Obituary: Bear Stearns
Commenting on the rapid decline of Bear Stearns, the US investment bank Hank Paulson, US Treasury Secretary said: "There’s always a decision to be made to say what’s best for the stability of the marketplace, the orderliness of the marketplace. I think we made the right decision".
This contrasts hugely with the messy and protracted nationalization of Britain’s Northern Rock bank. The speed at which the US Treasury accomplished a merger of Bear Stearns with JP Morgan was breathtaking and showed regulatory competence whatever the critics may say. In fact this is a nationalization of sorts with the Federal Reserve agreeing to fund up to $30bn of Bear’s less liquid mortgage backed assets, avoiding a fire sale and further meltdown in those markets.
Media chatter is now turning toward the subject of the losers.
There are the large direct investors, such as the hedge fund RAB Capital, holder of a significant stake in Northern Rock, who continue to trade shares even after the damage done by the developing credit crunch last summer was revealed. Similarly, Bahamas-based British investor Joe Lewis, who has a reputation as a big speculator in currencies is thought to have lost $1.6bn by investing in Bear Stearns too soon after its troubles became public knowledge last summer.
Then there are the sovereign wealth funds, offered "bargains" in most of the worlds banks over the last twelve months. From Singapore to Dubai, they have poured money into businesses as diverse as Barclays, Citigroup, Morgan Stanley, UBS and Merrill Lynch, and have also seen their investments drop by a third or more in a matter of weeks. It was thought at the time that the terms on which they invested were pretty onerous, and that they took full advantage of the banks’ need for capital. But even those terms will not be good enough to compensate for the capital losses since. The Chinese also put $3bn into Blackstone (US private equity) when it floated but the shares have halved in value in less than a year.
This is where it gets interesting. The banks’ losses continue to mount and the new capital raised lags well behind the write-offs already announced, let alone the others which may still come. So most of them will have a pressing need for yet more money. The likelihood is that some will have to go to the equity markets and many will return to those sovereign capital wells and tap them again.
However, with the US financial markets beginning to seize up this looks like a case of "taxpayer to the rescue" now. Twenty years ago, the American government decided to de facto nationalize the savings and loans problem and make the taxpayer pick up the bill in what was by far the biggest financial bailout the world had seen. Japan followed suit in the 90’s with their own particularly brand of banking nationalization.
It seems history is repeating itself. I believe the US and European taxpayer will now fulfil the role of ultimate "lender of last resort". Recent actions of the Bank of England and the Federal Reserve will probably cost the taxpayer quite dearly in years to come, in ways we can’t foresee today. Both monetary and taxation policy will now be dictated by the stresses of providing financial liquidity and keeping the broken market alive. With some of the markets on virtual life support, much vaunted public services reform and spending priorities will be quietly pushed to the backburner. Its a fight for survival.
I predict the fight over inflation will weaken as rising asset prices and increasing "nominal" wages will be seen as one of the few really effective ways to ensure owners of debt - toxic mortgage and credit card securities - are repaid to avoid further crippling write offs and embarrassing political announcements. The UK Government/Bank of England and the US Government/Federal Reserve are either explicitly or implicitly guaranteeing many of the billions of losses and liabilities you read about in the financial press. That’s you and me. Our future earnings and productive working lives have already been mortgaged to save the system. Only yesterday Britain was criticised by the European competition commissioner for undermining the UK banking system with the current Northern Rock commercial approach to savings products. Expect a lot more of this in the future.
And if I am right, two things will happen.
Firstly the banking class, including the rest of the middle and professional classes, will foot the bill through higher taxes on income in the future - some would say a fitting twist to this saga if one considers who started this in the first place.
And secondly, the ongoing skills shortage will result in accelerating wages of specialist technical skills (IT and Accounting) and rocketing financial packages for scarce experienced senior management talent. This will be driven by the need to maximise income to offset higher mortgage interest bills, personal taxes and the dreadful performance of their equity/pension portfolios.
And that’s one of the main reasons why professional and executive recruitment businesses will continue to prosper seemingly against the odds. Their revenue is derived from a gap in demand and supply of talent, multiplied as a percentage of wages.
March 17, 2008 06:33 PM | Permalink