Morning:
9°c
THERE could not have been a starker contrast to the bleak mood elsewhere in London last night than at the Sotheby's auction where a selection of works by the artist Damien Hirst was sold for £70 million.
It was standing room only during the auction as a succession of Mr Hirst's trademark pieces bearing resonant names went for prices that far outstripped the estimates: the shark in formaldehyde called The Kingdom went for £9.5 million; the pickled beast known as The Golden Calf lived up to its name and was sold for more than £10 million.
Even those sceptical about the intrinsic merit of Mr Hirst's works were struck by the extraordinary spectacle of so much money apparently freely available at a time when financial institutions are in freefall. It may not be coincidental, however, that those with money to invest may regard Hirst animal pieces as a safer bet than equities. Certainly, the one group that may share some of the anxieties of bankers are art dealers, whom Hirst simply ignored in taking his works straight to auction.
The spectacle of emperors' new clothes being found wanting is certainly prevalent in the City, where analysts now admit that a significant part of the financial sector was, prior to the fall of Lehman Brothers, massively over-leveraged, with a great deal of debt perched on a relatively small capital base. Few people believe the US Treasury Secretary Henry Paulson was wrong to decline to bail out Lehman's. If it had, the moral would have been that no matter how ill-judged a bank's operations, the taxpayer would have underpinned its future.
That is wrong in principle, even though it did happen both in the case of Northern Rock and in the recent bailout of the two largest US mortgage providers. They could not be allowed to fail but Lehman Brothers could. The point was thereby well made that securitising assets — wrapping up bad debts based on US property as tradable securities, misvalued by errant credit-rating agencies — was unsound banking. That lesson has been hard learned.
The question now is where the fallout will end. One institution that cannot be allowed to go under is the insurance giant AIG, which has received the equivalent of a bridging loan from the US insurance regulator to give it time to find cash elsewhere. AIG is the insurer's insurer. Unfortunately, its investment banking operations have been its undoing, but unlike Lehman Brothers, it is too important to the entire banking and insurance sector to sink.
As a result of these successive shocks, there have been predictable moves towards tightening regulation over the entire sector, articulated by both Barack Obama and John McCain and echoed in London. But the problems that led to the present crisis are complex and not susceptible to easy political solutions. In particular, as this paper's Anthony Hilton has forcefully pointed out, kneejerk regulation cannot be allowed to ride roughshod over the rights of shareholders; the remedy could lead to problems of a quite different order.
There are many people who will suffer from the fallout from the present crisis. Perhaps unfairly, the Prime Minister is one of them. He is certainly not responsible for the latest problems in the financial sector but febrile markets, falling pension values and uncertainty about the wider economy mean that the feelbad factor will affect his own political future. And that was already bad enough.
A good general
GENERAL David Petraeus is leaving Iraq in a far better state than when he took command of US forces there 18 months ago. Then, the situation seemed to have spiralled hopelessly out of control. But at least partly because of General Petraeus's so-called surge, the level of violence has reduced dramatically. The change was not just the result of increased troop numbers — though that was essential — but General Petraeus's recognition that the problems in Iraq required political deals, engaging with Shia militia and Sunni insurgents. Iraq could still easily revert to violence but the improvements effected by the General are a sound foundation for the future.
