Sometimes it’s great being poor. I’ve been watching the latest round of the gradual disintegration of the financial system with some glee.
Wall Street takes it up the arse
AIG, the grandly named American International Group, is the latest Wall Street financial giant to be taken into public ownership. In return for an $85bn loan, the Federal government has taken a 79.9% share in the insurer. How deliciously ironic: the US government taking companies into public ownership. An admission of defeat? Of course, there has always been a much stronger element of planning to the American economy than its leaders like to admit.
It’s funny, in my limited research - I remembered that I had a subscription to the Financial Times website – I haven’t come across any commentator who even mentions this little irony. I first picked up on it in a book called Supercapitalism, which talks about the role the US government played in regulating major industries during the Cold War.
Of course, this isn’t the first time in the past couple of weeks that the US government has taken a giant financial institution public. The two federal backed mortgage providers, Fanny Mae and Freddy Mac, were taken into public ownership last week. That was kind of different, I thought, because they were started as Federal Government schemes and were highly regulated – although they did have public shareholders. In any case I was too busy to care last week.
As befits the arcane workings of the financial system, AIG is a supremely complex institution (check out this .pdf). It has some four divisions offering various types of insurance and financial services, all of which are reporting an operation loss. So they’re perfectly positioned to feel the effects of both global warming and credit crunch. But the US government has decided that AIG is to important to go down. It’s tendrils snake their way in to pretty much every aspect of financial life in the US, it’s collapse could lead to an almighty systemic shock. But are they just postponing the inevitable?
Taking companies into public ownership gives no guarantee that they won’t fail. And lots of financial institutions are failing – just look at the fiasco at Bear Stearns or Lehman Bros. With the world’s biggest mortgage book on their hands already looking like a risky investment, can the US government bear the brunt of the cost of climate change through the world’s biggest insurance book? Remember Lloyds? (Actually I don’t, I was too young. But people have told me about it).
The other Lloyds, Lloyds TSB, today announces that it is in final stage of merger talks with HBOS. In fact, actually Lloyds TSB is buying HBOS. HBOS of course lost a spectacular 77% of its share price over the last. I’ve been too broke to buy newspapers, so I haven’t brushed up on the facts; but I must admit that I was secretly quite pleased because my overdraft with them is maxed out. It made me think of a Fight Club-esque scenario where we were taken back to economic year zero, but without the conflicted machismo.
not sure what's going on here, this is the geezer from the halifax ad
HBOS has the UK’s biggest mortgage book, by far. It’s collapse would be like Northern Rock times a million. But just like Northern Rock, HBOS relied on wholesale money markets for much of its funding. Their mortgage book doesn’t look to be in particularly good shape either: about a third of their mortgage customers own less than 20% of the equity in their homes – leaving them in all kinds of shit if house prices tumble (as seems inevitable). The numbers are vast, and rather difficult to understand. Read for yourself.
Apparently, because they’ve been comparatively sensible and didn’t join in the with the credit gold rush, Lloyds TSB would be able to absord HBOS’s vast liabilities. But their merger would create such a massive financial institution that it would constitute a threat to efficient markets – one BBC reporter terms it a ‘Banking Collossus’. The government has said it will legislate to make sure the deal avoids the attention of the Competition Commission, but what about the EU?
And is it really a good idea to make institutions larger? Whatever about efficient markets, a combined HBOS and Lloyds TSB would have a massive structural role in British financial life. Is it wise to have profit motivated organisations playing such a major role in society? Perhaps they are trying to maneuver themselves in to a position that they are too big to fail. But the larger they come, the harder they fall – see above.
Oooh. The boards of the banks are apparently meeting now… Watch this space
