Banking Rescues - Necessity or Baulking Free Market Capitalism?

The feeding frenzy begins as Lloyds TSB has successfully taken over HBOS for around £12bn and Barclays have bought some of Lehman Bros' assets like it's former prestigious New York headquarters and a couple of data centres for around $1.75bn.

Meanwhile, rescue efforts are coming in thick and fast. Last week, the US Government moved into to rescue the mortgage giants, Freddie Mac and Fannie Mae while this week it has bailed out AIG to the tune of $85bn. In the UK, Northern Rock was saved by the UK Government who took it into public ownership exposing the UK taxpayers to over £100bn of liabilities and clocking up massive consultancy fees as the 'experts' fight to reconstruct the failed bank.

The alternative to such rescues is pretty unpalatable, yet it it poses some big questions. For instance, why did the US Government step in to save Freddie, Fannie and AIG yet let Lehman Bros go down the swanny? I am sure many US mortgage holders sighed a huge breath of relief when the rescues took place, but what of those holding investments in Lehman Bros?

It has emerged that many foreign banks across the globe were very exposed to Lehman Bros and this may hold the key. To some extent, the US Government and public may not quite care so much if a Chinese or Swiss re-insurer ends up losing a few hundred million dollars but when taxpaying voters in a run up to an election are hit financially maybe it's just good politics.

What of Competition?

Most financiers, if asked, would be whole-hearted supporters of free market enterprise and capitalism and in the same breath they would certainly say that some win, some lose as a result. So it may be surprising as we see these rescue deals coming in and saving daft Executive Teams and Boards of Directors from their mis-management that there isn't a massive outcry. Surely, it's just a consequence of free market enterprise or are these guys just keeping quiet as their jobs may be on the line next?

One area of concern in the UK with the rescue of Northern Rock is that it can put the newly rescued bank in a strong position competitively. While all other banks have to rethink their low cost products, the argument was that Northern Rock could effectively act with abandon as it was underwritten by the public and so offer ultra-competitive deals.

But perhaps the merge of Lloyds TSB and HBOS is of more concern. Suddenly two of the giants of the UK mortgage business have combined and now jointly account for over 28% of the UK mortgage market, HBOS having already been the market leader. For Lloyds TSB it seems to have been a cheap and fast method to expand and become a much bigger player. And how sweet - none of it gets referred to the monopolies commission and I dare say, to the same at European level.

In fact, as the crucial hours closed in on the struggling HBOS, Gordon Brown himself stepped in to persuade the CEO of Lloyds TSB, the aptly-named Sir Victor Bank, that a merge would be in the nation's interest. In doing so, the Government used a 'National Interest' clause to waive scrutiny by the competition watchdogs. The CBI, rather curiously, stepped in to support this move.

Yet not many hours before, we were being told that HBOS was rock-solid, well funded and not at risk. The only reason that it was allowed, inferred Mr. Brown, was to prevent a run on HBOS, Northern Rock-style. Whichever way you cut it, the newly combined Lloyds TSB-HBOS Bank now has 22m customers and by a mile the largest chunk of the UK mortgage market. If that's not anti-competitive, then what is?

Tear up the theory of free market enterprise - if a bank fails, all rules are forgotten.

Ah, but for the cynics, the newly combined mortgage giant will not be allowed to offer ultra-competitive deals or else those boys in the competition commissions will be on their backs like a ton of bricks. Yes, those same eagle-eyed chaps who have been told to turn a blind eye to the merger - right.

Comment

As an account holder at HBOS I had a concern about their position and was relieved that something was done. However, from a neutral perspective, I watch the calamities in the banking sector unfold with some disdain. Serial mis-management, greed and hubris has created a financial market and system that was all built on the most fragile of materials that took just a few jolts to collapse. If that had happened in any other industry, no Government would have stepped in to save the companies from the mess they create. Yet Executives and Directors will walk away from the carnage with fat pay-offs and their reputations still intact somehow while their employees watch on confused and jobless. The shareholders pay the ultimate price.

As the whole mess unfolds it should be noted that in the last 18 months Lloyds TSB's market value has dropped around 35%, HBOS by nearly 75% while in the US Lehmans Bros dropped from $49bn to just $0.109bn, Citigroup from $270bn to $82bn and AIG's from £179bn to $5.7bn.

I understand that it's important to keep the capital markets functioning and to make sure there is confidence in the system, but that does not mean that the public should blindly trust the bankers to regulate themselves and create markets of such dubious fragility to make themselves fabulous wealth. Banking has become a world of its own, full of complexity and cross dealings that has spawned its own language such is its cliquishness.

Now when it fails, rules and regulations governing all other companies are forgotten in a mad panic to save the system and make sure the gravy train does not stop. If it was a major manufacturing or electronics firm, the same would not occur. As always, there is a parachute in banking - after all, you wouldn't want all those clever people having to go without their Porsches now and avoid paying taxes, would you? It's in the National Interest, don't you know?