I'm going to do something I hadn't planned on doing on this blog, I'm going to get suddenly serious and topical. This wasn't meant to be about finance or politics, but I find a couple of the things that have happened over the last few days in particular slightly disturbing.
Firstly, the attitude of some of the senior management in the banks that are lucky enough to still be around at the moment. Take for a moment the fact that Lloyds TSB was one of the potential saviours for HBOS some days ago and is now revealed to be in need of the odd sniff of smelling salts and a good rub from a Premier League Trainer's Magic Sponge to make things better again. What happened there? I can't believe for one instant that there was some seismic shift in the last few days that saw the executives there scratching their heads and saying "Well, Clarence, I didn't see this coming, we'd better get on the Batphone to Number 10".
Clearly one week ago, two weeks ago even, it was possible for these guys to realise that the situation might just worsen a bit and that their bank could be next. I mean, these banks aren't lending each other any money for that very reason. "It's the state of the market, you know," they were probably saying. "How would we know if we'd get our money back? We have to be careful these days."
But when they see a competitor in trouble, circling the great plughole of bankruptcy with all the menace of a mid-west twister, it's suddenly all different. "Break out the wallet, chaps, we can make a killing on this one!" What do they hope to achieve? Seriously, when you look at it, they won't lend money to banks that are still in operation, but they wanted to BUY one that is going down the toilet ... Hey, Einstein, where's the bigger risk in THAT equation? Or were they just making a cynical land grab in order to bump themselves up the Market Share rankings, at who knows what cost to the long-term sustainability of their own bank? "Never fear, we can introduce some imaginary cost savings from the new acquisition onto our balance sheet for this financial year! Oh, and if we get big enough, the Government won't dare let us go bust"
But really, the big question marks in this respect have to be in the American market. JPMorganChase, for example, bought Bear Stearns back in May when (granted) the full reality of this situation had yet to hit home. Today, it's one of the top three beneficiaries of the US bailout. Aside from the possibility JPM didn't see this big crash on the horizon (and if you believe that, then please form an orderly queue, the withdrawal forms are on the counter), you have to wonder at their eagerness to gobble up the company that was at the leading edge of the sub-prime crisis more than 9 months prior to the deal, the company which was coughing up blood long before everyone else went looking for their own white flags.
Also finishing on the podium in the great US Bank Bailout Race 2008 is Bank of America, who swallowed up 'troubled' Merrill Lynch for the bargain basement value of $50bn (bargain because Merrill's market capitalization just over a year ago was $72.5bn; Mergers and Acquisitions generally happen for a premium on the market cap as a sweetener to existing shareholders). Almost exactly a month later, Bank of America promptly got $25bn of that back from the US Government in the bailout package. Now that's a deal, folks!
My second concern is that now we, the taxpayer, are guaranteeing the banks. These would be the same banks who "look after" our money for us, ostensibly because they can manage it better than we can. What does this say about the banks themselves?
For as long as we can remember, people have been told that money in the bank is much better than money in the mattress, and that the banks will safeguard your money in a way that nobody else can. But you almost have to smile at the irony when the taxpayer has to step in and steady the ship when the free market system would prefer to drive them into oblivion.
These are the banks that gave out mortgages and loans to people who really couldn't afford it in the first place. I can remember considering a mortgage in the UK when people were starting to talk about 100% of the property value at 5 times your annual salary, and this was seen to be a good thing. The same people would push credit cards and loans with huge no-interest, no-repayment periods onto the people who could least afford to purchase the expensive items that they would be used for.
I wonder if the governments haven't gone far enough, whether they should perhaps be completely nationalising and merging all of the banks together into a single finance centre, where people can go to get a home loan and what have you as long as they meet strict and publicly announced rules. When the taxpayer has to bail out the banks because they screwed up so badly with our money the first time round, you really need to question whether they are even relevant any more.
It is widely held that two things drive the financial markets - fear and greed. We saw the greed in evidence when institutions were trying to buy each other up even whilst in trouble themselves, and we saw the fear when they refused to lend money to one another to continue normal day to day activities. Even though we have had some painful lessons in the markets in the 80's, 90's and even in more recent times, the tenet of "Greed is good" has always held true within Wall Street and the other financial centres. Perhaps now, there will be a radical rethink of strategy. But then again, until all the people who got us into this mess are sacked or indicted, I think we'll be waiting for the Danish Bacon Air Display Squadron to come flying to the rescue.
Ultimately, to me, it looks like if you're not in the market and don't understand the market, you're always going to lose out.
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For some interesting background, I urge you to check out this Four Corners episode,
Mortgage Meltdown, first broadcast more than a year ago. I saw it for the first time today, and I marvel that while everybody knew the 800lb gorilla called Sub Prime was in the room, nobody wanted to do anything about it, until the very viability of the global financial system, and even the solvency of some large national economies, was in serious danger.
