Seven years on from Lehman Brothers collapse, it's time for Fed to raise rates

Richard Fuld

The seventh anniversary of the collapse of Lehman Brothers falls on Tuesday. By the end of this week, the US may have raised interest rates for the first time since June 2006, marking the moment when a version of financial normality is restored.

Federal Reserve policymakers meet on Thursday for the most keenly anticipated financial event of the year. Should the Fed – finally – take the plunge and raise rates? The answer is yes. Deutsche Bank’s chief economist David Folkerts-Landau puts it well: there’s never a good time to go to the dentist, but you know delaying it can have consequences.

One of those consequences would be the perception that US policymakers can be blown off course by a modest upset in financial markets. The slowdown in China has meant stock markets have had a rough couple of months but let’s keep some perspective: the Dow Jones Industrial Average is about 10% below its springtime highs but that is after a six-year bull run in which US share prices have more than doubled. It’s not the job of the Fed to underwrite stock markets.

A related argument – and the source of late lobbying from the World Bank and the International Monetary Fund – says a US rate hike now could turn China-related tensions in emerging markets into a full-blown crisis.

That’s clearly a worry but, again, there are risks in the Fed standing still if inaction just creates another dollar-borrowing binge outside the US. Even in emerging markets many central bankers argue that further delay would be more damaging than an actual US rate rise. Maybe everybody would calm down if the Fed ladled on a few soft words about future rate rises being gradual.

In the current low-inflation climate, it’s clearly possible for the Fed to construct reasons for standing still for another month or two. In the end, though, the argument for acting is simple: near-zero rates were meant to be an emergency measure and, on current form, the US economy is no longer in the sick bay.

Is Justin King on terra firma in new role?

It was interesting to hear Justin King, the former Sainsbury’s chief executive, last week mention Four Seasons Health Care as one of the companies where he would try to add value in his new job as vice-chairman at Terra Firma, Guy Hands’ private equity outfit.

Good luck to King but the financial crisis at the UK’s biggest care home provider, one of the larger investments in Terra Firma’s portfolio, looks deeper than the one he faced from the outset at Sainsbury’s more than a decade ago.

The credit rating agency Moody’s spelled out a few facts last week when downgrading some of Four Seasons’ classes of debt deep into junk territory. For example: earnings before interest, tax, depreciation and amortisation (ebitda) fell from £33.4m to £20.8m in the last half year; there is a shortage of nurses in the UK, driving up costs; fees from local authorities are under pressure; occupancy rates are lower than a year ago; and the new “national living wage” lies around the corner.

Many of those operational factors affect all care home operators, which is why the sector is lobbying central government to shovel cash to local authorities to avert a crisis. Fees in England have fallen 5% in the last five years in real terms, it is argued, and failing care homes always create a political storm, as the Southern Cross fiasco demonstrated four years ago.

The well-connected King, perhaps, can help with the industry’s lobbying. But he would be hard pressed to explain why his new ally, Hands, thought it a good idea to load Four Seasons with so much expensive debt.

The company had net borrowings of £514m at the end of June, or roughly 10 times ebitda in the past 12 months. What’s more, the two main classes of debt carry interest rates of 8.75% and 12.25%. All options are being considered in the current financial review, management said a fortnight ago. Jolly good but, given this industry’s record, it’s late in the day to realise that care homes and over-leverage do not mix well.

Corbyn’s energy policy could be a drain

“The perceived political risk faced by the sector, which had eased in recent months, may be about to increase again,” says Peter Atherton, Jefferies energy analyst, dryly. You bet.

The pledge by Jeremy Corbyn, the new Labour leader, to renationalise the UK’s energy industry could cost up to £185bn, Atherton calculated a few weeks ago. That’s a good reason to think it will never happen, even in the unlikely event that a Corbyn-led party wins the general election in 2020. But if the official opposition is committed to full renationalisation, don’t expect government policy to get any easier for the companies.

Powered by Guardian.co.ukThis article was written by Nils Pratley, for theguardian.com on Monday 14th September 2015 19.48 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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