Financial World: Atlantic Widens While Pacific Narrows

The UK is joining The Netherlands and Gernamy in forcing the break-up of banks that can't survive without government support. The Royal Bank of Scotland (RBS), Lloyds Bank (LYG) and Northern Rock wiil be broken up, according to an article at ft.com by Angelo Faiola (here).

This follows the news a day earlier that both Lloyd's and RBS have asked for £54 billion in additional government support between them (here).

The gulf of the Atlantic ocean is wider than ever for the financial world. European governments are insisting that their troubled banks face the music and restructure into separate parts that can survive on their own. This involves less long-term sovereign debt commitment, although the short-term financial pain for bond and equity holders as well as sovereign debt positions will probably be significant.

This all follows the announcement last week (here) that ING has announced a four year plan to break up, under pressure from and sponsorship of the Dutch government and the European Commission. This follows an earlier forced reorganization of Germany's Commerz Bank.

Meanwhile, in the U.S. AIG (about 80% government ownership), C (about 40% government ownership), FNM and FRE (both virtually 100% government ownership) are proceeding on an undefined path. There are viable financial operations buried inside these bloated carcasses but there appears to be no plan to get them out, let the unrecognized losses be put on the books and the equity and bond positions be restructured to meet reality.

At the present time, the U.S. looks more Japanese than European, speaking in financial system terms. Edward Harrison (here) has a good article discussing the dead end to which that leads. Simon Johnson also has a good note about the lonely path the U.S. is following here.

Comments

[Clive Corcoran:]

One suspects that, just as in the case of Japan in the 90's following the massive bubble collapse in the Nikkei and real estate, some of the US banks have really horrendous balance sheets and the Administration is reluctant to have to finally come clean on the matter which is what would be implied in a break up and sale to third parties.

Interestingly it is the European Union's new financial regulation powers which is forcing the pace in the UK, although it is fair to say that Chancellor Darling is becoming increasingly exasperated by the fact that the UK basket case banks are not lending and hoarding cash to try to repair their balance sheets.

The gamble that the US is taking is that they may have underestimated the time required to repair the financial damage done over the last few years from bankers lending against collateral that is now seriously impaired. That in essence appears to have been the Japanese error and, as you suggest, it may turn out to be the American miscalculation as well.

Nov 04 07:33 AM

[Graham and ...:]

The United States is becoming too much like Asia, and too little like Europe.

Nov 04 09:10 AM

[User 248306:]

the new appellation should be "Big Bunks", and TBTF should be expanded to "TBTF, Too Rigged To Jail".

Nov 04 01:20 PM

[Steven Hansen:]

the L is beginning to appear.

we have too much money being contributed by the financial lobby - no one has the balls to take this on, as it will assure that person will not hold office during re-elections.

Nov 04 09:45 PM

[TinyTim:]

The irony here, which I'm sure isn't lost, is that the European countries have had a long standing rep as being politically liberal and economically socialist. In other words, leaning to the left.

The US, on the other hand, is demonstrating by its actions so far that it is further left than the Europeans. This has the same impact as a recent news story about an American Army officer in Afghanistan commenting on the toughness and perseverance of the French forces assisting there.

It should be well noted that the dichotomy is only in the financial area, and specifically in banking. It's no coincidence. Contrast with the current health care debate, comparisons with many European countries and screams of socialized medicine.

What is obvious to the Europeans, that smaller banks are less risky and cutting out the bad to leave the good, seems to be a blind spot for Congress and the Administration.
Is there any doubt that this is evidence of regulatory capture?

Nov 05 05:52 PM