Global Bailout Roundup

Here are some quick updates on Banking rescues within the EU and other parts of the world:

(From the FT): The German and French government on Monday unveiled plans to restore liquidity and inject fresh capital into their banking sectors – as part of a coordinated bailout campaign by western governments.

Berlin’s bill to shore up the country’s ailing banking and insurance sector was potentially worth up to €470bn, while France’s plan totalled €340bn. Details also began to emerge of the plan to recapitalise US banks and other financial institutions.

Italy was among other countries poised for a bailout announcement after Britain said it would inject £37bn into Royal Bank of Scotland (RBS), HBOS (HBC) and Lloyds TSB (LYG). News that the German bill was on its way to chancellor Angela Merkel’s cabinet sent the Frankfurt stock exchange soaring. The exchange’s blue-chip DAX index was up 6.53 per cent, or 296.53 points by mid-morning.

Gordon Brown, the British prime minister, said that he expected other countries to follow his country’s “unprecedented but essential” bailout . “In extraordinary times, [with] our financial markets ceasing to work, the government cannot just leave people on their own to be buffeted about,” he told a news conference in Downing Street.

Spain on Monday said it would provide up to €100bn of guarantees for new debt issued by commercial banks in 2008 and an unspecified further amount next year as part of a eurozone plan to restore confidence in the financial system. José Luis Rodríguez Zapatero, the prime minister, made the announcement after an emergency cabinet meeting following the eurozone summit in Paris at the weekend.

Mr Zapatero said the cabinet had also approved a measure allowing the government to buy bank shares, although ministers say they do not see the need at this stage to inject capital into Spanish financial institutions.

In other moves, Australia and New Zealand announced guarantees for all bank deposits, as did the United Arab Emirates , while Saudi Arabia cut its interest rates.

The Swedish government said on Monday it would unveil steps to safeguard their financial sector in the next few days, but did not plan to inject capital into the Nordic country’s banks. Norway announced at the weekend it would offer its commercial banks up to $55.4bn in government bonds in exchange for mortgage debt and Portugal said it would make as much as €20bn ($27bn) available in guarantees for its bank's financing.

At this point while not a truly unified plan I think that this is still as good as it's going to get (for now) because you can't truly deploy a unified solution to the banking crisis when each nation has it's own set of problems, even if they're all being impacted by a fairly common cause (the credit bubble, derivatives, etc).

While I think the markets will rally in the short-term, I think the market jubilance will be short-lived because not all of the bailout plans address the banking system's core issues and many of their problems simply need to run their course. In other words while the recent actions of various governments around the world are a good first step, there is still a need to address deeper seated root causes/systemic issues and a reform of the global banking system.

Over the long-term this situation illustrates the need for there to be better international coordination between domestic banking regulators, and more thought given on how to keep financial contagion from spreading globally. Global leaders should be thinking about how to identify root causes of future financial crisis, and the tools they need to fix things when they're still small problems so that they don't become potential global financial cataclysm-size problems later.

After all, it's not as if no one saw many of the events of the past 18 months coming; the world would've been a lot better off if the people who are tasked with protecting the banking system had stepped in back in '06 as by that time there was plenty of evidence of the coming storm.

Granted there were many conflicting views at the time and many bears didn't predict a crisis of the magnitude we've seen over the past six weeks, however regulators should always err on the side of caution as their primary duty is to protect the banking system. In fact, due to the risks that troubled banks pose to the global economy both banking executives and regulators should always err on the side of caution, because it's better to be less profitable and safe then more profitable for a few years and the next Wachovia (WB) afterwards.

Finally on a go-forward basis, the banks are going to have be to regulated more closely/encouraged to be more conservative, because a lot of the government interventions are going to benefit banks that aren't profitable/viable and/or are just near the brink of disaster. Thus creating a situation where banking executives could very well believe that they can make riskier choices because government help is available if they get near trouble, as the level of fear around future crisis will be so great that the government may be willing to step in proactively just to make sure that there is no chance of the bank needing more help later.

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Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.