Afternoon:
10°c
It has been this column's view for some time that we would not get through the financial crisis without the collapse of an investment bank, and probably a commercial bank. Those who disagree tend to do so only to a degree. As an example, I was told last week that the troubled institutions would not fail because banks are like football clubs - there is always someone out there with a lot of money who wants to own one. Someone will ride to the rescue.
That is certainly how it has panned out so far but it may be too comfortable a view. One only has to look at the firms that have disappeared from the City since Big Bang or in collapses or takeovers to realise how little there is in a name. Who these days remembers Drexel, DLJ or Salomon? Yet all were major players in their time. Who would have thought Carlyle would care so little for its reputation that it would let a quoted flagship hedge fund collapse last week, or that KKR would be willing to leave its Amsterdam-quoted fund floundering and friendless.
The brand value of a financial institution needs to be reinvented for each cycle because memories are short and the driving forcesmove on. Perhaps the biggest names will always find a rescuer, but there is no guarantee the lesser fry will.
The mood of potential investors is also changing - largely because they have already been badly burnt. It was not a distressed purchase when the Chinese put $3 billion into Blackstone when it floated but, given the shares' behaviour since, it might as well have been. The Chinese are not thrilled to see the shares halve in value in less than a year, even if the loss is only $1.50 a head for their 1.3 billion people. Such public pain is bound to colour their attitude to other investments, and the terms under which money will go in.
Theirs is not the only capital thatmay be less keen to come forward now than it was a few months ago. Bahamas-based British investor Joe Lewis has a reputation as a shrewd operator but he is thought to have lost $1.6 billion (£800 million) by going into the shares of Bear Stearns too soon after its troubles became public knowledge last summer. He is unlikely to show such enthusiasm next time.
Nor will the sovereign wealth funds that have poured money into businesses as diverse as Citigroup, Morgan Stanley, UBS and Merrill Lynch, and have also seen their investments drop by a third or more in a matter of weeks. It was thought at the time that the terms on which they invested were pretty onerous, and took full advantage of the banks' desperation for capital. But even those high rates are not enough to compensate for the capital losses since.
This is where it gets interesting. The banks' losses continue to mount and the new capital raised lags well behind the write-offs already announced, let alone the others still to come. So most of them will have a pressing need for yet more money.
This could be addressed in part by selling off choice assets, but in these markets finding a buyer at a reasonable price could prove a challenge even for the best stuff - given that the likely buyers will probably find themselves in a similar pickle. The likelihood is that they will have to go back to the sovereign capital well and tap it again.
The word is that, having been burned, those funds have not set their minds against any further capital injection, but it will not be on the same terms. The only possible interpretation is that they will want a greater degree of control - either the terms will be stricter financially or they may insist upon management changes and seats on the board. So the political temperature is likely to rise still more.
If the Americans, in particular, find that unacceptable in an election year, there is just one way they could avoid it, and interestingly it is one that is talked about more and more.
ALMOST all the American savings and loans institutions - organisations that were the equivalent of British building societies - were in huge financial trouble in the 1980s. They had become bored with the low returns they got from collecting retail deposits and lending the money out as mortgages, so they started playing in the financial markets and it was only a matter of time before the Wall Street banks took them to the cleaners - stuffing them full of toxic products that, of course, all blew up.
With the US financial markets beginning to seize up, the American government decided in essence to nationalise the savings and loans problem and make the taxpayer pick up the bill in what was by far the biggest financial bailout the world had seen.
We are not there yet, of course, but in three to six months' time, some similar Government rescue may well be seen as the only option left to solve the current mess even if "make the taxpayer pay" is not the best slogan for an election year.
