Lehman Brothers eight years later

Eight years ago this month, Lehman Brothers filed for Chapter 11 bankruptcy. With that, the Global Financial Crisis (GFC) kicked off in earnest, and millions of families lost their homes, savings, and jobs. Concepts from Islamic finance can offer simple yet effective guidelines to help us avoid the worst of financial crises. With the Lehman debacle squarely in the rear-view mirror, let’s take a look at some of those ideas and how they might help in the future. Avoid debt Lehman was highly leveraged near its end; in 2007, the firm’s ratio of assets to shareholder equity was 31. This made it increasingly sensitive to market turbulence. Islamic finance principles call for companies to avoid excessive debt. In tough times, companies with less debt are likely to do better because they have flexibility and fewer outstanding liabilities. Low debt keeps a company’s interest costs down and gives it more latitude to grow the business. Promote risk sharing Unlike Lehman, Islamic finance practitioners do not invest in interest-based loans generated by financial and insurance companies. Speculation and short-selling are also discouraged, in keeping with internationally accepted guidelines. Those excesses were at the heart of the GFC, when an unconstrained banking sector

September 21, 2016 No Comments

Why the Dakota Access Pipeline could mean trouble for banks

In North Dakota, thousands of tribal leaders and activists are camped along the Cannonball River by the Standing Rock Sioux Reservation to resist the construction of the $3.8 billion Dakota Access pipeline (DAPL). Once complete, the pipeline is expected to carry 570,000 barrels of oil per day from the Bakken and Three Forks oil fields in North Dakota to Illinois. Opponents, chief among them the Standing Rock Sioux Tribe, argue that the project threatens supplies of drinking water and has already destroyed sacred sites, including burial grounds. The tribe recently filed a lawsuit against the Army Corps of Engineers, which is responsible for the federal lands the pipeline will cross and which granted permits to Energy Transfer Partners, the Texas-based energy company sponsoring DAPL. Recently, after a federal judge denied the request to halt construction, the Obama administration overruled the decision. But the move is only temporary. In addition to pursuing justice through legal means, a new potentially powerful strategy to combat construction was announced on September 3 during a rally at the encampment. Beginning that day, protest organizers launched a two-week call for action against the financial institutions bankrolling DAPL. It was recently revealed that more than two dozen

September 14, 2016 No Comments

Global warming’s best friend: the megabank

Most of us are aware of the existential threat that climate change poses to our species. The immediate impacts of a warmer planet range from melting polar ice caps to drought, famine, and extreme weather events globally. Google the phrase “Kiribati climate change” to read more about the people whose country is expected to be the first to disappear due to rising sea levels. If greenhouse gas emissions continue at their current pace, experts warn that widespread catastrophe looms by the beginning of the next century. The most notorious culprit in this drama is carbon dioxide (CO2). Most CO2 emissions come from the burning of fossil fuels. Thus, fossil fuel companies have been the target of a sustained divestment campaign by the socially responsible investment industry. While divestment is impactful, there is a critical but often overlooked driver of investment in the fossil fuel industry that has only now begun to get the collective attention of the environmentally conscious: big banks. Banks play an essential role in allocating financial resources for the private sector. They do this through their lending and investment operations. For example, coal-fired power plants, the nation’s top source of CO2 emissions, are costly to build, typically

May 6, 2016 No Comments