Despite the White House denials, the nationalisation of a big chunk of US and European banks is being considered as so many global banks are insolvent because of the losses they are concealing. Australian banks shudder at the repercussions that might have for our local banking industry and our major corporate borrowers.
To understand what is now being discussed at the highest levels in the US, Britain and Europe, I have to take you back to the dark days of last September when Lehman Brothers collapsed.
We now know that the world went perilously close to a complete breakdown of the banking system, which would have ended globalisation as we know it and led to unemployment of over 50% in most countries. Global leaders looked into the abyss then, and they are now determined to do whatever is required to avoid a global banking breakdown.
As Chinese leaders have said in private briefings, whatever repercussions there are in a few years from the current rescue efforts, it will be nothing like what became possible in the 36 hours after the collapse of Lehman Brothers. In the banking system most of the sub-prime losses have now been covered by $1 trillion worth of capital raisings (much of it from governments) and it was hoped that a solvent banking system would allow the rescue packages to boost troubled economies.
Sharemarkets are falling again because the world now realises that there are still at least two more “sub-primes” yet to be announced by global banks. The first is the complex topic of synthetic CDO losses, a subject that Alan Kohler has provided a great deal of excellent commentary on.
The second “sub-prime” is the lending from the big European banks to eastern European people in Swiss francs. Their losses may equal sub-prime losses because the customers can’t pay the inflated loan totals thanks to the collapse of eastern European currencies.
At the same time, the bank executives who got us into this mess are using government money to pay bonuses. The public anger with UBS in Switzerland and Merrill Lynch in the US remains white hot. It is becoming increasingly apparent that after struggling to raise $1 trillion to cover sub-prime losses, the banks now need a minimum of another $1 trillion and probably more than $2 trillion.
We cannot risk another Lehman Brothers so when the global bankers decide to come clean they may need to be nationalised. Wall Street is petrified, but there may be no other way.
If most of the big global banks are nationalised then we are looking at a totally different world banking environment. There are already plans in Europe for an increase in regulation, including clamps on hedge funds and salaries, which means that banking will no longer be a world of excitement filled with imaginative financial products.
But widespread nationalisation will take the process even further and it will be back to national or even regional traditional banking. The world capital community will be fundamentally changed, and it is highly likely that the nationalised banks will look inward and concentrate on the funding needs of their own countries.
However on the banking front Australia is better placed than most countries because we learned from the events the early 1990s when Westpac and ANZ almost went to the wall. Those lessons were reinforced when NAB had problems with its Homeside business and foreign currency trading desk.
As a result of what we learned, Australia is one of the few western countries in the world with a solvent banking system. Other banks in our region have been hit by the crisis but they learnt a number of lessons from the 1998 Asian crisis. Meanwhile our regulations are being hailed around the world as the way to go.
Australian banks might be solvent, but they have had big losses and there are more to come. The local losses and the global unpopularity of bank stocks as an investment have hit our banking shares hard; they will not find it easy to raise the capital to fund a mass exodus of foreign banks. This is where Ahmed Fahour and the “Rudd Bank” will have to step in and act decisively.
The Chinese rescue package has put a floor under commodity prices and is being hailed as the most effective in the world. With this package, together with our solvent banks, we are likely to get through the global turmoil better than most countries. Which is why Reserve Bank Governor Glenn Stevens was so upbeat at the weekend.
This article first appeared on Business Spectator