Slow burn - Bad decisions taken in boom times can take a surprisingly long time to unwind
One of the things that most caught The Value Perspective’s eye about the record $9bn (£5.25bn) settlement BNP Paribas has agreed with US prosecutors in relation to allegations of sanctions violations was not the huge price-tag nor even that it all but cancels out all of 2013’s profits – effectively meaning the staff of an international bank spent the whole of last year working for the US Treasury.
No, it is the way this sorry tale is another illustration of how decisions and actions that apparently began to be taken a decade ago are still coming to light and working their way through the judicial process. For it is a feature of booms in general – and financial and credit-based booms in particular – that they can take a very long time to unwind completely.
This is true at both a national level – years after the boom in Japan, for instances, the country is still hugely leveraged and exposed to comparatively small moves in interest rates – and at a corporate one. Examples here are legion but it is worth pointing out Barclays only recently faced up to the need to ‘ring-fence’ certain non-performing assets in a ‘bad bank’ – something Lloyds and RBS had done years previously.
From a value perspective, there will be times when share prices do not discount this sort of historical baggage and times when they do. Nevertheless, even in those latter times, investors tempted to buy into stocks that have been swept along by very large bubbles need to do so with their eyes open. While these things are necessarily difficult to predict, some recognition of the fact that the fall-out of these booms can be large and take a long time to unwind should be factored into the price one is willing to pay.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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