What is the moral of the story? That in an upturn we are too busy reaping the rewards to be worried by the fetters that increased regulation would place on an otherwise functioning marketplace?
That’s precisely the point – market makers, traders, analysts, regulators, financiers and politicians all have benefitted from twenty years of light touch regulation. We tell ourselves that the market is cyclical, but then the downturn, without fail, shocks us.
Jobs are lost in their tens of thousands – sometimes within weeks, and potentially this time, within days. HBOS was a successful long established and well run company, well financed with a sustainable savings ratio to the outstanding loans. It was aware of investors’ hesitations and resolved them earlier this summer by securing an extra £4BN of funding through a rights issue – whereas RBS raised £12BN though the same means and was considered “safe” and spared the run that saw HBOS sold to Lloyds for £12.2BN – a third of its value of a year ago.
The biggest news of course, is the demise of Lehman Brothers – another great Wall Street bank – within a week of its Chief Executive’s optimistic view that the Korea Development Bank would take over, Lehman filed for Bankruptcy. The biggest ever filing, with liabilities of $613BN. Meanwhile, Merrill Lynch, an elite investment bank, sold itself to Bank of America for $50BN – half its $100BN value of less than a year ago. Morgan Stanley is in merger talks: this is three of the top four US investment banks, leaving only Goldman Sachs to ride out of the other side of this crisis. AIG has been rescued at a cost of $85BN to the US Treasury – who now own a near 80% stake in the huge insurer. The rationale? To stem the destructive fleeing from all things financial, and allow real world businesses, such as home & vehicle insurance, to continue.
There are too many “told you so” pundits popping up, sagely offering reproaches to anyone who’ll stop ringing around for interviews to listen. But that’s partly it: only with the sort of financial innovation that allowed these re-packaged debt products to flourish, was the wealth that they brought into the financial system celebrated. The bulk of that wealth though stayed within the financial system. In the US, the investment & financial services sector is a tiny proportion of GDP – yet almost a third of all corporate profits were reported by this sector last year. That’s money that is being paid in huge bonuses, and not going back as share dividends, companies’ investment capital and pension contributions. Perhaps we need a leaner financial sector. Perhaps we’ve now got one.