Here we go, again
I must, first, apologise for the long gap between my last blog posting and this one. I've been finishing off a book about the credit crunch and trying to write about the same subject in two different genres at once was too much for my brain.
But the book's finished, just in time for Round Two of the financial crisis, which opened on Thursday with the nationalisation of Anglo Irish Bank. Yesterday (Friday) we saw both Bank of America and Citigroup announce huge Q4 losses, and BoA get bailed out to the tune of $130bn.
The significance of this is that, back in September, both BoA and Citi seemed like part of the solution, not part of the problem. BoA chivalrously bought Mama Merrill, while Citi offered to buy the failed high-street bank Wachovia. Even back then it was obvious they were going to be victims of the crisis themselves - indeed victims is the wrong word: Citi alone was responsible for 25% of all "structured investment vehicles" in the shadow banking system at the time it collapsed.
And then, at precisely 1500 GMT, another "solution" bank, Barclays, saw its shares collapse by 25%. (Barclays remember bought part of Lehman and even looked at buying Merrill on 14 Sept). BARC's shares have lost 45% on the week, 80% on the year. The reason is (a) short selling was unbanned in Britain yesterday and (b) Barclays has repeatedly sprurned government cash in the bailout phase, going to the markets instead and in the process diluting the value of existing shares. Yesterday's collapse was prompted by the knowledge that another round of bailouts is a-coming, and by a boardroom scrap that saw deputy chairman Sir Nigel Rudd resign. The rumour (denied) was that the scrap concerned the way Barclays was valuing certain assets on its balance sheet.
Anyway, all that is just a hors d'ouvres for what is to come. Right now UK Treasury officials are at work on several overlapping schemes to try and re-bail-out the banks. Clearly the £37bn the taxpayer put in in October only worked to stabilise them; as all know, they took the money and decided that they would henceforth lend little, and at high interest rates, while taking as many deposits as possible at very low interest rates. This has hammered both borrowers and savers to the point where it is hardly worth doing either activity; as both borrowing and saving are crucial activities for the functioning of a capitalist economy, and banks - as we all learn in school - are there to encourage this, it's a bad situation.
But it's about to get worse if somebody does not do something...
We're all waiting for the impact of the recession to show up on bank profit and loss accounts; but it's now clear that the old problem, bad loans made during the structured finance boom, has not gone away: in fact both the part-nationalised banks, RBS and Lloyds/HBOS, are facing big Q4 losses. Gordon Brown has called for banks to come clean about their losses but this is hard to do.
So now, as far as my sources will tell me and the newspapers are speculating, we face the following:
a) In short order, a credit guarantee scheme for businesses to allow them to roll over their loans
b) A taxpayer funded cap on bank losses, so the banks can draw a line under the old crisis and start meeting the new (hopefully not with new excuses about why they cannot afford to lend)
c) If they can get away with it, and if the banks will stomach it, a TARP-style fund to buy up bad debts and but them into a "toxic" bank, owned by you and me.
d) And if this doesn't work, nationalisation. I mean real nationalisation. Gordon Brown refused to rule it out in his FT interview today and with the newly neoliberalised Libdems calling for it, it can hardly be portrayed as a left wing measure.
As a rough guide to politics over the next two weeks, you will now see the political class go to war in an attempt to avoid (d); but they will not agree over c) because it gives the banks something for nothing, nationalising their losses while their owners - in Barclays case mainly various Middle Eastern magnates and governments - trouser any profits.
Here's the paradox: for (c to be done in a way conforming to market doctrine - where those who take the risk reap the rewards - the taxpayer would have to take a stake in the rescued banks. But we already own 60% of RBS and 44% of Lloyds/HBOS (plus of course 100% of Northern Rock). And if the debt write-off or ring-fence is extended to all banks, then it means the so-called survivors - Standard Chartered, HSBC and Barclays - will have to surrender part ownership.
In a way, this brings us back to where the US government was in September 2008. Their plan to buy up toxic debts was first stymied by a vote in Congress and then passed so late, and with such conditions, that it never worked: it was abandoned in early December. Though there was bipartisan agreement on the British banking bailout I doubt there will be on measures c and d above.
For one thing, internal Conservative politics have changed. The David and George show has been quietly and subtly replaced by an ensemble performance in which one William has been shoved into the limelight and in which a certain Kenneth is waiting in the wings to make his entrance. One of the reasons the Tories have had an internal shakeup is that they don't feel they came off particularly well from the bipartisan episode.
Because they will face potential parliamentary opposition to any soft bailout of the banking system's debt - from the Labour left, the Libdems and possibly the Conservatives - the next problem the government faces is whether they put next week's bailout measures to a vote. In retrospect, doing a lot of little things over the past two weeks has had two benign effect s on the government's position: It's provided a constant stream of headlines and nothing has to be put to the vote. A bit like Heathrow really.