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Commentary: Don't hold your breath, the West's finance system is on the rocks
Chris Blackhurst15.09.08
So the worst kept secret in the City and Wall Street is out: after Lehman, Merrill was next. It was the bank causing the most anxiety, the big one, that if it collapsed, could bring the whole pack of cards crashing down. Merrill occupies a position in American society quite different from its relative obscurity here.
Over there, it has an office in virtually every large town and it goes by the nickname Thundering Herd. For it to fail really would have spelt disaster. Banks aren't meant to go under. Their bosses are clever and slick.
We trust them with our money. They're not like two-a-penny charter airlines - in the business pecking order of power and influence, banks are at the summit.
What has to be hoped now is that the Bank of America takeover of Merrill could mark the end. Certainly, when Alan Greenspan prophesied more disasters to come he would have heard the rumours about Merrill but he did not know it was close to seeking sanctuary.
So it's possible to heave a sigh of relief and wonder if Northern Rock, Alliance & Leicester (to be swallowed by Spain's Santander), Lehman, Merrill, Fannie Mae and Freddie Mac, and Washington Mutual (another, smaller US bank in trouble) might mark the biggest casualties of this crisis.
Together with them, of course, we've witnessed the spinning revolving doors at the top of the other major US and European banks, and job cuts galore. If that's the only price we pay then it doesn't seem like that much - the world will move on, regardless.
But the danger is this is not the final play - that the dramatic events of the weekend that saw two banks capitulate will be replicated.
Greenspan, the former chairman of the Federal Reserve, was careful to point to what he thought had to happen for confidence to return - US property prices have to stop falling.
Only when certainty is restored can lenders begin to release the credit squeeze and in the US, as here, there is no real sign of that occurring. All the talk in the US is of retail banks being fatally weakened, of credit card providers experiencing enormous defaults.
The bubble that was allowed to develop on the back of rising house values was vast - AIG, the giant company that insured many of the subprime bonds, has slotted into the seat by the exit that would have been Merrill's but for Bank of America's intervention.
It is seeking a $40 billion lifeline from the Federal Reserve. The Western financial system is holed on the rocks and the resulting slick continues to belch. So far, every attempt to stem the flow has failed. In this country, the Government's rescue of Northern Rock shook nerves rather than calmed them. The move by the central banks to restore liquidity had minimal effect. The nationalisation of Fannie Mae and Freddie Mac didn't save Lehman.
The announcement that 10 of the world's biggest banks are stumping up a combined $70 billion to use as collateral to try to kickstart borrowing may do the trick - but don't hold your breath.
Reader views (3)
Hopefully, this financial disaster will make the start that is needed to make people responsible for their actions at every level. At the top, we have bankers taking huge gambles and giving themselves bonuses; whether they were successful or not. At the bottom, we have whole families who view the benefits system as a career choice. Well, money doesn't grow on trees whether you are the top or the bottom. I want my hard-earned tax to go to neither.
- Lorna, London
Perhaps it might be wise to remember that is was the environment of cheap credit created by Alan Greenspan that led to this mess. He cut rates too much and too far. don't waste your time listening to him
- Zurich Banker, Zurich, Switzerland
We are seeing a paradigm shift from US dominated "numbers" driven one dimensional supervision to to old fashioned ethical banking, trust will be everything and speed/efficiency will count for little. The traders that took these risks blinded the management with number rationalism( Let's call them suprvisors cos they didn't understand the risks). No one was watching the real world. Smaller banks outside the bulge bracket are well positioned as they weren't able to reach for these products and they will step up to service the market gap that the US dominated Banks have left wide open. This is a historical market share shift from big technology The age of economic rationalism, where the world was dominated by accountants is drawing to a close. A new style of leadership will emerge that will be multi dimensional and considered. The Banks that capture this talent will lead the industry of the next 20 years.
- Joe, London
