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Bye bye bulge-bracket

Robert Peston | 09:43 UK time, Monday, 22 September 2008

That the last two bulge-bracket firms standing, Goldman Sachs and Morgan Stanley, have become licensed deposit-taking banks is extraordinary.

Trader watching shares boardIt is precisely the opposite of what happened after the Great Crash of 1929.

Back then, the US government decided that the best way to protect US citizens' savings was to prevent investment banks having access to those retail savings.

So investment banks which engaged in what was perceived as high-risk securities trading and underwriting were banned from taking insured retail deposits, under the Glass-Steagal Act of 1933.

That prohibition was removed on 12 November 1999 - and since then there has been a rapid convergence between commercial banking and investment banking.

The preferred new banking model became the universal bank, typified by Citigroup, with its mixture of retail banking, commercial banking and investment banking.

The universal model hasn't been an unalloyed success: Citi and UBS, to name just two, have lost colossal sums on their subprime-related investments, imperilling their depositors (though both have survived).

Even so, in the wake of the credit crunch, the new orthodoxy is that all investment banks must have access to retail deposits.

Why? Well this is where it becomes a touch surreal.

First, retail deposits are supposed to be stickier. Or to put it another way, you and I are less likely to panic en masse and withdraw our savings at the first whiff of trouble at our banks.

Banks are counting on our inertia for their survival. Which is not altogether reassuring.

Second, the political and economic fallout from any damage to our savings is such that retail banks that take our deposits receive much greater protection from the authorities than banks that don't look after the public's savings.

In the US context, for example, there's the official insurance provided for deposits. And, more importantly, there's access to the Federal Reserve for day-to-day and emergency funding - which Goldman and Morgan Stanley will be able to access in full, now that they are formal "Federal Bank Holding Companies".

So the conversion into banks by Goldman and Morgan may perhaps be redolent of the greatest failure of global financial regulation over the past decade or so.

The original separation of investment banking and retail banking was designed to prevent ordinary savers from being damaged by the collapse of a Goldman Sachs or a Morgan Stanley.

But Goldman Sachs and Morgan Stanley have been permitted to grow so enormous, and other banks which look after our savings have become so inextricably dependent on them, that even they are now too big to be allowed to fail.

Just a week ago, the US Treasury took a big risk and allowed Lehman to fail.

Since then, the repercussions have almost brought the US, the world's biggest economy, to its knees.

The collapse of Lehman is what - in part - has led to all money-market funds being insured at an incremental cost to the taxpayer of $400bn and to the US Treasury's proposal to spend $700bn on buying distressed mortgage and other assets.

So the attitude of the Treasury and of the Federal Reserve, the US central bank, is that it would be better to allow Goldman and Morgan to become formal banks - benefiting from the full protection of the US government - than to sustain the illusion that they could be allowed to collapse.

But Morgan Stanley's claim that its conversion into a federally insured bank will not lead to "limitations on its activities" will doubtless be viewed by some US politicians as contemptible.

Now that the US taxpayer is in a formal sense underwriting Goldman and Morgan Stanley, their days of buckling the swash on the worldwide high seas of finance are over, possibly for good.

Comments

  • Comment number 1.

    This gets beyond satire, doesn't it?

    Did you hear John Mack, head of Morgan Stanley, moaning about how all the nasty hedge funds were shorting MS stock?

    That's the same hedge funds who all the investment banks, and MS more than most, have been sucking up to for years! ... falling over themselves to sign them up as customers, to get all their juicy business.

    And what formed a big part of that "juicy business"? Why, offering stock and credit lines so that the hedgies could short the hell out of whatever company they felt was vulnerable to a share price fall. "Prime Brokerage" they call it.

    Amazing.

  • Comment number 2.

    This implies a huge loss of face for the masters of the universe.

    In effect they are coming cap in hand to directly to the very people they have ridden roughshod over before - the ordinary people.

    Somehow I dont think there will be a rush of depositors coming forward to place their savings with GS and MS. They sure as hell won't be getting any of my money.

    I believe there is a huge disillusionment going on with the probity and security of banks now. If only we could return to the gold standard most people would rather keep their money in their own house.

    Who is to say that would not be safest place for it?

  • Comment number 3.

    The thick-skinned, irony proof investment banking business never ceases to amaze..
    The banks are like sulky teenagers who have had to go back to their parents to ask for money and maybe move back in their house - although the teens are normally complaining about their parents not giving them any freedoms - all the while telling their friends that it's not going to stop them going out partying and doing what they have the right to do..
    And we are supposed to give them our money..? yeah right!

  • Comment number 4.

    Has there been a global coup by Goldman Sacks? Get your man into the US Treasury (Paulson) get your UK equivalent advising the UK (Gavin Davies). Interesting that Golman's also pick up the tab for the Bilderburg meetings. Now they get access to Joe Publics money as a Bank Things that make you go Hmmmm...

  • Comment number 5.

    Masters of the universe,what a joke. They hire the brightest people but most have no experience in banking,what goes around comes around.

  • Comment number 6.

    "First, retail deposits are supposed to be stickier. Or to put it another way, you and I are less likely to panic en masse and withdraw our savings at the first whiff of trouble at our banks."

    I think the Northern Rock run disproves this belief to be true.

  • Comment number 7.

    I have no problem with banks using retail deposits as their main source of funding - but they should pay for the state guarantee that comes with it.

    If banks were forced to pay depositors at least the risk free interest rate (it is after all risk free to the depositor), and then pay the central bank any risk premium placed on it by the market (effectively the value of the state guarantee) then I don't see any reason why the central bank shouldn't guarantee all retail deposits fully. Banks would effectively be forced to pay an insurance premium to the central bank, which would go someway to pay for the regulation of these institutions. This would also force banks to separate deposit interest from deposit service charges, and promote competition, as well as saving.

  • Comment number 8.

    "precisely the opposite of what happened after the Great Crash of 1929"

    Perhaps this indicates that we have not yet had the crash yet?

    When it comes, as now seems inevitable, it will be very bad and the banking and business World as we know it will change for decades to come.

    The UK is extremely vulnerable, being hugely dependent on the crashing financial sector and the city and real economy will suffer.

    Regulation will be increased to the point that it stifles competition and business to the point of suffocation. This now seems inevitable.

    I can not see that the US (or UK) taxpayer will be able, let alone willing, to bail out the World's Banks.

    It seems inevitable that interest rates will rocket as national governments seek scarce funds. Borrowers will be slaughtered as collateral damage.

  • Comment number 9.

    Surely, the one thing that has been pointed out in this mess is that allowing companies to get so interwoven into the fabric of the country is a bad thing.

    The government should be looking at the biggest companies in the UK and saying, right, if you failed what would be the consequences. Not just banks, but Telecoms companies, water companies etc etc.

    I don't think that they should be nationalised, however, I do think that they should hold special status that should be punitive in measure. This would help prevent companies developing into monopolies.

    So, for example, legislation should exist to prevent short selling of special status firms. To prevent rumor milling of big companies to the benefit of the unaffected. Equally, special status firms should be prevented from taking on inordinate amounts of debt.

    These are just a couple of examples but you get the idea. Free market economies are ok, but we don't have a free market at the moment as more and more we are seeing firms described as "Cannot be allowed to fail". Well, that protection afforded by Governments should come at a HUGE price precisly because the cost of protecting one of these companies can potentially be huge in itself.

  • Comment number 10.

    Oh yes, Please can they open some branches in the UK, because I would just be rushing to go and 'deposit' my life savings with these big financial firms with such a strong record in the prudential lending and investment which are the key characteristics of a risk-free institution...

    They say satire died when Kissinger won the Nobel Peace Prize..evidently not...

  • Comment number 11.

    "Glass-Steagal Act of 1933.

    That prohibition was removed on 12 November 1999 - and since then there has been a rapid convergence between commercial banking and investment banking."

    WHAT ? YOU CANNOT BE SERIOUS !!

    As Mr McEnroe used to say.. Why hasn't this been more obviously brought to our attention before ? Oh, of course, the mainstream media relies on the advertising from these people, so cannot risk upsetting them by 'rocking the boat'...

    And people are wondering why we are in this mess - the key legislation which implemented the 'lessons learnt' from the last 'big crash' and the Great Depression repealed - Yeah, like that is going to work..

    Is there anything else in the woodwork which has been 'glossed over' in the past few years which is now going to shoot out and bite us ???

    Scandalous and unbelievable...

  • Comment number 12.

    The solution to all this is simple;

    * let them go to the wall - in the end there is no other correct capitalist solution.
    * before doing that, talk to the Chinese about setting up new financial instituions (or buying the shells of Lehmans etc). They have infinite funds so the liquidity required exists.
    * we in the real world would then just deal with Chinese based institutions for our liquidity requirements.

    The World would go on, we'd just borrow from the Chinese instead of from the made up World of Western banks. Since this is what our governments are increasingly going to do anyway, what's the problem? I have no more allegience to a British or American shyster than I have a Chinese bank. The Chinese are likely to be competently regulated anyway.

    Of course, this would leave the City of London in ruins, which would be another good thing. Britain would have to go back to basics, learning how to make goods to feed and cloth ourselves and live within our means. Sure, it means the end of the welfare state as we know it, but that's coming anyway once the money runs out. We might as well get there on our own terms.

  • Comment number 13.

    Any company, bank, utility, or whatever, which is "too big to fail", should be nationalised immediately. After all, the taxpayer will be picking up the bill when the arrogant idiots who run these companies demonstrate their total incompetence yet again. So why shouldn't the taxpayer get the profits when times are good? Run the banks on the lines of National Savings- a very successful, efficient and cheaply run organisation which has been a cash cow for the government for many years. I see no reason why managers in a zero risk business should get high salaries and huge bonuses. They have screwed up as badly as it is possible to screw up, now Joe Taxpayer, who is on about 5% of their income if he's lucky, comes along to pick up the pieces. Time for it all to stop.

  • Comment number 14.

    At #6 -

    The individual savers NR run only occurred after NR had to seek emergency BoE funding - which it did because institutional investors had already withdrawn their support.

    Therefore although individual savers are not completely inert, it is definitely the case that they react a lot slower (but more visibly!) than financial institutions.

  • Comment number 15.

    What's that old adage: You owe the bank a $100 it's your problem, but if you owe the bank a $100m then it's their problem..

  • Comment number 16.

    i doubt that gs and ms have any intention to set up a serious deposit-taking business at least in the near term. their main concern is to get immediate access to the fed's emergency funding in order to consolidate the rebound in confidence they enjoyed on friday. the increase in regularly oversight that comes with their change of status they probably figured is a small price to pay as it is something that is going to happen to them after this crisis anyway.

    lbg @ 11, this was widely reported and analysed at the time (as well as at the time of the consequential merger of citigroup with salomon brothers). it is not the fault of the media, the banking community, regulators or the government if you didn't bother to read about it until now.

    bb @ 12, your suggestion that:

    "I have no more allegience to a British or American shyster than I have a Chinese bank. The Chinese are likely to be competently regulated anyway."

    made me laugh out loud. let's see what happens to the chinese banks when chinese growth falls significantly below 10% for the first time in over two decades, as seems likely to happen in the next 6-12 months. personally, i would rather have my savings with goldman sachs.

  • Comment number 17.

    #15

    I think the adage "if you want to make a lot of easy money, very quickly, don't rob a bank, open one" is more fitting these days!

  • Comment number 18.

    "History is bunk"... tricky dicky

    Any person or institution that doesn't care or take heed about the past will make the same mistakes again and again.

    Situations may change but humans don't seem to... That in my humble opinion is why we need business history to be taught to all these men and woman making decisions to keep selling debt so that they can make more debt to sell. As with eating rich food. I tastes good, looks good but it is not for eating for breakfast lunch and dinner. Then it becomes toxic and bad for ones health.

    Bankers need to have a sense that they are creating wealth for people with families and jobs. Not just themselves.

    More quality, moderation and long term thinking. Please.

  • Comment number 19.

    Ref 15, (warbath)

    Now you can add the line
    ....and if you owe the bank $100bn its the government's problem

  • Comment number 20.

    Are Goldman and Morgan Stanley's starting positions as licensed deposit taking banks ones of, err, adequate solvency and capital reserves? (which is presumably what one has to prove to pass the test, or could those on this blog who a bit borrowed in the US now also apply for a license?)

  • Comment number 21.

    HBOS employs 75000 people and has 1100 branches.

    Lloyds employs 70000 people and has 1900 branches.

    So, did the staff in Lloyds branches just work a lot harder?

    I understand that the back room divisions may have been structured very differently, but this does look (on the face of it) as if Lloyds was a lot more efficiently structured.

    Could some of HBOSs issues have just been that it was badly managed and throwing away money on inefficient staffing levels?

    In this sense, perhaps the impending redundancies were inevitable, even without the buyout?

  • Comment number 22.

    More to the point , how is Brown getting away with what seems to be prioritisation of Scots jobs over English ?

    Why has the media barely reported this ? Why have the Tories said nothing ?

  • Comment number 23.

    Love comment no. 3 - the "sulky teenager" analogy is perfect (and in harmony with one put forward by a friend regarding America in general (i.e. the US is an adolescent: it doesn't listen to anybody else and it's never wrong!)).

    I really desperately hope that all investment banks and similar institutions don't follow the path of GS et al. If banks which failed due to absurd risk-taking are allowed to simply shrug off the consequences of their actions and take refuge in the protection of the taxpayer, we really are all royally stuffed! As the New York Times put it last week, we aren't operating in a truly free market if companies are allowed to succeed but not to fail. What I really want is for someone in a position of authority to explain why the continued bail-outs of massive organisations like GS is good for me personally.

  • Comment number 24.

    #21 - apollo_mcqueen

    No. Lloyds TSB's lending policy was much more conservative and as a result, they were much more liquid. It really is that simple.

  • Comment number 25.

    More to the point , how is Brown getting away with what seems to be prioritisation of Scots jobs over English ?

    Why has the media barely reported this ? Why have the Tories said nothing


    Brown is getting away with it because any loss of jobs in Scotland will be seized on by Alex Salmond as evidence that Labour doesnt care about Scotland.

    The Tories are saying nothing because anything they say will be seized upon by Alex Salmond....

    There is nothing to be gained by Labour or the Tories in not encouraging Lloyds/HBoS to subsidise Scots jobs at the expense of jobs in England.

    For the same reason that no EU government bangs the desk and makes a fuss about the EU parliament travelling en Masse between Brussels and Strasbourg for no good reason.

  • Comment number 26.

    #24 threnodio

    Thanks. I suppose since NR always prided itself on being the lowest "cost to assets ratio" banking organisation, then wasteful staffing practices can't be considered a meaningful factor in the HBOS debate anyway.

    I just wondered.

  • Comment number 27.

    All the parties are the same, all the leaders of said parties will do, more or less, the same thing. They share the same interests and goals.

    Only when the corporations are no longer represented by politicians in our government will we have a hope of something getting near good governance.

    Blair and Brown should be thrown in jail.

  • Comment number 28.

    trevst #19

    Surely you meant....

    ....and if you owe the bank $100bn its the TAXPAYERS problem!

  • Comment number 29.

    It would seem the taxpayer is to become the guarantor of their own deposits.

    This is an institutional tautology.

    The bankers have become as absurd as their own integrity. I am surprised they can hold their heads up in public for the shame of it.

    OK; if this is what is going to happen then I suggest all the banks are taken into public ownership without compensation with immediate effect. Deposits can then be transferred into a National Savings scheme therby reducing public debt.

    The new national bank can then have one branch open in every town and village. We could even call it the Post Office.

    I had better shut up or New Labour will think this policy is worth nicking.

  • Comment number 30.

    As long as bonuses encourage reckless gambling (for that is what caused this), things like this will continue to happen. It's hardly as if the house price bubble was a surprise to anyone except the terminally stupid and greedy.

    I think that what is needed is a way to surcharge the directors and boards of the banks for their losses and to do this quickly and publicly. Up until now they are only losing other people's money- the prospect of losing their own homes and money might make them play a longer game. God knows that without some sort of stick being wielded they will do the same again and again.

    I can't see that anyone with an ounce of sense will put money into banks that have already been presented as "risky" in the media. I certainly won't. This means that the upshot is that what paying customers won't support, the taxpayer will...

  • Comment number 31.

    I find this whole scam quit incredible. Has anyone looked up a rather interesting video on the Net searched for under "Money as Debt"?

    The whole money mechanism that got us to where we are today is built on Fractional Reserve Banking and the fact that when people talk about money, they don't mean cash - they mean debt. And why on earth does our government have to "borrow" money to shore up the banking system? Where do they borrow from? And have you noticed that Sterling is Bank of England (nothing to do with government money or the Treasury) just like Fed notes? Wake up folks, however we get this spun to us, this is , always has been and always will be a scam by the banks (and not the visible faces of them) to further endebt the many to the few. Just look up a quote by Sir Josiah Stamp (former BoE govenor) to see how rotten this whole system is. Mr. Peston, how about looking into this aspect of the Credit Crunch?

  • Comment number 32.

    Dear Robert

    Rumour has it another British institution in the financial sector is about to go belly up,
    so why do we keep hiding the fact from the general public who ineffect bailing out Private institutions with public money, are the ones who suffer.

  • Comment number 33.

    #32 solomanbrown

    Any further details, or do you think it would be reckless and immoral to reveal such information in case that actually caused the eventuality you're describing?

    If that's the case, you're on the wrong blog...

  • Comment number 34.

    I don't think many of them either side of the Atlantic have the remotest idea of what they are doing. At times it all smacks of grab at any possible spiv bankers solution and cook up some wheeze and story to sell it on to the public. I don't even think the Dogger Bank that Paulson has proposed for the toxic dollars is half the risk it is touted at. Mortgages however toxic still have a value because they are secured on property. property always has value, if not today then tomorrow. When you start talking about 20 to 50% of value, say 33% there is likely to be long term profit. Could even be there was a gameplan was to let LB go to the wall to supress the book value of the toxic stock, because if you are left convinced that the only out is buying the toxic stock you want is as absolutely cheap as possible and certainly don't care about LB. I don't believe for a minute we are hearing half of what is going on. One thing is sure - As soon as the dogs are off the leash there will be somebody picking up gross profits again somewhere, even out of the wreckage. The only thing which is certain is the public will be fleeced again and again and government will raise taxes and tell us how well they are doing and what a good job they have done even when there is nothing to compare their performance to. Fed up of hearing about Browns global aspirations the man is a legend in his own mind.

  • Comment number 35.

    It's funny how people on this Blog are so gleeful at the current turmoil !

    The FSA have been maintaining close relations with all UK financial institutions, so it is very unlikely that anyone of them will suddenly go down.

    Every financial firm that merges means, of course less competition in the provision of financial products.

    Independant firms of all sizes are good for the consumer and general public.

    The trouble with all this turmoil is that it will feed through to higher unemployment, lower pensions etc, etc.

    The ordinary people like you and I will be the losers.

  • Comment number 36.

    "I have no more allegience to a British or American shyster than I have a Chinese bank. The Chinese are likely to be competently regulated anyway."

    No. Chinese banks have lent huge amounts to US banks and the loan value was calculated in dollars. As the dollar has devalued the Chinese banks have HUGE holes in their books.

    Chinese regulation tends to be no more than shoot a few scapegoats whenever a scandal goes public (such as baby milk, lead in kids toys paint etc). While it would be quite nice to see a few hedge fund managers executed in old Trafford, but wouldn't fundamentally clean up the markets.

  • Comment number 37.

    The banking system is in itself the biggest toxic waste repository in the world as are nuclear power stations ,why should the waste be removed ?are the banks AAA's holes not big enough that the taxpayer should provide one ,for everything the Long John Silvers wish to dispose of, including their wooden legs

    Why not sell AAA field

    POST 31 The banking system will soon be based on the fictional reverse auction model

    The fact is that money is a con venient part of the barter system that is losing its relative value is due to the fact that banks[including central ones] have been bartering it for their own worthless AAA's in order to get even more out of the food chain preferably a big piece of moby dick to securitize

    The colapse of the fraudulent banking system ,providing it does not destroy the sound banking system ,will leave more wealth for the people who create real wealth, rather than to those who steal it legally with smoke and mirrors

    Short trading is the equivalent of allowing pirates to shoot accross the bows of merchant ships [in order to be invited aboard],how central banking came to allow unregulated banks to fund hedge funds to practice such skullduggery will be pondered by future generations

    Building oriffice blocks to house transactions in worthless AAA's holes will be seen as akin to the building pyramids and symbolic of the final outcome of the westearn farewell state

    Money that should have been spent on infrastructure development and preparing for baby boomer retirement , has been blown on an orgy of consumer greed and appetite

  • Comment number 38.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 39.

    Excellent value for money Robert :)

    City sharks made £190m killing in minutes before BBC report on HBOS takeover

    http://www.mailonsunday.co.uk/news/article-1059216/City-sharks-190m-killing-minutes-BBC-report-HBOS-takeover.html

  • Comment number 40.

    Maybe the biggest effect of this whole thing (and it's had and will have some pretty big effects) is a complete change in the way the Banks, Bank Managers and the self-styled Masters of the Universe are viewed.

    In the same way as the first world war revealed the fact that one's "betters" weren't at all really---- and started a process of undermining the long established automatic deference to inherited position in the UK; with the move to respect and authority having to be earned rather than assumed or granted.

    I feel the anipathy and shock being registered by odinary people about the underlying 'principles' and mechanisms of Banks is of a similar order.

    And the effects are likely will play out for decades and not years

    .

  • Comment number 41.

    Mr. Peston: No irony intended, true curiosity at play here.

    Could you enlighten us further about the fate of all that cash Goldman Sachs sucked out of London just before it declared bankruptcy in the US?

    I smell scandal here, rotten scandal, with bonus packages for US employees being honored, and the London office having to scramble to meet payroll in the UK.

    This whole affair is shameful. And we, the US taxpayer, are being forced to underwrite it.

  • Comment number 42.

    #41 OldSouth

    I'm sorry, I must have missed that in the news - They're honouring the BONUS packages of the staff involved in these companies (which are folding)?

    Surely if your employer is a "busted flush", you definitely haven't earned your bonus and wouldn't expect it?

    I think salary should be paid, obviously, but not "performance bonus". Unless they had a target to cripple the business. In which case, well done -

  • Comment number 43.

    11. At 10:53am on 22 Sep 2008, lordBeddGelert wrote:
    "Is there anything else in the woodwork which has been 'glossed over' in the past few years which is now going to shoot out and bite us?"

    In 1938, the SEC adopted the uptick rule, more formally known as rule 10a-1, after conducting an inquiry into the effects of concentrated short selling during the market break of 1937.

    The SEC eliminated the uptick rule on July 6, 2007.

    The 'credit crunch' happened one month later.

    Coincidence probably.

  • Comment number 44.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 45.

    Hmm! Is anyone else starting to feel that the big plan announced to calm everyone last week is beginning to fray at the edges so soon.
    Was it madness to assume that such a rescue of global markets could be done over a weekend.
    Perhaps to get back to base and start again it is necessary to ensure the stability of good business and let bad business fall by the wayside.
    Asking taxpayers to carry the can for an indefinite time to prolong the inevitable demise of bad business is too much to ask them to bear.
    Good pruning always stimulates better growth.

  • Comment number 46.

    This is a lot more insightful than your comment on Today. You said that you were excited by the difference in the reaction of government to the Depression and the current crisis, but you didn't explain what was interesting or why. OK, you didn't have much time to make your point, but if you know you have limited time please don't waste it. People need to understand this crisis. They don't need to know what rings your bell - that's an appropriate topic for a blog, but not prime time news.

  • Comment number 47.

    not sure how to post a link, but I found these two articles interesting:

    http://www.nytimes.com/2008/09/22/business/22lobby.html?ref=business
    http://norris.blogs.nytimes.com/


  • Comment number 48.

    #21, 25
    I don't think either of you fully understand how fundamental the Bank Of Scotland is to the Scottish economy. England has lots of banks and has a much more diverse economy.

    This is going to hurt Scotlands economy disproportionately. Tens of thousands may lose their jobs. The net effect of this will be that England will have to pay more in subsidies.

    When the Northern Rock was going under, Brown rushed to save it. The Bank Of Scotland is one of the few banks with the right to issue currency. Its loss will be much more visible than the loss of Northern Rock would have been. It seems there is one rule for English financial institutions and a different one when its a Scottish insitution.

  • Comment number 49.

    My comment has been removed, for the word fail..

    I did not swear, use any aggressive terms, or cause any offence. So Why?

    I suggested mr Peston had titled an article with the term "fail" and was now eating humble pie.

    The bbc is going very bad..

  • Comment number 50.

    #41 - It was Lehmans that "sucked out the cash", not Goldman Sachs. And it is they that declared bankruptcy !!

    Re. Morgan and capitalisation - I just read the news that Nomura has just agreed to buy 20% of Morgans subject to regulators' agreements. The same Nomura is on the prowl for any good Lehman assets left in the rest of the world, to be purchased at fire-sale prices !!

  • Comment number 51.

    If the taxpayers are now acting as insurers of the assets which the investment banks are gambling with, then there should be some more sophisticated pricing for the depositors' cover. Surely the regulators or central banks should charge a premium on the retail deposits taken which reflects the aggregate risk of dealing with those banks who invest heavily in products of high or difficult to measure risk? This would be a far superior way to penalise and discourage excessive risk taking to any "windfall" tax. So called windfalls are not that at all in most cases. They are the expected high return from the activities of highly remunerated traders. Let the taxpayers get an up front and transparent income from the risk taken in their own interest by these betting shops, sorry, investment banks. Then at least the state is getting something fair and respectable for acting as underwriters instead of picking over the bankrupt stock when the crash has happened.

  • Comment number 52.

    Just a couple of points, Bill Clinton signed away Glass-Steagal, calling it 'an arcane piece of Depression era legislation'.

    Soon, the rot set in again as these banking institutions cavorted in their new found 'freedom'.

    Secondly, I do not agree that retail deposits are 'sticky'.

    For example, I have been in NYC this past week but the minute I heard a whiff about HBOS, I logged into my HBOS account(s) and made a substantial transfers out of HBOS to a hopefully safer place.

    For me, the relationship with HBOS (and the seven other significant financial institutions under the same banking license) is now over.

    It is just rational behaviour.

  • Comment number 53.

    I am reminded of a religious tune I heard in my youth that went - House Built On A Weak Foundation Will Not Stand. I think I finally understand the tune.

  • Comment number 54.

    REF : 31

    YES ALL SHOULD WATCH "MONEY AS DEBT" on you tube.

    an alternative in text "the money text book" is available to read at http://www.monetaryreform.org/

    this was written by the late Dr. Edward Hamlyn.

    quote "Dr Hamlyn campaigned for Monetary Reform and was writing materials to his dying day. "
    .................................................

    ".. if you want to be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and control credit."


    Sir Josiah Stamp, Director, Bank of England, c1940

  • Comment number 55.

    I see that far from the Chinese coming to the rescue of Morgan stanley, the Japanese have. This makes far more sense - a country at China's level of development should be importing capital, not exporting it. Part of any return to stability must involve the Yuan rising against the US Dollar, encouraging trade to the mutual enrichment of US, China and the rest of us, combined with an increase in US savings. The New World Order may be a lot like the old!

  • Comment number 56.

    Law of unintended consequences at work again. According to the Bloomberg site, oil went up more than ten dollars a barrel today, at the prospect of the 700bn USD bailout bolstering the US economy and increasing demand. Some sites say that it has now risen to 124 dollars/barrel.

    So, the 700bn USD for the banks is already causing the ordinary American in the street to be further hammered as the cost of petrol (gas) rises again to 4 USD/gallon and over.

    Really, Paulson has. no. idea.

  • Comment number 57.

    About time all these "dandy's" just pushing our money around in the "casino" lost their jobs and found out what real life is all about. No sympathies from me, they belong to the same category as Estate Agents and used car salesmen. Maybe time to move on and and do some real work! Try working as a nurse in the health service!

  • Comment number 58.

    56:

    Actually, oil jumped $25/b to $130/b, an unprecedented jump.

    Nothing has happened in the oil industry to remotely explain such a move, but neither is it based on an assumption that the economy will recover, boosting demand. That would not have caused such a spike, even if anyone believed it.

    The implication is clear and stark; markets expect the dollar to nosedive. Scary.

  • Comment number 59.

    Everybody hates the bankers. The fault(s) lie with very few who consistently "pushed the envelope". They are easily identifiable. The rest are lucky: they had their moment in the sun. Now, it is bad.
    The next up will be one or more LBOs needing refinancing. The LBO firms will be pilloried into committing their free cash in their funds to these refinancings. The maximum fear and the most intense retribution on the few is yet to come.
    Not a cause for rejoicing ,but ,inevitable and the direct route for the financial world to impinge ferociously on the "real" world.

  • Comment number 60.

    It means their filthy rich investment accounts now dont need to fear and run on MS or GS.
    Separately Michael Hudson of islet has an illuminating piece "Financial Bailout; American Kleptocracy". Its a must read for anyone who wants to know what isnt being told about the crunch.

  • Comment number 61.

    The main reason why Governments had to intervene in the market is that certain organisations had become so critical to the economy that their failure would be catastrophic.

    Perhaps, as another commentator pointed out the Treasury should identify those organisations that are critical to the National interest and ensure that they are adequately monitored. Further, Directors and Senior Staff in such organisations should have a greater accountability and perhaps higher penalties for failure

  • Comment number 62.

    Just saw the Panorama programme the 'credit crunch' on BBC1 tonight.

    ....they asked the FSA to make some comments to some of their queries....but; surprise, surprise...they were unavailable for comment. Can you imagine that sort of response from an institution from any of the other major western economies? (a well as from some banana republics?).....I thought not.

    Mind you though...that Jane Corbin looks a bit of alright!....something about her......'thinking mans crumpet'..... I wouldn't have turned her down!

  • Comment number 63.

    The film inked to was made in 2005, and is a lecture by G Edward Griffin, who wrote a book some years before titled “The creature from Jekyll Island”

    The link starts a few minutes into the video, at a particularly prescient point.

    http://video.google.com/videoplay?docid=638447372044116845

    The “creature” from “Jekyll Island” was in fact the Federal Reserve, and if you watch the video from the beginning it explains how a secret meeting was organised by some of the largest bankers, to create the Federal Reserve. The meeting was held on Jekyll Island.

  • Comment number 64.

    I was reading the Sunday papers and after all the financial stuff came across a review of a new CD.

    The title - ' I Started Out With Nothin and I Still Got Most of It Left ' - a suitable slogan for NR, Halifax, Lehman etc and soon for the rest of us ?

  • Comment number 65.

    Paulson's personal wealth is a reputed $60 billion (did I leave a nought out?)......who would have expected Paulson to announce anything other than a $1 trillion (US taxpayer) bailout of the worlds US banks.......in the words of Cilla...SURPRISE, SURPRISE!!!!
    Cheers all you Yanks....it was worth loosing the Ryder Cup for you takin on all OUR debts! A sincere thankyou!!!

  • Comment number 66.

    Adair Turner is talking a lot of rubbish about the FSA and regulation of bonuses. The FSA have had this power, and indeed did a major consultation on the subject, in 1999/2000 but completely failed to do anything whatsoever. It had all the necessary power and sanctions to hand then.They effectively encouraged the big guys to take ever great risk by blinking into the sunlight. It is all on the public record.

  • Comment number 67.

    Peston! You're misrepresentation of the truth... Twice in two weeks is frankly disgusting. Your seniors should castrate you for your reckless and extremely poor journalism. Twice you have reported on "average" bonuses paid out to city workers. Your 'average' is obviously borne from numbers of employees v bonuses paid. That is absolute nonsense. You haven't taken into account the massive bonuses paid to the high flyers versus the pittances paid out to staff in ops and back office. Your lack of understanding this simple fact makes you completely unworthy to continue to report on the current financial crises.

  • Comment number 68.

    Gosh!
    I've never met anyone who knows how the world works financially, outside the pub that is. Neither does anyone else I suspect. One thing for sure your taxes will pay for the mess. No pay offs to the pocket liners sez I.

    Publish a few names here. Who?
    If you lend money to some programmed stampeding typical working dude trying to get a house before prices go out of sight, pay yourself a nice bonus, then finance his job offshore to the new boom land over the horizon, what did you expect? Sad and criminal. Ruin lives for greed. Not nice.

  • Comment number 69.

    All I can think of is Monty Pythons Meaning of Life sketch about the Pirate Bank. They seem to have got it so right.

  • Comment number 70.

    What is truly frightening is not so much the events themselves, but the public response to it.

    We have let ourselves be run by thieves, with barely a whimper. There should be rioting on the streets right now. There is nothing of the sort.

    Either people don't understand what's going on, or they feel powerless to make any difference, or both. I suspect it's more of the latter: after all, if Bush and co have been able to get away with the most unconstitutional presidency in US history, why not this as well? They have tested the public reaction on a variety of fronts, and discovered that they can do pretty much whatever they want.

  • Comment number 71.

    "Your 'average' is obviously borne from numbers of employees v bonuses paid. That is absolute nonsense. You haven't taken into account the massive bonuses paid to the high flyers versus the pittances paid out to staff in ops and back office."

    Errr...is that not in fact the definition of "average"?

    Perhaps you're thinking of the MEDIAN bonus...?

  • Comment number 72.

    #67

    I suppose that would be like averaging the salaries plus bonuses of premiership footballers and not including the back room staff. What's John Terry paid? 5M and sum, I believe. Or come to think of it, that second rate player but first class (and convicted) thug Joey Barton. Just a thought..

  • Comment number 73.

    I apologise for going off-topic but this seems to be an active blog with some fairly knowledgeable contributors, so was hoping to get an answer to a couple of questions..

    Is there not now a very real risk of the accelerated collapse of the US dollar? This was a process seemingly underway with various oil-rich states opting to accept euro rather than dollar bills as their supreme trading currency, encouraged no doubt by the US's ridiculously short-sighted aggressive foreign policy. If there are fewer dollars bills in general circulation, due to the rise of the petroeuro system, a greater number will start appearing on the Federal Reserve's doorstep and the Fed will have to honour these "promises to pay" as that is all dollar bills are. Of course, the Fed is so indebted already there is a very real chance of it defaulting as the bills come flooding back and it being forced into a series of humiliating devaluations and credit rating downgrades as the world wises up to the fact it can no longer pay its debts.

    Has the US now not itself been shown up as just a very large, failing fractional reserve bank which the world has started a run on?

    Where indeed could that end? Are we talking about the US economy plunging down a black hole inside a matter of a few months/years?

    And what will the impact be for Britain for basically backing the wrong horse?

  • Comment number 74.

    #56 - stormy-petrel

    Any port in a storm. Where are you going to put your money? The stock market is up and down like a yo-yo, the banks are tumbling like ninepins and even trading currencies is dodgy. So obviously it has to be commodities. They are tangible and you cannot magic them out of thin air. So yes the consumer will get hit and yes it is an undesirable side effect but it isn't Paulson's fault and nobody should really be surprised.

  • Comment number 75.

    73:

    Spot on. I think today's spike in the oil price - quite unrelated to any fundamentals in the oil business - is a harbinger of the next stage; the dollar will crack.

    This is the logical next step in this unfolding crisis. I would love to be wrong on this, but the process has a grim inevitability about it.

  • Comment number 76.

    So many people wanting to twist the knife. So many people on hear seem to think they know best...so whats the solution you all seem to have known about before the fact...communism.....or maybe another bright idea?
    Simply put, we have all to some extent or other contributed and prospered from this now brocken and alway an imperfect system. So what to do next.....maybe twist again?
    Yes it is a disaster, but the market will redefine itself, society will benefit once again and some people will get payed huge sums of money and others will resent them for it, get over it.

  • Comment number 77.

    and once this crisis is over maybe 4-5 years maybe 20 depending how markets/ gov react, there will be more crisis ahead, that is inevatible. hopefully we will learn from this one and the impact of the next one will be less.
    hold on to your hats

  • Comment number 78.

    Does it strike just me as obvious that these two banks became deposit-taking simply in order to get most of the $800 billion which will be newly printed according to the recent decision?
    Clearly they cannot hope to get any deposits from real people, which leaves this other opportunity as the only one they seem to have...

  • Comment number 79.

    Regarding Morgan Stanley and Goldman's overnight transformation: This is really a bunch of garbage. Go to your US bank and ask them if they have anyone coming in to deposit savings. If they are honest they'll say, "No, no one has any money." That was what my banker told me and I live in one of the US's most affluent areas.

    Therefore, MS and Goldman have, with a wink and a nod from the 'regulators' tapped into Fed funds simply by completing a little bit of paperwork. Of course they'll now have to contend with Federal oversite, but given the amount of money they throw around, that shouldn't represent much of a problem. You're being sold down the river if you live in the US or rely on dollars for purchasing folks.

  • Comment number 80.

    Why do people keep refering to me in their posts ? OK so I pay tax, we all do, but surely I can't pick up the tab for everyone's mistakes as many posters seem to think I can !!

    Yours, Joe (a taxpayer).

  • Comment number 81.

    Surely the problem here is too much regulation not too little. Where did the sup prime mess come from? In the early 1990s, the Clinton administration asked the U.S. department of housing to come up with a National Homeownership Strategy. Public and private institutions were asked to make home ownership affordable to all Americans. To exclude minorities or economically disadvantaged was regarded as discriminatory. Now that these types have absconded, the same politicians that forced these regulations on business are telling us the answer to the mess they created is ahhhmm more regulation.

  • Comment number 82.

    People trust me to do my job correctly because that's what I'm paid to do. When something goes wrong I'm supposed to fix it.
    It seems to me that any monkey could have made money for their bank over the last 10 years but they are paid to fix it when it starts to go wrong, let alone when it collapses.
    Jail time for these self styled experts for lying on their CV's.

  • Comment number 83.

    Just a couple of thoughts..

    Everyone is in part to blame for perpetuating this global pyramid scheme based upon continually (and unrealistically) increasing home values.

    Home buyers who thought they could get away with buying a house they really could not afford.
    Bankers who took unacceptable risks to get excessive compensation.
    Regulators for believing the market could/would self regulate and engaged in lax enforcement
    And, the investors who didn't look behind the cd veil as long as the returns were attractive.

    And no one is yet talking about the "other" shoe that will inevitably drop once/if the dust settles - bail out or no bail out. That other shoe? Litigation... I can not imagine that there will not be tons of litigation resulting from this madness for years and years and years...

  • Comment number 84.

    I find this to be a very enlightened group! aaustraliis directed us earlier to this article by Michael Hudosn "Financial Bailout: America’s Own Kleptocracy" . Until I read this article , I was very much in the dark as to exactly who were the real benefactors of the bailout . Now I understand why there is such a rush to get this accomplished. This is a bailout for the very rich who knew what chances they were taking and needs to be stopped now.Even if you think you know all the facts, and I don't think anyone really does, I do suggest you Google the article. See you in the food stamps line !

  • Comment number 85.

    A lot is being said and written about the current global financial turmoil. For me, the simple truth is that common sense (remember that?) tells me that when the US and UK governments (to name just two) borrow recklessly and way beyond their means (er, like a sub-prime kind of arrangement) then somebody, somewhere has to got to pay for it in the end. American and British taxpayers (who will become a declining species over the next few years as unemployment soars) will be utterly hammered by the failure of our politicians either to comprehend or control what they unleashed by abolishing the Glass-Steagle Act. To make matters worse, the real impact of the end of cheap energy will kick in with a vengeance over the same time period and - hey ho - prepare yourself for Mad Max. I think there is only a minority of commentators who truly appreciate the seismic ramifications of all this.

  • Comment number 86.

    In the comments posted (under the name Rajeev Moudgil) on 13 December 2007 and 12 March 2008, I had remarked that tax payers would pay for the excesses of those who made enormous money. Though feeling sort of vindicated, I am said to note that the idea of free market capitalism have become a victim of its own practitioners.
    What has happened is just a disguised fraud on public money. Any takers for prosecuting those responsible and recovering stolen money from them.


  • Comment number 87.

    Mr Peston. re...the bank wreck.
    Are we going to see the return of communism in a big way in the USA (and UK)?
    In areas like New Jersey, Baltimore, Philadelphia, Cleveland, St Louis etc there is a risk of significant activity by the Communist Party. (Glasgow? Hull? South London?)
    This could be the moment when the big "C" starts to re-appear.
    Ironically, at a time when Russian and Chinese capitalism is thriving.

  • Comment number 88.

    When the crisis is over the banking service should employ managers like Captain Mannering from Dads Army. His answer to present day bankers STUPID BOY

  • Comment number 89.

    with the change in status to the 2 banks
    can anyone tell me if we can go to GS and MS and open a deposit account and stick a couple dollars/pounds in?

  • Comment number 90.

    Funny, no one has actually come out and called the financial crisis what it really is, and that is a depression. Not a "Credit Crisis" or a "Recession"... It may not be as bad as the 1930's, but it is a financial depression nonetheless.

    Funny thing is that it wasn't really called "The Great Depression" until after it was all over... Also funny is that government involvement (AKA bailouts...) in the great depression was pin pointed as one of the deciding factors that turned a fairly average market recession into a fairly awesome screw up on near global proportions.

    The only difference now is that if you leave a comment on the NY times website saying how U.S debt has doubled in less than a decade, to 9.6 trillion USD, a debt that with 2005's profit margins wasn't a big deal, but with many institutions profit in the negative now, they can hardly afford the interest payments on said debt, then your comment gets deleted.

    But hey, I'm just some 18 year old guy from New Zealand who breaks in horses for a mere pittance, what would I possibly know about market analysis..?

  • Comment number 91.

    It's about time Gifted Gordon set out his wretched 'Vision for Britain' innit? It was to do this that he refused to call an election.

    How he loves to play the 'man for the job'. He must live for the next crisis. Anything to divert from doing something useful.




  • Comment number 92.

    This situation is surely perfectly summed up by this quote from Michael Hudson's essay on the bail-out at the Counter Punch website :

    'This is not industrial capitalism; it is asset stripping. The closest analogy I can think of would be to give the Mafia free reign to start a new crime wave “in the taxpayers’ interest” so as to raise enough money to pay its fines to the Justice Department.'

    Thus the tax-payers shoulder the debts in perpetuity while the bankers retire in luxury to the Bahamas!

  • Comment number 93.

    It is shamefully that GS and MS have been allowed to become commercial banks just to protect themselves which is why they where not allowed to take depoist in the first place.

    What is the US goverment going to do about the billions paid out in bonus to the traders and senior managers of these banks ?.

    Some where received bonus of 10's of millions only this year.

    It was pure greed and total lack of basic risk managment that have caused this issue.

    Think about this Tesco's third or fourth largest supermarket chain in the world wide (profit £2.2 billion). How can banks trade the debt on small individual mortgages and make profits and pay bonus in the billions ?.

    You cannot make money out of nothing which is what they where trying to do. Feed the beast as long as it growing its fine.






  • Comment number 94.

    If this bailout is really needed, impose a Capital Security Tax to pay for it.

    Paulson presented only half a plan. The other half is how do we pay for it? If the bailout does not contain the mechanism to pay for it in full, then we are just transferring one bubble to another, undermining U.S. credit and creating a larger crisis. The ONLY time Congress has the leverage to demand payment is BEFORE they pass the bailout. If not, then it will in fact be paid for by defunding other vital programs.

    One test of how real this financial market crisis is to those same financial markets, as well as a check on abuses arising from conducting such a bailout, would be to impose a Capital Security tax to cover the bailout costs in full. Just as Social Security and unemployment taxes cover the costs of labor security, the Capital Security Tax should cover the costs of capital security. This tax could consist of taxes on capital gains and financial transactions, the rates determined by the funds needed for a Capital Security Tax Trust for current and likely future bailouts. In addition, firms using funds from Capital Security Tax Trust should be required to pay them back over time in the form a restitution surcharge on net corporate income, not unlike unemployment insurance paid by employers and workers.

    A Capital Security Tax would keep inflation down by not increasing the national debt and encourage market regulation needed for more orderly financial markets, since orderly markets would mean a lower Capital Security Tax. It is obvious that, unless the financial crisis is paid for by the capital sector, the current crisis and bailout will be far more expensive, and yet another crisis and bailout is sure to follow. On the other hand, if the financial industry is made to bear the burden of this bailout, it will far more likely to be tightly managed and limited to essential institutional bailouts. The Capital Security Tax creates a built-in self-interest for adequate regulation and prudent management to keep the Capital Security Tax low and limit the need for future Capital Security Tax Trust funds.

    The current financial crisis, while real, is limited, in that the subprime mortgages are concentrated in a few markets (Florida, Texas, Arizona, Southern California, basically the Republican “New South”) and only a few large financial institutions that borrowed too much money to buy securities based on these mortgages. When an increasing portion of these mortgages defaulted and the value of real estate underwriting all mortgages dropped as the Federal Reserve raised interest rates, these financial institutions could not come up with the cash to cover the short fall, nor could AIG pay up on the investment insurance policies that were used to create the illusion of low risk.

    While many ordinary people are hurting from a host of pressures increasing their impoverishment, mostly recreated by corporate policies, a vast majority (about 90%) of mortgages are being paid and almost all banks and insurance companies did not catastrophically overextend themselves. Of the remaining 10% of likely “bad” mortgages, at worst a considerable portion are salvageable by adjusting the terms with limited loss, with the remaining sadly going into foreclosure and likely bankruptcy, both well known and regulated processes. Instead, the current crisis arises because of the uncertainty about the extent of loses, which are likely limited but unknown, and the refusal of the wealthy and their institutions to risk their capital during this uncertainty. If the Capital Security Tax Trust is pledged to buy all defaulting mortgages and its funding is secured, then this uncertainty no longer exists.

    If this is such a terrible crisis, is the financial community ready to pay a Capital Security Tax to help pay to fix it? If not, then perhaps this is not yet serious enough.

    Unfortunately, the U.S. Congress is no more ready to pass a Capital Security Tax than they are to stay in session prior to the election to hold hearings and actually think about what they are doing. Instead, as an alternative to a Capital Security Tax, they are going to do what they are told by the people who own them, which is to burden ordinary tax payers and their decedents with the huge bailout proposed by the Bush administration, increasing the national debt and reducing the willingness of foreign investors for finance that debt, with the bailout spinning out of control as it turns into the biggest Congressional pork barrel of all.

  • Comment number 95.

    I think Paulson and Benarke do have an idea, and I think its this: they'll keep interest rates low, fuel the money supply to rescue the financial system and use the consequent inflation to ease the burden of debt.

  • Comment number 96.

    #83 It is not only people buying houses they cannot afford. It is people adding credit card debt to their mortgages in a rising housing market. A couple of years ago I read a piece in the Sunday Times by Rosie Millard (the former BBC arts correspondent) explaining how she would run up a large credit card bill (tens of thosands of pounds) and then pay it off by re-mortgaging and then start the process again. She mentioned that many of friends were doing the same. These people must have been clever enough to understand the folly and long term implications of this.

    As a nation, we have been living beyond our means for too long. Same goes for the US. We are all to blame - the bankers for lending the money, us for being stupid enough to borrow it and the government for encouraging it.

    Anyway, the party is over now.

  • Comment number 97.

    Sean Broseley

    Exactly. What I have been saying for the last few years. Basically borrow a trillion, devalue (through inflation over say twenty years at 5% per annum compounded) result-pay back zilch. With treasury yields of around 4% you can actually make money. Just PV a cash flow model and see what you get. It's the old old flim flam.

  • Comment number 98.

    Strange behaviour. I was certain that regulators would do two things.

    1. Prohibit short selling as in a bear market it pushes the market ever downward and prevent a market finding its level as opposed to the old fashioned, dip and kick from next day profit taking and bargain hunting.

    2. Segregate retail and merchant/investment banking activities. I foresaw a move away from the Swiss "universal banking" model and a retrenching into niche specialisms that prevaile pre big bang. Hell in the US it was forbidden to take deposits across statelines.

    I predict a real mess when voters - the retail market - get ruined by banks taking unassailable derivative positions and leaving them high and dry.

  • Comment number 99.

    Your last sentence buckling the swash I believe refers to bucaneers. On this side of the pond we use perhaps a more appropriate title---racketeers.

  • Comment number 100.

    Today governments of EU, China, Japan help US by holding USD assets to avoid triggering inflation. Unfortunately US has 3x times more USD in paper currency aboard than home. (more than any other country). Once market loose confidence in USD all our green chickens will find way home trigger enormous inflation. It most surely will put governments and institutions in EU, China, Japan in survival mode making them dump all USD back assets...

 

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