The crisis gripping major banks in the US and other major northern economies shows no sign of easing three weeks into the New Year and it wouldn’t surprise to see the new Obama administration reveal plans to ease the squeeze this week, along with the much discussed economic stimulus package.
Australian banks still seem to be in solid health compared with the troubles in the US, Ireland, Germany and the UK where plans are advanced for a new loan ‘insurance’ scheme from the government.
US bank regulators closed two small banks on Friday; the first American banks to fail in 2009 after 25 were shut last year.
The moves, late Friday night, US time, to close the National Bank of Commerce of Berkeley, Illinois and Bank of Clark County of Vancouver, Washington, came hours after terrible losses were reported by the stumbling mega banks, Citigroup and Bank of America, with the latter getting another round of government aid to match the level of aid given late last year to Citi.
The two failed banks were tiddlers in comparison to the giants: both had assets and liabilities each of less than half a billion US dollars.
But the closures underlined the still pertinent fact, glossed over by investors in the end of year break, that banks are still weak, especially in the US and many other major economies.
Barclays, the big UK bank, lost 25% of its market value last week on worries about earnings and its strength, while figures published in Germany claimed the country’s major lenders had over half a trillion US dollars of festering lending assets that were not returning anything to the holders.
And the Irish Government took over the country’s third biggest bank, Anglo Irish Bank, after a run forced it to abandon a 1.5 billion euro recapitalisation plan.
The bank had been hit by a crisis of confidence over secret insider loans to the former chairman and other board members.
The scandal forced mass retirements from the bank and caused Ireland’s senior financial regulator to leave his job early.
The crisis at Anglo meant the government would have been on the hook for upwards of 100 billion euros under its controversial guarantee of all bank liabilities.
That move sparked the unseemly global rush to introduce government guarantees in October-November of 2008 as governments sought to steady their shaking financial systems.
But the key problem remains the illness in the US banking sector that is in turn preventing banks from lending and re-starting the credit system.
Last week confirmed that the source of the problem, the depressed US housing sector, was not recovering with an 81% rise in foreclosures in 2008.
The pace of filings against borrowers jumped 17% in December from November.
Housing sectors in Germany, the UK, Ireland and other countries are still poorly, unlike Australia where some signs of a rebound in demand from first home buyers is emerging, thanks to the federal government’s stimulus package late last year.
In an attempt to restore the confidence of the troubled US financial sector, the new Obama administration and the US Federal Reserve are reportedly discussing moves said to include a government bank that would buy up toxic assets from the banks; these would include failed mortgages, poor corporate and other property loans, dud credit card, student and car loans as well.
The purchases would be funded by taxpayers; the “bad bank” would buy the assets clogging bank balance sheets and transfer the risk of holding them on to the government.
The funds could come from the second $US350 billion tranche of the bailout package approved last October. The US Senate passed its release Friday.
US media reports say the Obama administration will use some of the $US350 billion to help homeowners avoid foreclosure.
It may also assist cash-strapped cities and states that are having trouble selling bonds in the US now because of a lack of buyers. The Fed has also indicated that it will support these sectors if need be.
In Britain there’s a proposal for the UK government to ‘insure’ the bad loan assets of the country’s banks instead of buying them.
Under the plan, the UK government will create a new insurance scheme that would see that liabilities of up to $A400 billion will be ‘insured’ via a scheme that would have the government picking up any shortfall beyond an as yet undisclosed level.
London media reports said this scheme won favour at the expense of alternative plans to create a "bad" bank under which the government would have simply bought banks’ existing toxic debts, as the Americans seem to be heading towards.
An announcement could be made in Washington within days of Barack Obama taking office as President on Tuesday night (Australian time), such is the importance of the move after Citi and Bank of America shook confidence last week with more losses.
Friday was one of Wall Street’s most dramatic days since the failure of Lehman Brothers last September as the US government maintained its lifeline to Citigroup and bolstered the one to Bank of America.
Citigroup announced that it would split itself in two, while Merrill Lynch, which was taken over by Bank of America (BoA), reported a $US15.3 billion loss for the fourth quarter, leaving BoA with its first quarterly loss in 17 years.
Citigroup announced its fifth consecutive quarterly loss (totalling more than $US42 billion).
The government acted to support BoA’s plunging share price by agreeing to inject $US20 billion into the group and to underwrite losses on a further $US118 billion of its most toxic assets.
The $US20 billion injection will come from
