Lehman bankruptcy will prolong investor caution

An industry consultant says the return of the debt trading market looks set to fade into the distance in light of the Lehman Brothers bankruptcy.

Steve Khan was the former head of residential trading at Morgan Stanley and has previously worked for Lehmans.

Now the proprietor of The Mortgage Trading Consultancy, Khan warns that this is exactly the kind of warning sign that cautious investors have been looking for to stay out of the market.

He says that the financial services market has taken a series of high-profile knocks in the US, from Bear Stearns, to the Bank of America takeover of Merrill Lynch, and now the Lehmans bankruptcy.

This is in addition to the warning signs already seen in the UK, with the run and nationalisation of Northern Rock, the Santander takeover of Alliance & Leicester, and the restructured rights issues experienced by Bradford & Bingley.

Khan says: “If you couple all of these recent developments together, one cannot see how an institutional investor would be buying securities in the UK.

“This is definitely taking confidence away from the market.

“It is hard to see the debt trading market returning when any investor cannot fail to see the issues with the banks, and when they cannot help thinking that banks they are trading with may be the next to succumb.”

He adds that the decision from the Federal Reserve not to swoop in and rescue Lehmans was a wise one.

“The Fed has just bailed out Fannie & Freddie, they just haven’t got the resources to keep going like that. If that was the case theoretically every bank on Wall Street could turn to them and ask for money.”

He adds: “Losses should be borne by the shareholders, as a shareholder it is up to the individual to decide which company to invest in and as a result investors should be prepared to take those losses.

“We are experiencing the pain that needs to take place.”