Another day, another bank in trouble – Lehman

We learn this morning that Lehman is filing for protection from creditors whilst it seeks to sell assets to sort out its financial problems. Markets are falling on the news ,as on this occasion the US authorities have not offered to rescue it directly.

I am not surprised they have declined to put up the money. There have to be limits on how much the US taxpayer can support. The massive rescues of Fannie and Freddie stretch even the long pockets of Uncle Sam.(See September 8th post).The decision on Lehmans in that sense is doubly good news. It will force the private sector to accept more of its own risks and not to expect a bail out in every case. It will also provide some much needed relief to the escalation of risk for taxpayers.

At the same time the US authorities are all too well aware of the possibility that the Lehman collapse could place strains on other financial institutions who have relied on doing business with Lehmans or have similar “assets” on their balance sheets that may need writing down as a result. So the US authorities are making yet more liquidity available to the system.

Maybe they have also encouraged the larger private banks to make available their own facility to help financial companies in trouble, which is being announced today. We are also likely to hear of the takeover of Merrill Lynch. It looks as if there is a massive amount going on behind the scenes in the USA to try to bottom this banking crisis and establish a new pattern of ownership, finance and values of financial instruments that might prove stable.

The US authorities remain alert and active, whilst the UK authorities remain sleepy and inactive. The CBI have revised their forecast for the UK economy to show a recession in the second half of this year, and practically no growth next. That must mean at least another £15 billion of government borrowing in each year, to add to the massive total the government has already committed. The UK financial positon is still deteriorating fast. The government refuses to produce its own new forecast, so it looks increasingly out of touch and behind the plot. Every knows its forecatss are wildly optimstic, so why not change them and try to look as if they want to manage events rather than be managed by them?

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7 Comments

  1. David Eyles
    Posted September 15, 2008 at 10:20 am | Permalink

    For at least a year before Gordon actually got the job he wanted, the nation was in thrall to the endless "will he, won't he?" discussion. Although much of the governmental administration went on as usual, it was pretty clear that decisions were not being made at the highest levels because civil servants did not know who would be in power next week or next month or whatever. Added to which, Gordon was doing everything he could to scupper any necessary reforms by using his powerbase at the Treasury to block progress.

    Gordon is now in power and things have only got worse. As Janet Daley suggests this morning, the entire Labour party, not just the government, are fretting so much about their own careers and the future of the Labour Party, that they have completely terminated all interest in governing.

    Effectively, this country has been without a proper functioning government for two to three years – some would argue eleven – so it is hardly a surprise that the BoE is in a similar state, given that much of its activities are curtailed and hidebound by a non functioning government.

  2. Brian Tomkinson
    Posted September 15, 2008 at 10:21 am | Permalink

    The answer to your final question is that Brown thinks only of what is best for him not the country. The other incompetents, laughingly called the cabinet, are similarly fixated on their own futures. Your party could have a louder and more authoritative voice too!

  3. adam
    Posted September 15, 2008 at 12:23 pm | Permalink

    Why does our government still not know how much NR is worth

    How can they make any announcement about NR if they dont even know its value.

    Why do we need to pay 5 million to have it valued, cant the market do that. With the market the way it is, wont the valuation simply be out of date by the time its finished.

    What have they been doing this past year if they still havent worked out its value.

    Economy collapses, Labour fiddles.

    confused

  4. APL
    Posted September 15, 2008 at 1:44 pm | Permalink

    JR: "The massive rescues of Fannie and Freddie stretch even the long pockets of Uncle Sam."

    Sad to say, it has been a very long time since Uncle Sam had anything in his deep pockets except crumbs.

    Uncle Sam now sits on the street corner begging the Japaneese and Chinese and the Russians for charity, (please buy my bonds).

    The Uncle Sam that launched the Marshal plan, was a fine upstanding fellow who was able to fund himself entirely from his own resources. Uncle Sam today, is a down and out crack addict.

    It is so sad, with potentially horrendous implications for all of us.

  5. Posted September 15, 2008 at 4:57 pm | Permalink

    Bankruptcy is the ultimate guarantee for free enterprise. Failing enterprizes have to be allowed to fail to clear space for better ones. This is what Schumpeter called the "gales of creative destruction" & if America has been driven to it becauses they no longer have the money to do otherwise at least they have bitten this bullet.

  6. Freeborn John
    Posted September 16, 2008 at 2:51 pm | Permalink

    The differences between 2001 and 2008 are interesting. When the Internet bubble burst the TV crews were outside our London offices as laid-off colleagues left the building. Alan Greenspan’s talk this week of a “once in a century event” is exactly the same phrase used by Silicon Valley CEO’s in 2001. One difference between now and then is that it was the startup tech companies that went bust. The well-established tech-majors were able to ride out the downturn thanks to the billions accumulated in the bank during the preceding Golden Decade, but the coffers are bare at some of the famous names in the world of finance. The biggest difference though is the government intervention. I don’t think it even entered anyone’s mind that the US government would pump money into Silicon Valley in 2001 like they are doing today on Wall Street.

    The tech-bust was a hurricane for anyone near the eye of that storm but did not cause a broad-based recession. The talk today is of recession in the wider-economy, but it seems more likely to me that Greenspan’s “once in a century event” will also prove to be limited to the one sector (finance) closest to the recent “irrational exuberance” in house prices.

  7. Pete Chown
    Posted September 17, 2008 at 4:25 pm | Permalink

    Don't be so pessimistic about the UK's financial position. If the government can't borrow any more in the markets, there is always the IMF…

    Darling says that the downturn is the worst for sixty years, therefore worse than the 1970s. In the 1970s, Labour really did have to go to the IMF, and inflation reached 27%. Makes you wonder if he knows something we don't, doesn't it?

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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