One reader asked me to look at long-term answers to the banking crisis
rather than short-term, after my blog the other day.
will provide a more in-depth answer to this question on January 5th when I make
my predictions for 2009.
it needs the full backdrop to answer that question by reviewing the
course of this crisis, with the heart of the storm in September and October:
8 Sep: the US Treasury takes over
Fannie Mae and Freddie Mac. Together these two provides loans or guarantees to the tune of $5.2 trillion of the
total American $12 trillion mortgage market.
15 Sep: Lehman talks with JPMorgan and Barclays failed, so Lehman is allowed to fail without US government assistance. Government also
refuses AIG's request for a $40 billion loan. Merrill Lynch merges with Bank of
17 Sep: US Government
reverses position on AIG and Fed gives $85 billion loan in return for an 80% stake in AIG.
18 Sep: The Financial system
freezes. Hank Paulson and Ben Bernanke tell President Bush that the situation is
“extraordinarily serious”. With President Bush’s blessing, Hank Paulson wins Congress
leadership approval to push for $700 billion bailout plan. Fed adds US$180
billion liquidity to key central banks. Treasury gives Fed $100 billion of
bonds. US SEC and others ban short-selling. Fed provides guarantee for money
market funds to discourage withdrawal which sees three-month Treasury yield near
zero. In the UK, LloydsTSB takes over HBOS.
22 Sep: Federal Reserve allows Goldman Sachs and Morgan
Stanley to become commercial banks.
26 Sep: US House fails to pass $700 billion bailout
plan. US stocks fall 5-7%. Washington Mutual (Asset size $300 billion) taken
over by JPMorgan.
28 Sep: The UK's 3rd largest mortgage lender,
Bradford and Bingley, is nationalised.
29 Sep: In Europe,
Fortis bailed out by Benelux governments with a $16 billion capital injection. In
Germany, Hypo Real Estate is taken over by the German government. In the USA, Wachovia is taken
over by Citigroup but, after renegotiations and a couterbid, Wells Fargo later proves successful.
30 Sep: Dexia given a capital injection of $9.2 billion by
shareholders and the governments of France and Belgium. The Irish government guarantees all bank deposits.
Oct: President Bush signs a $700 billion bailout bill into law. The UK's regulator, the FSA, raises
guarantees on deposits to £50,000 from £35,000.
6 Oct: Germany announces a €50 billion plan to save Hypo
Real Estate. Denmark gives 100% guarantee on savings, and Sweden increases its
7 Oct: The
Icelandic government takes control of Landsbanki, the country's second largest
bank, which owns Icesave in the UK.
8 Oct: UK government announces a rescue package for the
banking system worth at least £50 billion ($88 billion), along with £200 billion
($350 billion) in short-term lending support.
11 Oct: G7 nations issue a five-point plan to unfreeze
13 Oct: UK
government invests £37 billion into Royal Bank of Scotland, Lloyds TSB and
14 Oct: US government
announces a $250 billion plan to purchase stakes in the nation’s largest
19 Oct: South Korea
announces a $130 billion rescue package by offering a state guarantee on banks'
foreign debts and by investing capital into struggling financial firms. The
Dutch government announces a €10 billion investment in ING, plus a €20 billion
to protect the financial sector from the credit crisis.
20 Oct: Sweden's government offers up to $205 billion in
credit guarantees to banks and mortgage lenders.
Purely from a banking markets perspective, the specific
short-term resolutions have therefore included:
Australia: A$10.4 billion fiscal stimulus for
pensioners, family and first home buyers. Guarantee of bank deposits for three
controlled €85 billion clearing house to provide cash by holding illiquid bank
assets as collateral. Also pledge to buy bank shares should domestic
institutions seek to sell new stock. Total package: €100 billion
China: a two-year $586 billion
economic stimulus package to help boost the economy by investing in
infrastructure and social projects and by cutting corporate taxes.
France: Guarantee €320 billion of
bank debt and up to €40 billion to recapitalise banks.
Germany: Guarantee up to €400 billion of lending between
banks, plus €20 billion to cover potential losses and €80 billion to
Government has taken control of Iceland’s three largest banks. $2.1 billion
IMF loan, the first IMF loan for a Western European nation since 1976.
Ireland: Guarantee bank deposits,
covered bonds, senior debt and subordinated debt of six major Irish banks. Total
bailout package up to €400 billion. A further €7 billion pledged to the three
largest banks in December, effectively nationalised Anglo Irish Bank.
Italy: Guarantee some bank debt and
buy preferred stock in banks if necessary up to €40 billion.
Korea: Dh$477.5 billion in
guarantees on foreign debt and to recapitalise financial firms.
Netherlands: Guarantee up to €200
billion of interbank loans.
Pakistan: $7.6 billion IMF loan to avoid defaulting on
Guarantee all bank deposits until 2010, following similar measures in
Malaysia and elsewhere in Asia.
Spain: Guarantee €100 billion of bank debt and allow the
government to buy shares in banks in need of capital.
Switzerland: SFr6 billion in a recapitalisation of UBS
as well as SFr54 billion loan.
£200 billion liquidity scheme, up to £50 billion to recapitalise banks and
£250 billion guarantee of bank debt issuance. Total package: £500 billion
Ukraine: $16.4 billion IMF loan to
bolster the economy, shaken by global financial turmoil.
USA: US $700 billion TARP package, including US$250
billion support for major US banks in October, followed by a further $800
billion into the economy in November to try to stabilise the financial system
and encourage lending. Of this new investment fund, $600 billion will be used to
buy up mortgage-backed securities while $200 billion is aimed to allow the boost
of more consumer credit lending.
Note: This is not the complete list of financial assistance
programs underway globally and amounts are subject to change and if you’d like
to know more, the BBC has quite
a useful overview.
So that’s the
history with most of it being cash generated by governments to support the
bank’s weakening capital bases, and to promote more lending. Without lending,
the consumer and corporate confidence is killed and the economy tanks.
But it’s all short-term, as is a bank shareholder
there are clear requirements for transparency of risk. All of the above is
created by the lack of transparency of OTC Derivatives, along with a lack of
Will these solve the
But the biggest solution would be a
globally shared risk exchange, which all regulators and banks can access and
use. A global risk data warehouse.
is now tenable and possible.
about it more when I come back to blog about the predictions for 2009 but, right
now, I think I’ve depressed y’all enough so here’s a more cheerful note, courtesy of The Morning Paper.