September 29, 2008
The Financial Crisis Goes Global – European Banks Need a Bail-Out Too
Another day dawns, and the list of failed banks grows ever longer. Congress has renamed the Bail-Out as The Emergency Economic Stabilization Act. The House has just rejected the latest draft by 228 votes to 205. George W. Bush said he was "very disappointed". Whilst Congress were extending the new act to a total of 109 pages over the weekend, banks around the world were dropping like flies as the virus spread.
In the United States Wachovia is the latest venerable institution to fall prey to the contagion. Citigroup has agreed to buy the banking operations of Wachovia for the knockdown price of around $2.2 billion. Wachovia Corporation was the fourth largest banking chain in the US. It originally got it's name from the Wachau valley of the river Danube. Settlers from Moravia named part of North Carolina after their homeland way back in 1753.
The deal does not currently include Wachovia's money management and retail brokerage arms, and the government is providing a limit to Citigroup's risk on the transaction. In a similar guarantee to the one provided to JPMorgan Chase in their emergency takeover of Bear Stearns, the Federal Deposit Insurance Corporation will absorb all losses that Citigroup incurs on Wachovia's riskiest mortgages over and above $42 billion. Sheila Bair, the chairwoman of the FDIC, said that:
This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury. This action was necessary to maintain confidence in the banking industry given current financial market conditions.
As the the International Herald Tribune points out:
The deal further concentrates Americans' bank deposits in the hands of three banks: Bank of America, JPMorgan Chase and Citigroup will control more than 30 percent of the industry's deposits. Together, they will have unrivaled power to set prices for their loans and services… Some small and midsize banks, already under pressure, might have little choice but to seek suitors in order to compete.
Whilst the US government was underwriting Citigroup's buyout of Wachovia the UK government was being similarly obliging as Spanish bank Santander bought the 197 branches and £20 billion retail savings operation of the United Kingdom's Bradford and Bingley for £612 million. The bank's £50 billion mortgage and loans business has effectively been nationalised. Santander subsidiary Abbey has been paid £14.6 billion from the Financial Services Compensation Scheme, plus an additional £4.5 billion from the UK Treasury. The UK government says it will start to recoup that money when it sells off the mortgages that it now owns. UK Prime Minister Gordon Brown said that:
We will do whatever it takes to ensure the stability of the British financial system… We allowed Lloyds TSB to take over HBOS. We intervened to deal with share speculation in the market, and will continue to do whatever is necessary over these next few days in very difficult times, turbulent times around the world, to make sure that the British stability for which we have done a great deal over these last few years is maintained, and that's why the actions have been taken in the way they have.
As if Wachovia and Bradford and Bingley were not sufficient it seems as though the breakdown of the new paradigm in Anglo Saxon capitalism is not confined to just the United Kingdom and the United States. In other announcements today the governments of the Netherlands, Belgium and Luxembourg have agreed to bail-out Fortis to the tune of 11.2 billion euros, and the goverment of Iceland has agreed to pay 600 million euros for a 75% stake in Glitnir, Iceland's third largest bank.
When do you suppose this government sponsored concentration of wealth into the hands of fewer and fewer giant corporations will stop, if it ever does?
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Comments on The Financial Crisis Goes Global – European Banks Need a Bail-Out Too »
No listens and no learns from history. This is the same thing done during the S and L crisis. The govt. kills banks with good assets but over regulated and gives the assets to big Northeastern Banks (who have been involvent for years due to their bad overseas loans, which no one want to talk about) and those banks then get huge govt. funds in guarantees which they use loan to consumers for ten times cost. Remember, historically banks lent for 1 to 1.5 percent over cost of funds. Find that now. Try 5% or greater. Bank of America used horribly cheap Fed money to buy Countrywide. No wonder they weren't worried.
Failure to learn from history is one of my hobby horses. Don't get me started!
However for more background on Rob's point the Federal Deposit Insurance Corporation helpfully provides a chrono-bibliography of the Savings and Loan crisis of the late 1980s on their website.
Note the final sentence – "Additional bank crime legislation the next year (i.e., the Crime Control Act of 1990) mandates a study by the National Commission on Financial Institution Reform, Recovery and Enforcement to uncover the causes of the S&L crisis, and come up with recommendations to prevent future debacles."
I guess their recommendations didn't quite go far enough.
Today Landsbanki, Iceland's second biggest bank, has been nationalised. Investors cannot wihdraw their money from Icesave, the British internet bank owned by Landsbanki. Landsbanski will almost certainly go into administation. There has been absolutely no media information about Heritable Bank, another British bank owned by Landsbanski, however, when I contacted them, they also stated they were not taking deposits or allowing withdrawals.
Geir Haarde, the Prime Minister of Iceland stated, "It is very unlikely British investors will lose money." Wrong Mr.Haarde! On the contrary, it is more than likely. Unlikely things seem to be happening everyday lately. Mr. Haarde looks like a decent chap, but he's a politician. Even if in the end, we are correctly compensated in accordance with the rules,(by no means certain due to the economic mess that is now Iceland) his statement is likely to be quite wrong. Under European banking regulations, (which include Iceland)interest on one's deposit stops on the day the bank goes into administration. The bank has up to three months to compensate depositors. If one has say £50,000 on deposit, in three months you will have lost up to £800 in interest! Is Geir Haarde going to replace this money? – of course not!
UK Chancellor Alistair Darling was on BBC television this morning announcing details of the British Bail-Out. Regarding Icesave he also said:
"The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here."
Maybe Mr. Haarde isn't such a decent chap after all? Maybe he has no choice in the matter because his country is bankrupt?
According to Mr. Darling:
"Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it."
Maybe that's why Geir Haarde is trying to borrow €4 billion from Russia? According to Mr. Haarde:
“We have not received the kind of support that we were requesting from our friends, so in a situation like that one has to look for new friends.”
Mr. Darling evidently doesn't intend to rely on Russian cash to protect British savers, so he announced a special bail-out for Icesave customers:
"I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back."
No mention of Heritable Bank so far, however, and no mention of lost interest either.
The markets were obviously impressed by Mr. Darling's bail-out plans. The FTSE 100 is currently down 5.8% already this morning.
Newcastle Building Soc. have operational links with Landmineski – should we be drawing our money out there too????
When Gordon Brown and Alistair Darling got to the House of Commons this morning Mr. Brown finally announced some co-ordinated global action on the financial crisis.
The UK, US and EU (and a number of other countries too) simultaneously cut interest rates by 1/2 a percent. Japan offered their moral support, but their interest rates are only 1/2 a percent in total at the moment!
Mr. Darling has just talked to the Commons about the Icelandic banks. Heritable's deposits will be transferred to the Dutch bank ING. This applies also to Kaupthing Edge, the UK internet arm of Iceland's biggest bank. He reiterated he will do "whatever it takes" to protect savers. I assume he doesn't think that he'll need to borrow from Russia in order to keep his promise.
The FTSE 100 has erased this morning's losses, and is now in positive territory to the tune of 1/2 a percent.
I have approx £10,000 invested in three year bonds with each of Icesave and Kaupthing-Edge banks.How will the collapse of these banks affect me. Will I be able to reclaim my money? Also what would you advise me to do.
Keep a close watch on the Financial Services Compensation Scheme website. At the moment they say:
"We are working closely with all concerned on the practical arrangements to get people their money back as quickly as possible. We hope to be in a position to say more about the arrangements by the close of business on Friday, and we will publish updates on our website."