At the time of writing 5,000 people have been sent home from Lehman's at Canary Wharf, Merrill's has just been bought by the Bank of America, and perhaps most worrying AIG's financial rating has been downgraded by Moody's and Standard and Poors.
It would appear that UK banks with the biggest exposure to Lehman and therefore potential default on loans are Standard Chartered $77 million and Lloyds $75 million (source Reuters).
What you should remember is that this is not only the banks that invested in Lehman but bond funds as well. Those listed as creditors include Old Mutual's Dynamic Bond Fund which holds 3.25% of its assets in Lehman's making it the fund's fourth largest holding, and AXA Stirling Corporate Bond Fund with a holding the equivalent of 1.6% of the fund making it the seventh largest holding in the fund.
Documents filed by Lehman's show assets of $639 billion versus debt of $613 billion, so in theory at least they should be able to repay their borrowings.
Interestingly Lehman Brother's long term senior debt was up rated by Standard and Poors from A+ to A in 2005, the reason behind this was cited as "diversified earnings and strong risk management".
Which in a convoluted round about kind of a way leads me to the point of this article, and that is the security of cash deposits - or how safe is cash. In particular how safe is cash held through offshore bonds.
I have covered the use of offshore bonds to hold cash investments in previous articles, and true to my word have been looking towards cash as the home for investments more and more in recent months. However the security of those cash deposits is becoming more and more pertinent. How do I know that my clients' money is safe?
Well there are clearly the S&P and Moody's ratings of the deposit.
You might be able to earn 7.2% over 12 months with one depositor, they may have an S&P rating of BAA(1), or you can earn 6.44% over the same period with another institution with an S&P rating of AA - which would you use?
On the face of it you might think that the AA rated institution would be the better bet, and you would probably be right. However in this example the AA rated institutions shares fell by over 40%. And look at Lehman and AIG.
What about investor protection?
Isle of Man, for example, offers eligible deposits protection of 75% of the first £15,000 savings for eligible savings. However, assets held via an offshore bond are not eligible savings.
So far as investor protection of the bond provider is concerned, generally speaking if you invest in assets outside of their own suite of funds you forfeit any investor protection the regime may offer. So you are therefore wholly reliant upon the financial strength of the investment itself.
So what to do?
Well, you could bring everything back in house with the bond provider and you would benefit from the security that brings.
Provided the bond holder is habitually resident in the UK when the investment was made, the investment is treated as a long term insurance contract resulting in investor protection of 100% of the first £2,000 and 90% of the balance.
So decamping from external assets, particularly cash assets, and moving to insured funds with the asset class you desire could give reassurance to investors in these uncertain times even if the projected returns may be lower.
What made financial headlines over the weekend?
Regardless of Brexit outcome
Prefer hard assets and cashflow
£15bn investment gap
Replaced by Stephen McPhillips