Monday, January 19, 2009

Banking ripples around the globe

There have been substantial banking upheavals around the globe as our markets have been closed over the weekend.

The Royal Bank of Scotland lost 2/3rds of its market value on Monday after the British government took further steps to stabilize the lender. The UK markets actually climbed on this news, but asian markets read it the right way - this is bad news for everyone. It appears that the British bank bailout was pulled from the Paulson playbook:

"Banks wishing to participate in the U.K. government’s 100 billion-pound bailout, the second in three months, must agree to “have specific and quantified lending commitments that will be binding and externally audited,” according to the Treasury. The deal was one of “mutual responsibility,” Brown said yesterday.

“The absence of detail on this is blinding, it is just incredible,” said Peter Hahn, fellow in finance at London’s Cass Business School. “The detail of what the banks are and should be doing is a real mystery.”

When coupled with the problems at Citibank and Bank of America the banking industry remains in upheaval. There is growing talk that the US needs to create a government backed bank to take the bad assets off the balance sheets of the banks and stabilize the banking system. In theory, back in 1917, this might have worked, but it today's increasingly complex financial system there is simply no way to effectively determine who gets to sell their junk to the US (expect every US bank, investment bank, leasing company and foreign banks to argue that they deserve to be part of the bailout part deux). I am a believer in the mantra that if a bank is too big to fail, break them up until their small enough to fail. We can't continue to reward failure in our country.

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