There was a very interesting article by Peter Levene in yesterday’s Financial Times called Bad Bank insights from the rescue of Lloyd’s. Pay attention to the apostrophe (‘) here; we are not speaking of Lloyds Bank, always written without an apostrophe (and also in the news yesterday because of bad earnings) but to the 320-year-old London insurance market called officially the Corporation of Lloyd’s and, less formally, LLoyd’s of London. This body originated in the 1680s in a coffee shop owned by a Mr Edward Lloyd in London. It nearly went belly-up in in the 1990s owing to poor managment, but was saved when all its assets and liabilities were transferred to a new entity called Equitas.
Why is this important to us today? The big banks in the US, the UK and in some other countries are stuffed full of toxic assets arising from the subprime credit crisis and its consequences. One of the proposed solutions is to create so-called ‘bad banks’ which will acquire these assets. In theory this looks attractive but in practice will it work? As Ken and I say repeatedly in The Puritan Gift, studying the successes and failures of your predecessors is the cheapest and best form of research. Equitas provides at least a partial model. It solved the problem! Stripped of its toxic assets, Lloyd’s of London flourishes again. Meantime, Equitas has also been a success; it has been acquired by America’s richest man, the Sage of Omaha, aka Warren Buffett.
Admittedly, Equitas does not provide a perfect model for a future ‘bad banks’ since it acquired both assets and liabilities — and the ‘bad banks’ are expected to acqure only assets. However, the same problems of valuation will occur. The model also raises an interesting question: should the proposed ‘bad banks’ acquire some liabilities as well as assets?
Please comment! Ken and I are humble pilgrims, looking for the truth.
Will Hopper
