September 29, 2008
The Financial Crisis Goes Global – European Banks Need a Bail-Out Too
Another day dawns, and the list of failed banks grows ever longer. Congress has renamed the Bail-Out as The Emergency Economic Stabilization Act. The House has just rejected the latest draft by 228 votes to 205. George W. Bush said he was "very disappointed". Whilst Congress were extending the new act to a total of 109 pages over the weekend, banks around the world were dropping like flies as the virus spread.
In the United States Wachovia is the latest venerable institution to fall prey to the contagion. Citigroup has agreed to buy the banking operations of Wachovia for the knockdown price of around $2.2 billion. Wachovia Corporation was the fourth largest banking chain in the US. It originally got it's name from the Wachau valley of the river Danube. Settlers from Moravia named part of North Carolina after their homeland way back in 1753.
The deal does not currently include Wachovia's money management and retail brokerage arms, and the government is providing a limit to Citigroup's risk on the transaction. In a similar guarantee to the one provided to JPMorgan Chase in their emergency takeover of Bear Stearns, the Federal Deposit Insurance Corporation will absorb all losses that Citigroup incurs on Wachovia's riskiest mortgages over and above $42 billion. Sheila Bair, the chairwoman of the FDIC, said that:
This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury. This action was necessary to maintain confidence in the banking industry given current financial market conditions.
As the the International Herald Tribune points out:
The deal further concentrates Americans' bank deposits in the hands of three banks: Bank of America, JPMorgan Chase and Citigroup will control more than 30 percent of the industry's deposits. Together, they will have unrivaled power to set prices for their loans and services… Some small and midsize banks, already under pressure, might have little choice but to seek suitors in order to compete.
Whilst the US government was underwriting Citigroup's buyout of Wachovia the UK government was being similarly obliging as Spanish bank Santander bought the 197 branches and £20 billion retail savings operation of the United Kingdom's Bradford and Bingley for £612 million. The bank's £50 billion mortgage and loans business has effectively been nationalised. Santander subsidiary Abbey has been paid £14.6 billion from the Financial Services Compensation Scheme, plus an additional £4.5 billion from the UK Treasury. The UK government says it will start to recoup that money when it sells off the mortgages that it now owns. UK Prime Minister Gordon Brown said that:
We will do whatever it takes to ensure the stability of the British financial system… We allowed Lloyds TSB to take over HBOS. We intervened to deal with share speculation in the market, and will continue to do whatever is necessary over these next few days in very difficult times, turbulent times around the world, to make sure that the British stability for which we have done a great deal over these last few years is maintained, and that's why the actions have been taken in the way they have.
As if Wachovia and Bradford and Bingley were not sufficient it seems as though the breakdown of the new paradigm in Anglo Saxon capitalism is not confined to just the United Kingdom and the United States. In other announcements today the governments of the Netherlands, Belgium and Luxembourg have agreed to bail-out Fortis to the tune of 11.2 billion euros, and the goverment of Iceland has agreed to pay 600 million euros for a 75% stake in Glitnir, Iceland's third largest bank.
When do you suppose this government sponsored concentration of wealth into the hands of fewer and fewer giant corporations will stop, if it ever does?
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