A dreadful mistake

Nationalising anything is a dreadful mistake if the intention, in the medium or long-term (pace Keynes), is to facilitate efficient administration. Anyone who can remember dealing with a nationalised bank in central Europe prior to 1989 probably still has nightmares about the frustrations endured. At best nationalisation should be replaced by an administrator charged with maintaining some shareholder value before business can become stable again.
You cannot improve banks by turning them into part of the state apparatus as the management incentive is irreconcilably different. It will be interesting to see if Northern Rock proves me wrong.
Banks occupy a very special position in our economy and allowing any of the major ones to become bankrupt would have a domino effect of catastrophic proportions for the UK.
A ‘bail-out’ with taxpayer’s money should be seen as an, admittedly unexpected, investment in the commercial blood supply of the economy – one which will, over time, be fully repaid. This ‘bail-out’ is only likely to succeed if those managing the banks can look forward to advancing their own personal wealth. Our tax system has benefited enormously from the financial sector and with the right future modulation and supervision will continue to do so. ‘Toxic’ assets are not entirely composed of unredeemable features and, given time, a fair proportion may be realised. Writing down is inevitable, but writing off is stupid.
If we had been privy to more information about individual banking activities regarding credit swaps and leveraging, market forces would have long ago forced a change in these practices. One thing we do need for future stability is up-to-date transparency.

Bank on it!

Dark days indeed, especially if you have shares, own an overvalued house you need to sell or have lost your job and source of income.
It is little consolation that things will eventually improve and this, financial burst bubble, will become just an historic tide mark.
The ‘get-rich-quick’ syndrome is part of human nature and we are unlikely, genetic engineering notwithstanding, to eradicate it. More insight into the details of company accounts might have focussed attention years ago into banking practices which created the domino structure now causing havoc. Regulatory oversight was insufficient and/or powerless to intervene in the past and will not improve much in the future, 700Bn US$ or not, once the tide has receded. Detailed regulation is anathema to our culture, not just to our banking system.
Confidence will return, it always has, even if it requires some healing time.
The main trouble with banks is that I don’t own one.

Banking chaos: Umbrellas needed?

Banks are well known for lending policies where the loan is recalled at precisely the moment the client requires it. Bank lending strategy is to offer an umbrella in fine financial weather and take it back when rain starts to fall.
Lehman Brothers has filed for bankruptcy protection, Merrill Lynch has been absorbed into the Bank of America and globally banks are under pressure. Should the consumer give the banking system support in these trying times?
Whether the individual likes it or not, through the central banks and finance ministries, taxpayers’ money will be used in vast quantities to ensure the banking edifice does not collapse completely. Unlike other commercial tragedies which occur daily and receive no establishment support, banks have a special role in the generation of capitalist wealth which makes their survival essential.
In ancient times banking was fairly straightforward. Money (or Gold) was deposited, kept safely at a small charge and repaid when required. Somewhere along the way came the bright idea of lending out some of the secured money (which the bank did not own but held on deposit) temporarily to third parties for an interest fee. Experience soon showed that the bank could lend out to third parties a certain percentage of their deposits (assets) without much risk of the owners asking for it all back at any one time. This safety net percentage still underpins modern banking and is about 8% to 9%, I think.
Obviously, the smaller the bank the greater the risk involved that any large withdrawal might cause it to run out of money to pay other customers.
Although all banks have to lodge a certain sum with the central bank as security based on the size of their assets and they are legally required (like other businesses) not to trade when their liabilities exceed their assets, keeping track of the size of the assets and the liabilities has become rather complex.
Take a simplified Lehman Brothers as an example. Over the 150 years of their existence, Lehman Brothers made a lot of profit and gradually increased the size of their assets which belonged to them (own capital). Customers deposited money for Lehman Brothers to invest on their behalf which formed both an asset through the investment portfolio and a liability as money owing to clients. Because the sub-prime mortgage business was so profitable (higher risk – higher profit margin) Lehman invested in it – bought bundles of mortgages from other banks or Freddy Mac etc.
Lets say on January 2nd Lehman had a balance sheet showing 10 Billion US$ of assets and 8 Billion US$ of liabilities – a positive balance of 2 Billion US$. Unfortunately, due to the fall in house prices by July 2nd the value of the sub-prime paper assets had to be revised downwards and the balance sheet was then 7 Billion US$ assets and 8 Billion US$ of liabilities – a negative balance of 1 Billion US$. Assets fluctuate on external influences but liabilities usually remain stable or increase.
Although Lehman Brothers had substantial reserves it still meant they were technically trading illegally so they had to file for bankruptcy. The irony is that when the housing market again rises (and it will because banks etc. will give mortgages again) the paper assets will also rise in value without Lehman Brothers doing anything. It is all a question of who has the large enough umbrella.