the enormous rewards some bankers receive – even if they fail, but the business cycle has been characterised by periodic periods of reckless lending – we saw it during the mid ‘90s too, during the build up to the East Asia and Russian crises.
But, maybe there is another reason for short memories. When was the last time you saw a film and then promptly forgot about it? To remember a movie it must make an impact upon you. It’s like that with banking crises.
If there is one thing a central banker fears more than anything else, it’s a banking crisis. Banks are far too important too fail. That’s why central banks and governments will do what they can to stop a banking crisis – and that’s why memories among shareholders in banks are so short. It’s rare that banks’ mistakes are allowed to be as costly as when those same mistakes were made by a non-financial business.
That’s the moral hazard argument that central banks make, and why the Bank of England was so reluctant to orchestrate a bail out last summer.
But because no central banker fancies the prospect of being hung, drawn and quartered, they will always relent. And when they do, the crisis will recede, and looking back shareholders will say “actually, that wasn’t so bad,” then they will forget abut it, and jump with glee when a new management team drives a stellar performance based on investments into a new burgeoning market.
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