The rescue has failed: it's time to fess up, reboot and start again
Last Updated: 9:40AM GMT 18 Jan 2009
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It's official. Government policy isn't working. As bank shares collapse amid renewed carnage on global markets, we now know the worst isn't over.
This crisis just entered a whole new phase. Gordon Brown's "rescue plan" lies in tatters. Perhaps now the Prime Minister – and his counterparts across the Western world – will do what needs to be done.
Regular readers know what's coming next. I've been writing the same thing for months. But I make no apologies – for this ghastly episode will only end once senior bank executives are forced, under threat of custodial sentence, to FULLY DISCLOSE to one another and the authorities, on the basis of all available evidence, the extent of their sub-prime liabilities.
I accept that's not easy. The toxic debts have been sliced, diced and securitised – then sold on many times. Millions of trades must be unravelled, often across international borders.
But this onerous task must be done. Then the losses must be written-off. Only after such purging will the banks begin to rebuild mutual trust – allowing the interbank market to reboot, so restoring the credit lines that are so vital to the broader economy. And all this needs to happen BEFORE more public money is spent recapitalising our banking sector.
I know what I'm saying is drastic. But this is a drastic situation. In the UK and US, in particular, the banks aren't playing ball. They think they're more powerful than our elected officials, and for the last six months they have been getting away with hiding losses and burying mistakes while screwing many billions of pounds out of taxpayers.
Look at the cause of this latest spasm. Opposition politicians point to the Government's decision to lift the ban on short-selling – allowing traders to pile pressure on bank stock. That misses the bigger picture.
Bank shares collapsed on Friday because of renewed fears that said banks have simply enormous liabilities on their books that they're still trying to hide.
In the US, Citigroup, Bank of America and Merrill Lynch unveiled a $25bn combined loss for the final quarter of 2008. But what was really shocking was that $15bn was sustained at Merrill Lynch – and the Bank of America, which bought the brokerage last year, didn't even know.
In a bid to save his job, Ken Lewis, Bank of America's boss, admitted he hadn't foreseen such a "significant deterioration" in Merrill's finances. But his words lifted the lid on the extent to which financial institutions are disguising the true state of their balance sheets – even to their own parent companies.
No wonder rumours then swirled of vast buried losses at Barclays and Royal Bank of Scotland. No wonder their prices collapsed. And such fears will fester and keep bursting to the surface until our banks "fess it all up" – and a credible number is put on potential losses at each of our major banks.
Yes, those numbers will be horrific. Yes, bank shares will be hit once more. But until we do the maths and swallow the write-offs, the rumours will continue and trust will remain elusive – to say nothing of long-term financial stability.
There is much talk of Franklin D Roosevelt. Trying to justify big pork-barrel spending, and yet more government borrowing, politicians on both sides of the Atlantic are employing the rhetoric of the depression-era President's New Deal.
One important lesson we can learn from FDR is to restore the Glass-Steagall firewall he erected between commercial and investment banking – so foolishly removed by the "bankers-turned-public servants" who dominated Bill Clinton's administration in the 1990s and who are now back, in the Obama fold.
But we may now even need to revisit America's 1933 Emergency Banking Act – closing our banks for a period, flooding them with government inspectors, killing off the technically insolvent and reorganising those strong enough to survive.
As if all this renewed banking angst wasn't enough, yet another fear is now stalking international capital markets. Last week, any remaining hope the eurozone had escaped the worst of this crisis was blown out of the water. Economic sentiment is now at a post-war low. Even the European Central Bank, admirably restrained until now, could resist the political pressure no longer and cut its interest rate to 2pc.
This column has long questioned the eurozone's long-term survival. Now global markets are doing the same. At the start of last year, the average 10-year government bond yield among the weaker member states (Portugal, Greece, Spain, Ireland and Italy) was just 25 basis points above the comparable number in Germany. That spread is now six times bigger.
Credit default swaps (the cost of insuring against a government default) among the most feckless eurozone members have reached Latin American levels. Would French and German taxpayers bail out another eurozone member? The longer this crisis goes on, the larger that incendiary question looms.
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