New world order

Sigh! ... common sense appears to have left the building, instead fear has moved into the arena ... looking at balance sheets and I can see no good reason for the drops we see, but my gut tells me we have lots more blood to see yet ...

....or to put it another way. It is a return to normalilty and common sense. A healing process.

Maybe there should be a register of the names of all the failed finaciers, executives and directors of the bankrupted institutions so that they cannot get another job in that capacity again.

This is a 1929/1930 situation.

The precedents, and indeed much of the comments from informed financial commentators and market-makers is that this is a ten year problem.

The underlying house prices will have to fall to long term multiples of income, and until they do the problems will persist.

UK house prices are yet to fall significantly and until they do, to perhaps half of present levels reconstruction of banking confidence cannot begin.

To rebuild confidence all mortgages fro more than 50 percent loan to value will have to be written off. When this has happened and when the market has seen that this has happened (a year or so later) then banks will have confidence in each other again and in the balance sheets of the banks.

Accounting methodologies MUST be changed to include all presently off-balance sheet assets and liabilities and contingent liabilities. Liabilities MUST be valued as worst case if there is any doubt. (Institute of Chartered Accountants please note.)

Theses accounting changes are essential for balance sheets to be trusted again. All synthetic liquidity construction methodologies must also be on the balance sheet and valued as worse case.

Regulation and supervision will (regrettable) have to improve to check that these accounting changes are actually implemented.

Debt rating agencies will also have to be nationalised, or so closely regulated that it will be the same thing.

Hmm - I think you are being overly fair to HBOS here, who seem to me to be the architects of their own downfall.

In their rush to create scale in the mortgage business they were among the worst offenders in breaking common sense rules with their lending multiples.

At the same time they were furiously competing to give savings customers extra, with rates higher than they were earning on standard mortgages.

To fund this business model, they appear to have used a strategy of stocking the balance sheet with high yield (=high risk) US mortgage securities, and relying on a good credit rating for access to cheap funding.

And noone appeared to spot the rather obvious link that when the high risk piece wobbled, the cheap funding would disappear, swiftly followed by the hard-earned high street market share.

I doubt banks will be rushing to appoint FMCG experts again in a hurry.

Or could it be that everyone is seeking retail deposits, with a nice state guarantee attached, as a cheap source of base funding? How long before Gordon, in the interest of financial stability, suspends the competition commission's activities in this area too?

The HBOS CEO statements in the recent interview with you revealed rather to much vulnerbility. He was a smooth talker but there seemed to have been little conclusion of where the business was going. No dynamic means collapse, there is no middle ground. Pretty grim for a business that had to have been aware problems were coming for years. Comments along the lines of - it will take a long time to work through - are just an invitation to a Boston Tea Party.

The willingness of the UK government to bend the law on this deal are disturbing to say the least. The CEO of Lloyds must think all his Xmas' have come at once. You can only conclude that the workforce will suffer and the UK consumer will suffer.

The biggest challenge is how governments stop multinational companies setting the landscape, and however difficult it is as a job this government shows no sign of being up to it. The then boss of Courtaulds was quite unequivical about a decade or so ago or maybe more in interview - It is the job of a business to create a monoploy and the job of government to stop monopolies being created. Just how is this government discharging its responsibilities in this area.

Conservative institutions are not rewarded, as the bailouts and taxpayer subsidies keep the market in the grip of those institutions bailed out.

Northern Rock should have failed, the bondholders and equity holders capital gone, and the prudent banks would then have picked over its assets in liquidation. But that would have meant a faster housing bust, which destroys his illusory economic growth and no more boom and bust nonsense he kept saying as he turned his blind eye away from the clear excesses in the market.

I think it's a scandle that Brown is now chucking out years of regulations in a single day, to prevent a situation where only a few banks ending up controlling the UK domestic banking market, and is now helping to form a mega monopoly of TSB-HBOS to save one institution.

The best outcome for the UK consumer and saver would be continuing competition amongst banks in the mortgage market, the savings market, with the imprudent banks who created this bubble, going to the wall. And new banks coming along.

Brown is trying to go back to the days when BT and mercury owned the phone network and there was no competition. He is doing this to rebuild the banks balance sheets - at our expense!

Dear Robert
"How much of tax payers money went into the merger between Hbos and TSB"?

"... looking at balance sheets and I can see no good reason for the drops ."

This is fantasy! Banks create an asset when the write a loan. The asset is only as good as the probability that the loan will be repaid. Banks are paid to manage risk, this they have failed to do. The assets on their books are worth much less than they purport - that's the problem.

The return to comon sense and risk management is important - people forget that things can go wrong.

This will now be another risk management test, the banks are supposed to limit risks in any one area.

This doesn't seem to have worked with regards to mortgage backed securities, we will now see how their counterparty risk processes work wrt to Lehman bros.

What we appear to be finding is that some of the banks just don't seem to have a clue about how to run a bank - they thought it was all about making money for themselves and forgot they had a business to run.

We shold also be looking at Bank's auditors, who are supposed to review these risks.

Perhaps it will be a better world for the banks customers in the future.

Who in their right mind would want to take an unlimited punt on the UK housing market right now (least of all a bank which has remained pretty unscathed by the housing crash)? I think there's more to this than meets the eye.

With all these central banks putting Billions of £ $ € in to "the system" and buying failed banks.... who's supplying this cash?

Who now owns our banks... and our governmensts?

Maybe in a few years we will be seeking debt relief!

Phill

"The new rule for any bank or financial institution in the world is don't be too dependent on any one source of funding"
duh you don't say.
it appears to me that specialism in all areas of business has been encouraged for to long, rather than having diversified symbiotic businesses that are more tolerant of shocks, but maybe not as profitable in short term.

Maybe the BBC should take some blame for the state of the housing market. last week you interviewed the head of the Nationwide who predicted a peak to trough fall in average prices of 25%. You then repeated that as 'house prices to fall by a further 25%'. As with Northern Rock the BBC is making the news not reporting it and ordinary people are suffering because of panic you cause.

"So the main benefit of its merger with Lloyds TSB is that the enlarged group will benefit from more diverse sources of finance - which should mean, to put it in crude terms, that the beefed-up Lloyds TSB will be less at risk of a run than either HBOS or Lloyds on their own."

Robert you fool - Lloyds TSB was NOT AT ANY RISK OF A RUN so stop causing chaos by the asinine suggestion that there was one !! This is what gives financial journalism a bad name!

You are only doing to placate Lloyds TSB who have been shafted [just look at the Share Price this morning !!] with a deal they neither want nor need !!

Just wait until the pension funds and other shareholders vote down this deal...

Oh, hang on.....

I'm not sure it's worth you guys spoending too much time rationalising this situation.

It's the free markets doing what they're supposed to do. Whilst there's money to be made, traders will make it. If they can generate profits (and bonuses) by bringing banks down, then they will continue.

Its not 'if' but 'when' and 'who' now. The short sightedness of the system is now exposed for all to see and RP you shouldn't be focusinfg on the individuals but looking at the core reasons.

Robert, Can you at some point please make clear to joe and joeanne bloggs that there is a deposit insurance scheme in place, and how much of their deposits are insured.

This flight of deposits seems to only be exacerbated by the fact that noone is mentioning this!

Thanks

How blindingly obvious that if you rely too much on one source of funding you are vulnerable.
Do they not read any of the reams of literature they spew out when selling pension plans and investments - spread your risk.

The more worrying problem is that most of these banks appear to be buying and selling things they do not understand.
I find it a general rule if you don't understand something, don;t buy it until you do.

Investment Banking is a parasitic industry, run exclusively for the benefit of those who work in it ... long term, its demise is going to be a GOOD THING. We'll all be better off eventually.

The credit crunch has cause a massive reduction in the money supply as banks are forced to deleverage. On the other hand you have the US Govt creating billions of dollars to enable it to bail out these failing institutions. What is the overall impact of these to adjustments to the money supply and how will it impact inflation into the future?

another nice piece robert, but i think you make one error at the end.

i fully expect contagion from the current crisis to spread to china over the next 12 months. this is an economy that has been growing at 10% plus per annum for nigh on a quarter of a century. but given that country's dependence on exports to the us and europe, and the fact that these two main export markets are going into recession at the same time, i think a sudden slowdown in china is now inevitable. and when the tide goes out, you get to see who was swimming naked. china has already experienced a meltdown in its stock market. i expect a banking and currency crisis to follow (watch how quickly those reserves deplete..).

if i were an optimist, i would hope that this will lead to public protests in china and some kind of democratic transition. more likely it'll just mean we're all really screwed.

I think the real reason HBOS was such a concern was not that it was too dependent on one source of funding more it’s exposure to the UK mortgage market. On the funding front the money is still there in the system somewhere, the cash has not just disappeared it is being effectively horded until better times arrive. The BOE needs to stop reacting when times reach crisis point and put in place more long term robust plans. Just the prospect of liquidity being available over the medium term will probably precipitate a return to some normality for the wholesale money markets. The real moral hazard here is to push the financial system to the point of total meltdown, and along the way demolish the pensions, wealth and livelihoods of the entire UK population. Now is not the time to try to adjust the financial system in such a fundamental way, if the model is not appropriate then the time to correct it is when there is an improved economic climate i.e. a growth phase not a recessionary phase. The government and the BOE are the route cause for any structural problems with both the economy and the financial system, they need to address their mistakes when these systems are in a better shape to cope.

Are we seeing the bursting of two related bubbles here - A housing bubble and a banking bubble? If house prices do fall back by say 40%, then is it inevitable that the banking sector both here and in the US will be scaled back by a similar amount, either through failures or through mergers?

I've never liked the propostion that the financial services sector is the future of the British economy and that it now responsible for "generating" a fifth of our GDP. It seems more realistic to look at this sector as an overhead, like the finance division of a large company, and a 20% overhead is ridiculous and unsustainable.

As Robert says, maybe the future is with more Conservative institutions, but I would have thought the sector is not going to "earn" anything like as large a slice of GDP that way.

Was the US panic yesterday because market participants think there will be no US Treasury/Fed support for wholesale institutions, just for consumer related ones? This sees to be Robert Peston's interpretation of reactions to the AIG "nationalisation".

Or was it because Paulson and the Fed looked at the derivatives book of AIG and the wider portfolio of the AIG Financial Products group and saw the "Heart of Darkness". A complex, massive position which was impossible to value and where the funding requirement has gone from $20, to $40, to $75 and then to $85 bill in six days, and who knows what it really is? A company which reached into almost every significant financial institution in the world, and whose bankruptcy would force realism into derivative books across the globe?

The UK government has moved aggressively and sensibly to move HBOS into a company which has been much more conservative about its lending.

Who is monitoring and is ready to act with the transnational banks and insurance companies in Europe?

What are the infrastructure banks and PE funds doing about funding now their business models (like investment banking) are looking "old world"?

It seems to me that there needs to be coordinated US and European and Chinese intervention to lay out a medium term solution (medium term = weeks and months, not fire fighting).

Underlying this whole crisis is a massive US fiscal and current account imbalance, which has been funded by Chinese and Arab money. Consumer spending is being buoyed up by a return to negative interest rates in the US. But negative interest rates didn't get the Japanese consumer spending again in the mid-1990s.

It would be great to think that the financial crisis and the property asset price drop can be sterilised from the real economy, but the real economy of consumer and capital spending has been sustained by fantasy economics - a fantasy that US consumers can spend forever without saving, that companies can leverage without undue risk, and that investment banks and hedge funds are perpetual motion machines

The one thing that we don't want now is a sell off of the dollar. The ex-IMF chief economist, Kenneth Rogoff, addresses this in today's Financial Times. More than anything else US policy now needs to avoid a run on the dollar, which would result in another enormously disruptive market dislocation.

I read Friedman and Schwartz on the "Great Contraction, 1929-1933" this morning. It makes you think. No answers, but it reminded me that things can be bad, but bad subsequent policy reactions can make things even worse.

Wait a minute......£12Bn sounds familiar!! Was not £12Bn the sum raised by the Royal Bank of Scotland from its shareholders only a few months ago? Looks like Fred "I'll pay cash" Goodwin has been caught napping again, or is a case he no longer has the redies? It's a pity that he had not slept on the last time when he foolishly overpaid for ABN. Had he kept his powder dry he could have beat Lloyds to it and instead of merely being Sir Fred, he could have become King of Scotland!!

Not sure about your analysis of the the new world order. I would put HBOS into the category of conservative with it's business model primarily focused on the UK mortgage market, which should have made it a 'superpower', it doesn't look much like a superpower to me.
China are bound to be cash rich and now able to hold us to ransom with our own money due to a combination of the Chinese's manipulation of their own currency, and our(UK and US) incompetent handling of the structural flaws within our own economies. Given that we are generally in a lot more debt than them why don't we let inflation take hold thus reducing our own debt and in turn reducing the value of their cash stock piles, that'll teach em. Maybe that's what the Americans have got planned with the slashing of interest rates, perhaps they are ahead of the curve and we just need to fall in line?

the key issues here is what is being done to stop this happening again in the future?

if the banking sector is important enough to the UK and US economies for tax payers money to be spent keeping it afloat surely it should be regulated in a much tougher way such as, for example, the energy market is?

"China are bound to be cash rich and now able to hold us to ransom with our own money due to a combination of the Chinese's manipulation of their own currency, and our(UK and US) incompetent handling of the structural flaws within our own economies"

You would think so. Unfortunately (for China) a lot of Chinese banks have lent huge amounts of money to US banks... and the value of the debt was calulated in dollars. By devaluing the dollar the US have cleverly reduced the size of the debt and left many Chinese banks with huge holes in their balance sheets.

How sensible would it be for China to invest more of its reserves in Dollar assets, when the Dollar must, in the long run depreciate against the Yuan? Add to that how many of their investments in the past year have slid in value. A country in China's position should be deploying its wealth at home, to enrich its own people and stimulate trade in tangible goods. Wouldn't a rational chinese move be a managed withdrawal from dollar assets, not to pile into them more?

*Also the recent behaviour of the US and UK governments has sent out a worrying message to the investment banks and their backers.*

Really…? Oh dear, oh dear, and what about the very worrying message of colossal hypocrisy and double standards that is sending to those of us who are not investment bankers or their backers?

There is a double hypocrisy at play here in the cosy world of the self appointed *free marketers*:

The first one is the well rehearsed one of privatizing profits and socializing losses.

The second one is that the HBOS saga very clearly portrays the peculiar notion of free markets that these neo-liberals defend. First by making a joke of competition regulations they allow markets to become oligopolies in where only 3 to 5 dominant players are allowed. This is the case in banking, grocery retailing, energy providers, mobile telephony and a long etc. Then, as these oligopolists become far too big for comfort they – the free market zealots – declare that they are *too big to fail*. The recipe of the *free marketers*? Rescue the failing player with taxpayers money and push for an even larger player to be created, thus reducing even further the players in the oligopoly.

It doesn’t occur to this Public-School-cum-Free-Market elite that we wouldnt find ourselves in this situation if the banking sector – like so many others – was not an oligopoly in the first place, i.e. there wouldn’t be players that are *too big to fail*.

I wonder what would happen if and when Lloyds TSB-Halifax goes to the rocks. Would they nationalise the whole banking system and then privatise it in one go to put it in the hands of a single private monopolist, like the free market zealots previously did with BAA?

I don’t think this is a *new world order* but rather *business as usual* for the hypocritical self appointed defenders of *free markets*.

I don't think it's the funding that is the primary problem - it's where the funds are placed . If the placements are not secure then that rebounds on the funding . Diversity of both is very important .

The other situation is that we have had all these problems primarily emanating from the USA . Historically , this century and the last century , this is where problems with the financial markets have emanated from . The logic from this is that the World needs to restructure itself on a more compartmentalised basis such that it can ensure that problems , such as the sub prime crisis , are kept local to the countries where they occur . As such - countries such as the USA suffer the full results of their actions thus we - internationally - avoiding moral hazard problems .

We are all going to pay for this debacle..

I predict a return to an era when when banks charged us for each and every transaction.

This will be the end of free banking and a return to the good old days when cash was king. Only those people over 40 years of age will remember

Robert,

In all the discussions of the takeover of HBOS by Lloyds TSB, why no mention of the EU? The EU Commission has the final veto over whether the takeover will be allowed to go ahead, not the government, the FSA or the competition commission.

It is a measure of how seriously reporters have neglected the power of the EU to determine Britain's economy that they seem to be entirely unaware of this. If the EU vetoes the takeover, we plunge in to the abyss.

Anyone out here in the real economy knows that you have to diversify your business in many ways to make it stronger - customer base, credit sources, differing markets, suppliers and all the rest. This can be difficult but it has to be done to survive.

So how come all the City whizz-kids on their fat salaries could not see the blindingly obvious?

Probably lack of experience and training. So why the salaries and why the bonuses?

The people of Britain have been ill-served by the financial sector, by the government and the rest of the over-paid concert party that have been ruining this country for the past ten years.

Robert your defence of HBOS to the redoubt, in the last few days, has been out of character. Your point about sources of funding, however, is well made. The "flashy harry" style of management did for Northern Rock, including trading in US assets via Collateralized debt obligations (CDOs). A year goes by and the second most culpable player, in the form of HBOS, has now succumbed. Funny that Lloyds were not allowed to grave rob Northern Rock, but today the grave keeper has invited them back to pick over HBOS.

Lloyds are overpaying for HBOS, I guess that is an attempt to leave a few bruised egos in tact. It also means all those naughty "shorters" of the few few days make an even bigger profit.
Robert your defence of HBOS to the redoubt, in the last few days, has been out of character. Your point about sources of funding, however, is well made. The "flashy harry" style of management did for Northern Rock, including trading in US assets via Collateralized debt obligations (CDOs). A year goes by and the second most culpable player, in the form of HBOS, has now succumbed. Funny that Lloyds were not allowed to grave rob Northern Rock, but today the grave keeper has invited them back to pick over HBOS.

Lloyds are overpaying for HBOS, I guess that is an attempt to leave a few bruised egos in tact. It also means all those naughty "shorters" of the few few days make an even bigger profit.

That's capitalism!!

"It's a world in which the Chinese state, if it co-ordinated the investments of its cash-rich institutions, could end up owning more-or-less the entire financial system of the US and the UK."

Three months ago I would have been horrified to read that. Now I would welcome it. "Democracy", according to the Anglo-American model, has become no more than the exercise of a spasm of emotional self-indulgence, in which a lupocidal maniac like Sarah Palin can actually be regarded as seriously electable, and in which the collective hysteria of the hypnotised adolescents of the stock exchanges puts )(un)paid to thousands of people trying to do an honest job and live a reasonably rewarding life. Is no one else embarrassed at this meaningless lunacy? Is this supposed to be a civilisation?

I'm afraid all this goes to show that you can't actually trust anybody. They Govt, the top banks and their executives, financial advisors, or anyone else that purports to know what the heck is going on. Trust your own instincts with your future and don't let anybody say they know best because they are only in it to make themselves money. My instincts are; house price to fall by 50% of current, world markets to crash, Brown to go before Xmas, Labour to lose by a landslide next election, and the Tories to take us to the brink of civil war by 2011.

Some people seem to be criticising the central banks for supplying money to the moneymarkets.

Management of the money supply is one of their duties, but the loans from central banks are not permanent, they are extended whilst they are needed.

The loans smooth out the turbulence and do not necessarily impact on Inflation at all.

The loans help restore stability which makes economic activity possible.

The big problem right now is derivatives most types of which should be ruled out by regulators.

Issuing Bonds to raise money is no problem, selling on packets of Mortgages to Investors is a problem as the Investors are not directly managing the Mortgages.

Like Stock Lending (lending other peoples Shares at a profit) repackaging Mortgages takes the risk away from the lender or mortgage broker and gives it to someone who doesn't know what they've got.

It means an unscrupulous lender (ie American Mortgage Brokers) don't have to worry who they lend to, as they won't take the risk !

So lenders should remain the owners of the loans they create, in order to make sure that they behave in a scrupulous fashion.

Likewise Fund Managers should not be allowed to profit from lending out their Clients property (it wouldn't happen with any other type of property, for example an Estate Agent couldn't lend out your House whilst it was up for Sale !).

Stock Lending distorts the market in favour of Hedge Funds and Gamblers who wish to manipulate prices for their own gain, usually to the loss of the actual Shareholders of the companies being manipulated.

If these issues are not addressed the New World Order will not include Small Shareholders or any Private Pensions.

as a Lloyds shareholder do i get the chance to vote on this merger? if so what happens if it is voted down? What exactly was gordon brown's role it this affair or is he just wanting to be seen to be doing something? Did the government offer a sweetner to Lloyds? Do European competition rules have precedence over UK rules? what happens when the next bank is targeted... is HSBC/Barclays/RBS coerced by the government into taking it over?....so many questions so few answers. come on Robert lets see some investigative reporting.

@ 34 Soddball, I don’t think you understand how the EU works (in common with so many people).

To be honest, not sure if I understand it fully either, but as far as I do understand it the EU is responsible for competition in the *Single Market*, not the UK market, i.e. there is supposedly enough (?) banking competition in the EU27 Single Market, irrespective of the oligopolistic situation in the British market and the *even more oligopolistic* situation created by the HBOS saga.

Robert,

Do we need some discussion about exactly where all the money is coming from that the US and UK governments are pumping into the system? I heard that the US has a debt of some $800 billion, if the costs of the Iraq and Afghanistan wars are included. So taking over Fannie and Freddie, and bailing out AIG et al looks like simply moving debt from one (private) column to another (public) one.

I am not an economist but this looks very worrying to me. Can the Fed go bust? What are the implications of all this?

Well, personally I'm pretty hacked off about all this. I was just about to move my business bank account to Bank of Scotland, largely motivated by their generous interest rate on credit balances and low bank charges.

What's the betting those will still exist this time next year?

Ikantbelieveit wrote at 10:16am on 18 Sep 2008:

"We are all going to pay for this debacle.

I predict a return to an era when when banks charged us for each and every transaction.

This will be the end of free banking and a return to the good old days when cash was king. Only those people over 40 years of age will remember"

I wouldn't be surprised if he/she was right.
Free banking? Was it really free? Somebody had to pay for it.

I remember when I had to pay for every transaction on my current account when I lived in another EU country (not a country which sufferes from a banking crisis like the UK).

"JorgeG1 wrote:

@ 34 Soddball, I don?t think you understand how the EU works (in common with so many people).

To be honest, not sure if I understand it fully either, but as far as I do understand it the EU is responsible for competition in the *Single Market*, not the UK market, i.e. there is supposedly enough (?) banking competition in the EU27 Single Market, irrespective of the oligopolistic situation in the British market and the *even more oligopolistic* situation created by the HBOS saga."

JorgeG1,

I understand full well how it works, thank you.

In this case, council regulation EC 139/2004, of January 2004, means that EU law overrides UK law and the final say lies with the Commission.

Those wishing to read the document itself can get it here:

[Unsuitable/Broken URL removed by Moderator]

needafilip wrote "why don't we let inflation take hold thus reducing our own debt and in turn reducing the value of their cash stock piles, that'll teach em."

What an insightful and utterly wrong statement !! Will you be willing to pay £500 for a Big Mac ?? That is what it will take to really reduce the Chinese cash pile since they will insist on COD for all future trades. The only people hurt by galloping inflation are the poor of Britain !!

Commenting on #33 - it was a famous American who said, "In God, we trust. All others pay cash !!" But in their headlong rush in pursuit of wealth and happiness, the Americans totally forgot this saying !! Now they are paying the price of living off the never-never !! The British, not to be outdone by their American cousins, are also now paying that price !!

And those of us over 50 years old remember that *GOLD* is king after the £ (cash) was suddenly devalued by the then Labour Chancellor !! There was a mad dash for gold sovs, half-sovs and kuggerands !! There was no trust in the lying weasel-words of slime barrow boys trying to convince us that their air-filled assets were worth more than diamonds !!

And interestingly the US and the UK - the country with the most unrestricted capitalism are now falling prey to the country that runs a state coordinated capitalism. What does that tell us about the superiority of systems?

And note that the less free market a country appears to be the less in danger it appears to be from the powers of unbridled greed?

this is one of the possible translations of capitalism "rule of greed", the preference of the personal good over the common good.

Interesting that HSBC and Lloyds are coming out as the good guys when I seem to recall investors were heavily criticising them for 'underperforming'. It goes to show that the rule that directors are there to act in the best interests of the 'company'- ie all the stakeholders and for the longer term- is the right maxim. Shareholder power was being abused and lo and behold- the new order will need to make sure this does not happen. And this takes us to hedge funds and the enormous amounts of cash floating around the world- caused in my view because of the huge US trade and budget deficit in the main- there must be something put in place to limit 'gambling' in the worlds markets. If a company builds a genuine stake in a business it must declare it- we need really strict controls on buying and selling what you have not got as well.

The European Commission has no role in this take over because both companies have more trhan two-thirds of their EU turnover in the UK.

"I predict a return to an era when when banks charged us for each and every transaction.

This will be the end of free banking and a return to the good old days when cash was king. Only those people over 40 years of age will remember"

Not really. Cash can't be King with the importance of on-line shopping anymore. Equally as long as there are still 2 retail banks in the high street the customers who have money will move to the one that charges the lowest fee.

In real terms there's no such thing as 'free banking' and never has been. The banks have always more than covered their costs by paying sub-inflation interest rates on accounts and by slapping outrageous charges on any error the customer makes.

"And interestingly the US and the UK - the country with the most unrestricted capitalism are now falling prey to the country that runs a state coordinated capitalism. What does that tell us about the superiority of systems?"

It all depends on whether you think China's labour laws, health and safety rules and enviromental concerns are 'superior' or not. Ironically for a communist country its economic success is generated by exploiting its workers viciously. Mao must be spinning in his grave.

Of course, this does mean that all small banks in the Uk (and America) will end up taken over by larger Banks.

Economies of scale will rule the day!

Great headline Robert - gets one thinking and a wee bit research tells one all one requires to know about our future.

cheers

Are you ready to admit yet Robert that you missed the bigger picture altogether last year when you were so keen to focus on Northern Rock? Why didn't you tell us then that the same issues affected other banks too? Was it just more convenient to keep the story focused on a smallish bank up North than to explain the real issues facing the entire banking sector? If you did not know this- why not? Isn't that your job?

This battle is another win for the short sellers. The selling of shares should be only from shareholders only,any thing else causes too great a swing in the markets.We see swings of 20-30% in share price with no material change in companies true performance.

Justice was prostituted on the evil alter of securitisation years ago. Now we see the consequences. I can smell the panic in the Treasury, who in their right mind would buy a bank with a £200bn black hole, Lloyds must have been pushed.

The resultant Lloyds/HBOS is said to be worth £30bn. They hold a combined £675bn of customer deposits. Their loan book is £640bn. Well, assuming they have no defaults, stop selling the future and stop depositors withdrawing then we will be alright, wun'us?

The name of the article says it all....New World Order.
For those of you who don't know what that is........It is essential that you do a quick study to learn the history and future of what is refered to as the NWO. The central bankers have a plan for your future, that doesn't benifit anyone but them.

Covert class war is all I'm seeing.

A New World Order is exactly the reason we are seeing all this financial turmoil and banking crisis. This Lloyds/HBOS deal has created a monster and more mergers and takeovers will happen so eventually we will end up with one world bank. People need to wake up and smell the coffee before it's all too late. All this talk of it saving HBOS from collapse is nonsense it hasn't been saved at all. HBOS shares collapsed because investors pulled out because it's engineered that way.

15: peter-sym:

Peter: don't be silly.

My prediction for Interest Rates

Expect Mortgage rates to fall and deposit rates to fall faster.

Official Inflation will probably end up around four percent in the coming months.

Public Sector will probably go on strike over very unfair pay rises.

BBC/media reporting will remain melodramatic.

Labour will lose next Election to Tories.

FTSE 100 will probably touch 4600 by Christmas.

Now tell me why I'm wrong !

Givent that we are in extremely unusual and worrying times where the traditional market rules and frameword seem to be perilously close to imploding it astounds me that the Fed and the FSA/No 11 Downing Street haven't used the one lever which would stop all the market speculation. All financial services companies should be allowed to request that all trading in their stocks be suspended particularly the retail banks.

They should be given 12 - 18 months to clean up their balance sheets, focus on their core activities, divest all non-core business (AIG being the most extraordinary example). Much effort should be focused on extracating themselves from their interdependence which going forward needs to be more closely monitored.

Had Paulson suspended trading in Merrills, Lehman, AIG and Darling had done the same for HBOS they would still be around today. There would be no need for the $85 bn AIG bailout and calm would be more or less restored (at least in the financial markets) for a period to allow the balance sheets to be restored to some modicum of health. Leverage ratios also need to be looked at very closely going forward 20:1 doesn't give you much wiggle room if any of the assets in the 20 decline by 5%!

I also think there is a very strong argument to outlaw short selling. The advocates of short selling argue that they provide a critical service identifying and punishing poortly performing businesses is frankly nothing more than self-justification. Short selling allows the pendulum to swing far to aggressively particularly in times of fear. If nothing else financial institutions which hold retail and commercial deposits need to be protected from short selling speculators who have made obscene amounts of money in the last few days.

It strikes me that in 'interesting times' times someone ought to be looking at 'interesting solutions' and I am astounded that the suspending trading in certain stocks hasn't been given much more serious consideration.

I suspect that the reason for this merger was fear. Fear of what could happen.If HBOS failed the cost to the Treasury would be immense. It would break the Bank of England, Goverment debt would be increased. The pound would fail and the IMF would have to pick up the bill. This could happen if the other banks under pressure fail. This is one of the problems of not being in the EURO, we have no pants on and the tide is going out.

51: Peter Sym

Very good points about China, which is ultimately a one-party state. I don't think a one-party state is an effective economic model, so why is their economy out-performing ours?

The answer, I think, is that the US and the UK economies are suffering because both countries have been rather idiotically trusting and naive over globalisation.

China, India and others are free traders, but only where it suits them; try to export into their markets and you'll find out that there are very hefty tariff barriers.

It's time that we pursued equality in trade. Unless China et al remove import tariffs, we should retaliate. Free trade has been economic orthodoxy for decades but, as the public in the US and elsewhere look for a New Order, I can see protectionism returning to the agenda.

following on from ishkandar @ 46, it is interesting to see how well gold mining stocks performed in the recent crisis. have a look at the top performers on nyse on bbc's business marketdata site today.

the big fear that hank paulson and ben bernanke have right now is that if the crisis continues with falling stocks, loss of confidence in us banks, increase of expected supply of us federal debt (due to "socialisation" of losses) and further rate cuts by the fed, there may be a total loss of confidence in the usd.

the next few days will be crucial. if the us treasury cannot restore confidence, expect the usd to plummet through 1.60/eur. then the proverbial will really hit the fan.

60 supercalmdown

You're not wrong, you haven't gone far enough.

Anyone who hasn't read through a copy of 'Shock Doctrine' should do...this is the shock building and building till everyone supinely accepts the therapy of the new world order to save their homes, jobs and pensions.

Then the true level of economic and social inequality and immobility will begin to explode...

Somewhere in all this is the nagging feeling that if the UK were in the eurozone then all this wouldn't have happened. Better late than never?

59 Why is it silly to say the BBC are spreading panic? If they tell people that their house prices are going to drop 25% then people worry. You only have to see what 3 days of NORTHERN ROCK IS GOING BUST did to NR.

For years we've been buying nearly everything we use from China and now the big news story is that China owns us.

They own us because we don't make stuff.

And our banks have forgotten the rules of stable banking, lend only as much as you know is securely yours. Seems like certain banks have become more like money brokers, middle men in a chain of foreign money.

61 Bazmond:

Good ideas. Putting a stop to short selling might mean that you don't need to suspend share trades as well, but either approach could be a good one.

The danger when bank share prices come under attack is that it can spook depositors. They think 'there's no smoke without fire', i.e. if a bank's share price is being clobbered it must be in trouble. This means that the economy as a whole pays a hefty price for allowing short selling. The balance of public interest surely favours putting a stop to it - right now.

bazmond @ 61

well let's see what it achieves in russia

I 'd like to compliment poster no 61 for his well considered observations. The time to apprehend the west end mafia and put them behind bars is long overdue. Morgan Stanley has given the SEC the names of at least four "liquidity providers" it would like to see taken out. I am sure those that have been behind the sustained attacks on NR LB and HBOS are also well known to our regulatory champions. Perhaps it will again fall on the Rt Hon John McFall to haul these light-weights over the coals. They whistled in the wind when NR was attacked on tha basis that NR shareholders were invested in a reckless business and as such deserved what they got. I guess they summize that HBOS was little different. Is it any wonder that the hedgies feel they have complete control over who survives and hwo goes under?

I would agree with the comments in 61 about short selling.

Whenever you sell shares in a private business, one of the things you have to sign in the legal agreement is a clause confirming that you own full legal title. Why should this be any different for publicly quoted companies?

I cannot believe that the regulators allowed HBOS and for that matter NR to leverage themselves to this extent. HBOS was about 48% reliant on wholesale markets for sources of funds. This is a bit like having your business rely on one customer for 48% of your sales - a suicidal busines model. While I am sure the current CEO of HBOS must carry some of the can, he has only been in charge for 2 years. Hence we need a full investigation into the HBOS management going back about 10 years, basically since its (the old BOS) conservative model changed to one using the markets.

I cannot understand where all this money comes from - central banks pump in £180 bn; AIG is bailed out with £80bn; Bof E releases an extra £20m ?

Who pays for this or is the answer no one and that is part of the problem !

I know banks can just print new money but doesn't that cause inflation.

I have worked in the finance depts of many businesses and the answer to this could solve the continual problem of budget overspends - Just print some more money !

Toxic Brown has just been on the telly as usual saying how right he is and how much he has done. All he has done is let a banker slide up to him and propose the law be bent to suit the banker.

Oh yes lets jump to it. The solution is to allow a takeover that wouldnt normally be allowed, which will weaken competition and therefore damage every consumer's rights in the UK, and lets burn a few tens of thousands of jobs as well.

Strange how little he is bothered about anybodies job other than his own. When is this bloke going to do something proactive. The bankers have been on a Mad Hatters tea party since at least the mid 90's and they are still running the show from what I can see.

Browns answer is always he will do something vague at some undetermined point in the future. In the meantime he wants to keep marching everybody up to the top of the hill and marching them down again.

The LloydsTSB and HBOS is a funny one.

A big acronym too. LTSBHBOS.

Or rearranged: BS - BOLSHT

What is Lloyds playing at? For a bank that got its fingers burnt in South America in the 80's it had appeared to have learnt its lesson and had avoided all the derivative nonsense and the worst of the reckless mortgage lending. So why get into bed with a bank whose major business is (less prudent) mortgage lending and a lot of the funding reliant on cheap cash which has dried up?

So what if HBOS's share of the UK mortgage market is 20%. If, as in all reality, the mortgage market is dead for a generation, 20% of nothing isn't a right lot.

#74 - natashasdad

It's my understanding that the £20bn the BOE released was in the form of overnight or very short term funding, with interest, so in effect they're just making a profit while appearing to help the liquidity of the market.

What I'd be more interested in knowing is if the credit crunch was as "a result of banks no longer lending to each other", which banks have the money to lend, but are now hoarding it? It can't just be HSBC, effectively bankrolling all the other banks, can it?

I mean, clearly the likes of Northern Rock, B+B, C+G, HBOS weren't doing the lending but borrowing it, so who was funding them? Which institutions are cash rich?

Or were they lending and borrowing, all at various rates, to each other? If that's the case, what a mess!

The ritual slaughter of at least one big name company has taken place. The FTSE has plumbed the 5000 line. Now let's pick up the pieces and get on with running our country and our world to mutual benefit.

Surviving companies will become stronger (what does not kill me makes me stronger).
Displaced financial "wizards" will not go back to their cauldrons but will have energy and funds to invest. Expect a lot of self starters to be setting up small companies (after the initial flush of wine bars and art shops expect real investment in such potential growth areas as tourist facilities).
With a more sensible pound-dollar/euro ratio the chinese, russian, brazilian and indian tourists will be flocking here. A more competitive currency will boost our staple exports (whisky and weapons). Wage inflation will remain low with unemployment threatening. After some corrective deflation house prices will become affordable again to new buyers - and remember there is still a shortage of good housing - so the deflation will be short lived.

No this is not post 1929 it is more like post 1945. We are damaged but we can be optimistic of better times.

There are a few things I just don't get.

1. Why are any senior bankers still in their jobs? They have presided over the virtual destruction of the western economy and we, the people, will have to pay for their greed.

2. Why are the traders (rumoured to be hedge fund managers), who drove down HBOS shares by creating a false run through short selling stock, allowed to get away with raping the hard earned capital of the ordinary shareholder? Isn't it illegal to create a false market?

3. How can we ever allow these people to police their own behaviour in future. They had a chance and now we have their measure.

There seem to be two issues here.

1.) The decline in the HBoS share price has apparently unnerved institutional lenders, who began to look at calling back their loans. RP has descirbed this well, but he's not really looked at the cause of the share-price shifts.

2.) The Halifax management's business strategy (some might call it "greed") was funded by an abnormally large number of big loans from other banks. Under normal circumstances, these would have been paid back and replaced with MORE loans in a few months time. The credit crunch makes this replacement harder, and the size of the loans makes this a bigger problem than it is for less aggressive banks like Lloyds.

The question that RP isn't answering is whether the share price decline that has triggered the merger is really a genuine market reaction to the extent of the funding problem, or is it primarily the work of manipulative short-selling.

Yes, the HBoS senior management have been burned by a flawed strategy, but if the share price has been artificially manipulated here, then it's possible that the debt could have been serviced and HBoS could have remained independent.

There are clearly knock-on effects from a HBoS/Loyds TSB merger, for jobs, competition and the rule of law. So the haste with which this shotgun marriage is being arranged by the PM seems troubling. Even his pet chancellor is quoted as being "extremely concerned" that a lot of his constituents will lose their jobs and vote for someone else.

So, to echo what bazmond (comment 61) said: why not suspend trading until the actual facts are sorted out?

Or...

At the back of this, were the Government worried that THEY would have had to give HBoS money to repay the loans, which would have dealt a further blow to their already dubious borrowing targets?

Is HBoS the sacrificial lamb on the altar of government economic incompetence?

Has Labour made a big, unneccessary mess here in a clumsy attempt to help their chances of winning an election?

Given every other decision they've made since Mr. Brown took charge, I wouldn't be surprised. Gordon has been guilty of the same mistake as Halifax, Northern Rock, and all the people with maxed-out credit cards and overblown mortgages: spending money he didn't have. And now he's in trouble.

He's trying to stave off his own economic collapse by turning on shareholders and workers who don't deserve this punishment.

Isn't he?

The financial system is too complex and too closely coupled.

See 'Normal Accidents' by Charles Perrow - especially in the Afterword on financial systems.

See also article by Leon Gettler in TheAge. "These forces are so tightly linked, often in ways previously not contemplated, that problems will inevitably cascade through the system, leaving little room for safety and error."

Basically financial derivatives, Wall Street innovation and hedge funds have created close coupling between disparate financial and economic systems. No one can predict what the fallout will be.
The brainy oxbridge graduates who designed were not quite so brainy.

It's time to decouple and disrupt amplifying feed-back loops. Close the shop (i.e., the markets) and sort out the problems before they escalate even more?

trevst @ 80

the problem with your forecast is that any further downward correction to the housing market will cause bigger problems on bank balance sheets and lead to more crisis.

all the same, like you, i am reasonably bullish about the uk. i don't think our economy has been fundamentally misvalued for the last 10 years. unfortunately, i do not think the same can be said of the usa or china. and if both of these blow up, then we are all in trouble.

80 trevst

You must be in the running for a job as David Cameron's speechwriter!!!

Anyway, as any Batman fan knows its : whar doesn't kill me makes me stranger

A definite re-write for our times

Can someone please explain to me why those high flying bankers that have received five and six figure bonuses have not been made to pay it all back!

If China DOES hit the buffers because all its markets have crashed at once, perhaps it will reduce all the thefts of war memorial plaques and man hole covers for scrap.

And hard to see a way back to the top for the US - all its supplier countries have been lending it money for a decade to keep buying their goods, like the town grocer running a tab for the gun-happy drunken profligate young squire. Why would they want to start doing that again having just been financially wiped out? That US government credit is no longer AAA is unbelievable.

As another poster says, the demise of the investment banks is easier to take. Lending a predator money to take over a company, piling all the debt on the victim, and making sure you get paid on day one - nobody will miss that.

Supplying $'s £'s and Euros to the market is not helping but killing the values of each currency.

De-leveraging has meant a rush to unwind huge derivitive positions that were leveraged purportedly up to 35 times. These 'loans' to the market can never be paid backin full so we are left with a massive influx of new cash. That can only spell inflation down the line.

The problem was not only the leveraging issue but the dementedly large bonuses that made recipients think they could do no wrong.

We can not forget those in a position of responsibility also cast blind eyes because the gravy train was blinding them from reality.

If we are to really have a new order then present managements must all be kicked out, as should incompetant Treasury officials and overpaid FSA executive. WIth all these 'safeguards' events have shown they have all been a total waste of space!!

'Size matters..'

Indeed. The bigger they are, the harder they fall...

They should have let HBOS go to the wall and dealt with the consequences. Barclays seem to have driven Lehman to it's death, only to see them cherry picking the carcass and leaving the rubbish. I reckon that Lloyds have done the same here. People are waking up to the realisation that these corporations manipulate us like governments and it is not for our benefit. How many more times do the Government think that we will stand for them bailing out large shareholder run businesses when we need better schools, prisons and hospitals? Railtrack, Northern Rock and now Lloyds TSB? I'm off to put all my money into shares as it seems these are a guarenteed way to make cash....the business does well, you make money; the business fails spectacularly and the government bail you out.

This is an incredibly accurate look at the big picture.
Governments worldwide have been so apathetic at the opportunites laid open for those with enough resources to take over without a shot being fired.
They are now completely on the defensive for they don't know where the next attack will come from.
Very Worrying.

You are all very negative. Such negativity is self-fulfilling, as has been proven over the past few days. HBOS must have been a viable business or Lloyds would not have bought it, but speculation almost brought it down.

If someone could put a break on the current downward financial cycle, everything would be fine. Although house prices may stagnate over the next few years, whilst employment remains high, mortgage payments will continue to be paid and there will be no crash in the market. Only if the negativity demonstrated on this blog continues will banks continue to go bust, businesses fail through lack of finance, people become redundant and house prices crash.

Time to put a stop to this. Unfortunately the best people to do this are the top people at the banks who caused all this in the first place. However, I think we've all got a responsibility.

A questions I have though - why didn't G Brown buy HBOS for £12bn - seems like a bargain to me (compared to trident missiles)?

One of the things I have constantly wondered (and posted) about is what the cost to the taxpayer is of propping up our financial institutions.

I have asked previously on Robert's blogs if anyone could quantify this, but with no takers, so I thought I'd perform a worked example to stimulate discussion.

From the figures quoted on the BBC's website, it appears that we have accrued an extra £126 billion debt since the baling out of Northern Rock. Assuming we have to service this debt at 5%, this means we have to find £6.3 billion extra from the tax revenue.

There are apparently 29.54 million of us in work, so that means we each have to contribute an extra £213.27 per annum just to bale out Northern Rock.

Would anyone like to comment on my simplistic calculation, which assumes that NR are the only liability and that the 29.54 million of us in work is not decreasing ?

Absolutely correct, years ago, and now, and very likely into the future:

"It's a world in which the Chinese state, if it co-ordinated the investments of its cash-rich institutions, could end up owning more-or-less the entire financial system of the US and the UK."

Like the Chinese (??) said many years ago, "...we will hand you the rope with which you will hang yourself..."

U.S. President Reagan helped bring about the economic downfall of the U.S.S.R. and its satellites (which is trying to make another comeback now), and in a like manner, the Chinese, and one can be assured a few others, are acting in concert to now bring down the U.S. and other Western nations.

The people that will pay for all this as usual are ordinary savers, pension holders and workers. Just Capitalism going through its normal routine and the same people making the same apologies and excuses while lining their pockets at the same time. Brad Pitt had the right idea in 'Fight Club'......Instead of trying to run the system better (which can't be done) why not destroy it (or let it destroy itself)

What's curious is that Gordon Brown is now talking about "clearing up the City". Even supposing he could which I sorely doubt, one asks why he allowed things to get into this state over a period of 12 years, therefore?
Answer: either because it was convenient to let the City run riot, or he simply didn't know what was going on. Or he didn't know what was going on but this credit expansion thingy really is good for a boom economy. And until very recently he's remained in denial about bubbles bursting.

All he has to do is get the regulators to regulate; to ensure they understand the technicalities and risk of financial instruments in their sphere. I mean, just passing around packaged debt of dubious quality at high prices should have raised eyebrows but neither Brown nor his regulators knew what was going on.

And he needs to keep his nose out of the housing market - let it find its own levels instead of trying to promote the turnover of properties at bubble prices. The most useful thing he could do is enforce the rule that mortgages should never be greater than 3x one's salary or about 4x for joint mortgages. Dead simple. And personal borrowing should never exceed 1/3 of one's net income.

'Conservative institutions, and those with simpler business models and a history of careful management of their funding sources, are the new superpowers.'


....as well they should be!

I believe that Mr Peston is grossly ill informed with regards Wachovia and Morgan Stanley, more panic info!!

Some of the optimism that I'm reading here about the UK economy baffles me; it also seems to baffle the forex markets, since the trade-weighted value of Sterling has slumped over the last six months.

The UK has understated inflation (and consequently overstated GDP growth) for years; we've allowed our trade balance to become dependent on the financial services sector which is now being battered; our utilities are foreign-owned; we do not export very much in terms of physical goods; we've shut down our coal industry; we've depleted our oil and gas reserves, and are now importers of both; we've no idea how to replace our power stations before the lights go out; our public sector finances are shot; we have a cripplingly expensive bureaucracy and public sector; our economy depends on consumer debt hitherto 'secured' against artificially-inflated house prices; and our government is run by idiots.

Apart from that, it all looks great.....

The root cause of all these problems has been the property inflation bubble. The bottom line is that speculation in commercial property is natural and acceptable because a high proportion are leased with ownership vested in institutions and individuals who are in it purely for investment purposes.

There should, however, be a moral dimension to speculative investment in residentials which are, at the end of the day, peoples' homes. If some individuals are tempted to take big risks on their houses because they see them as speculative investments rather than 'a roof over their head', they take the usual risk that values can go down as well as up. However, if this is widespread, it drives prices up to a level at which first time buyers in particular simply cannot afford to get onto the ladder.

Not only does this mitigate against the interests of people who simply want somewhere to live but it makes a nonsense of the so called 'property owning democracy'. While downward pressure on property prices will hurt those who have to move for business or personal reasons or over-mortaged for other purposes, it is a necessary adjustment and values should be allowed to settle at realistic levels if the housing crisis is not to continue.