Thank Yank Hank

TUESDAY, SEPTEMBER 16, 2008

Thank Yank Hank

They've had the good times...

Hank is such a great apples and pears rhyming name. Much better than Alastair.

And come to think of it, Hank is also better than Alastair in couple of other respects as well. Like protecting taxpayers' interests in the face of financial crisis.

Whereas Alastair faffed around for 6 months over the Crock and finally had to resort to a full-blown taxpayer take-over, Hank moved swiftly to fold Bear Stearns into JP Morgan. OK, in the process he did land taxpayers with $30bn of dodgy debt, and he did leave Bear shareholders with some value - both less than ideal. But against that, he got the deal done and dusted over a weekend.

And Hank learns from experience. When it came to rescuing mega mortgage operators Fannie and Freddie, he effectively took them into public ownership, and this time, he insisted the shareholders should get zilch (yes, all right, it's not full nationalisation, and the shares still trade - but at virtually zero value).

Now with Lehman, he's played real hardball with the shareholders, who will get nothing whatsoever.

So thank Hank. Taxpayers everywhere should be grateful that he has had the courage to spell out to bank shareholders not to expect bail-outs from public funds.

As we've blogged many times, bank shareholders have enjoyed theextraordinarily good times (see US profitability chart above), so it's absolutely right and necessary that they accept the bad. And if they don't like the risks, they should force their bank managements to rein them in.

Who could possibly disagree?

Well, Anatole Kaletsky for one. He says ex-Goldman Paulson "misunderstands basic finance":

"By deciding essentially to wipe out shareholders in Fannie Mae and Freddie Mac and acting even more harshly to the shareholders of Lehman Brothers this weekend, Mr Paulson has sent the clearest possible message to investors around the world: do not buy shares in any bank or insurance company that could, under any conceivable circumstances, run short of capital and need to ask for government help; if this happens, the shareholders will be obliterated and will not be allowed to participate in any potential gains should the bank later recover.

This punitive policy towards the shareholders in Fannie, Freddie and Lehman, who had put more than $20billion of capital into these companies in the hope of keeping them alive, means that no US bank or insurance company can hope to raise any extra capital in the foreseeable future."

Tyler has today had two ex-City colleagues independently speak to him about this article. WTF is Kaletsky going on about? Doesn't he understand how investment works? Doesn't he understand that equity investment is inherently risky but that there's a price for everything? Does he want a financial sector that operates on the basis that troubled institutions can always get extra capital from the taxpayer? How much money would taxpayers have to stump up, and why wouldn't Tyler (Cayman) Inc buy a dodgy bank on the cheap, crank up the risks, and then tap the government for funds?

One colleague suggested Kaletsky is an unreconstructed Keynesian, who has never believed markets are better than government. The other suggested something we can't possibly repeat, but is a sort of rhyming slang.

Let's keep all our extremities crossed that Alastair takes his lessons from Hank.

PS Who's really responsible for this crisis? The BBC and the left says it's greedy bankers, and they are certainly in the frame. But we need greedy bankers to drive risk taking - without them, economic dynamism would soon revert to lethargic corporatism. Trust me. The alternative view is that it's down to the Fed - 15 years plus of cheap money has inflated a giant wobbling jelly of debt which has finally come home to roost - just like those roosting jellies always do. If only they'd been tougher earlier, the greedy bankers would have been kept in check. We'll look out some data.

The real history of gutting (from Calculated Risk)

Last night's C4 News was an absolute classic. According to Bishop Snow, the collapse of Lehman "guts the bedrock of global capitalism".

Guts the bedrock of global capitalism? Bedrocks have guts? Even in terms of the Bishop's own anti-capitalist fire and brimstone, that's more than usually spittle-flecked. And there was more:

"Nightmare... death... giant earthquake... tsunami... downward spiral..." - it was straight back to Private Eye's huge snakes roaming the streets of Britain's cities.

But one oft-repeated phrase really caught our attention - "The Day The Markets Went Into Meltdown". 

Meltdown?

And how about "there has never been a day like this"?

Never? As it happens, Tyler was at the screenface on Black Monday, 19 October 1987, and if he recalls correctly, Wall Street fell by 22.6% (DJI). Yesterday's fall? Just 4.4%.

And according to Afraid to Trade (via FT Alphaville), yesterday's 4.7% S&P decline was only the 14th worse since 1950.

Look, clearly this is a serious situation, especially if you work in one of the affected firms or own shares in them. But it isn't a market meltdown, and it isn't gutting the bedrock of global capitalism.

Much more scary is the risk of gutting the bedrock of fiscal discipline.

We've already watched as our bungling rulers failed to deal with the Crock, letting the Lloyds offer get away, leaving the incumbent management in place with a taxpayer guarantee, and eventually being forced to nationalise it in exchange for £100bn of dubious assets. How much worse will it be if they have to deal with, say, a failing HBOS? Its liabilities sum to over £600bn.

As we've said many times, taxpayers should stand firm against bail-outs for bankers. We must not let wild exaggeration by the Bishop and others make us lose track of that simple point.