New deal in financial regulation will inevitably follow the bailout
29 Sep 08
Shocking. It’s not too strong a word to describe what happened to financial institutions on both sides of the Atlantic over the past two weeks.
In a fortnight we’ve seen the credit crunch sweep over HBOS and Bradford & Bingley in the UK. In the US, it has claimed investment banks Lehman Brothers and Merrill Lynch, insurance giant AIG and Washington Mutual, the latter recording the biggest banking failure in American history, while the Benelux governments have had to bail out banking and insurance group Fortis.
All of these institutions are set to lose their identity in some shape or form, either though acquisition or through an effective takeover by the state. In Scotland, desperate attempts are under way to patch together an alternative financial consortium to preserve the identity of the Bank of Scotland, which otherwise is set to become an operating arm of Lloyds TSB.
Meanwhile, as of this morning it looks as if the rescue plan mooted last Monday in the US has finally won the support of the Republican and Democratic party leaders in Congress. If it is voted through Congress, the deal means the US taxpayer will pay $700 billion for the “toxic” loan-based assets that have brought the banking system to a virtual standstill.
Maybe this is the light at the end of the tunnel. Clearly, restoring confidence in the financial system is the priority, for both the US and UK governments. Neither HBOS nor Bradford & Bingley actually became insolvent; it is just that confidence in their financial stability had declined to the point where a collapse was a strong possibility. Meanwhile, even those banks not in such immediate danger are simply not doing business at the level they need to, to keep the “real economy” moving.
It’s a fair bet that for anyone who wasn’t around in 1929, the present situation is unprecedented. The Wall Street Crash of the 1920s was followed by President Roosevelt’s New Deal, which among other measure established the Securitiies and Exchange Commission as a regulator with real teeth.
If taxpayers are going to bear the burden of restoring liquidity and confidence to the money markets, a New Deal for the 21st century is inevitable. There is no way that the “light touch” regulation that has been the mantra since the 1980s will be seen as fit for purpose, when the true cost of paying for the mistakes of the past two decades becomes clear.