Midnight and it's as bad as it gets

It is 2am on January 1, 2000. The minicab you ordered six weeks in advance to take you home from the millennium party has arrived. "Forty pounds, mate," the driver demands. You haven't got enough.

You rush to a cash machine. It's not working. You go to another, put in your card, but all your records have been wiped. The money in your account has disappeared. In the bank's eyes you have ceased to exist. You realise you are a victim of the millennium bug.

Michael Foot's threat to remove the trading licences from 12 problem companies in financial services is supposed to prevent this happening. But - in a worse-case scenario - it could cause more problems than it solves.

Much depends on the type of institution, but any company taking in depositors' money would close if it lost its licence and probably never reopen. There would be a run on the firm. Customers would clamour to get their money back, prompting the sort of scenes that followed the Wall Street Crash of 1929.

The way financial institutions have been run since the 16th century means that they have only a small fraction of their assets in liquid resources - that is cash or financial instruments that can immediately be turned into cash. When the depositors knock on the door, only a small number will be able to get their money out before the institution runs out of funds.

Any bank that stops trading, even for a matter of days, becomes insolvent - as was shown by the collapse of British & Commonwealth Merchant Bank in 1990. This apparently healthy bank was hit by the collapse of its parent company. Although it technically had more deposits than loans, the difficulty of collecting debts when you have ceased trading meant that depositors saw their accounts frozen and lost money.

And what happens to the financial institutions that trade with one or more of the 12 that are closed down? After all, these are said to be 12 of the top 160 financial insitutions in the UK. Will the other 148 see the money owed to them frozen - or lost? And will this cause financial problems for the innocent company that just happens to trade with the bad apple? This "systemic risk" is a spectre that haunts financial regulators. It is why Long Term Capital Management, the hedge fund, was bailed out last September when justice suggested it should be allowed to fail.

Then there are the companies over which Mr Foot has no control. What if an ill-prepared bank in Tokyo, Thailand or Toledo collapses because of the bug? What will the effect be on British financial institutions, many of which have a finger in almost every financial pie in the world?

This unsettling situation will be an open door to anyone wanting to try to destabilise a bank for nefarious reasons - be it fraud, a bear raid or a more fundamental attack on the financial system in an attempt to destabilise the country.

Add to this concerns that the FSA has been hoodwinked by the industry, with many firms making it seem that they have sorted out their bug problems, when they either haven't or do not know if the solution will actually work.

The result could be massive losses for investors and customers. It makes having to walk home pale into insignificance.

JASON NISSI

-- Nabi Davidson (nabi7@yahoo.com), March 20, 1999

Answers

And so, the panic starts in London, eh? Wonder how long it will take to grow into something frightening?

Good post, Nabi.

-- De (delewis@inetone.net), March 20, 1999.