Obama's tough choice over US banking crisis
Jan 16 2009 by Neville Boyd Maunsell
American banking disasters no longer come singly.
With five days of the Bush administration to go, America’s two biggest banks are in crisis. Both Bank of America and Citigroup are too big to be allowed to fail – so this cannot, as some doomsters were suggesting yesterday be a replay of last September’s Lehman Brothers cataclysm with an extra nought on the lost billions.
Yet Wall Street is all-but writing them off regardless. Their shares are in free fall – each lost about 25 per cent of the overnight value by local lunchtime yesterday.
Just 15 days after it completed its acquisition/rescue of Merrill Lynch, Bank of America is said to be casting around for a way to wriggle out of the deal on the grounds that no sane person could have imagined the scale of the mayhem within Merrill.
It has already received £17 billion of American taxpayers’ money and was promised billions more – how many billions is not said – as a reward for taking on Merrill. Now, apparently, even that is not enough.
Citigroup, not long ago the world’s biggest-hitting bank with a finger in every imaginable pie – and the recipient of two bail-outs so far, is engaged in an old-fashioned dash for cash, virtually putting up for sale any part of itself that may be saleable.
Providing the stricken duo are still there next Tuesday, their plight will test the untried Obama administration with a historic decision within its first week.
So far as we know, neither bank is suffering a hidden run on its deposits like that which is thought to have panicked the Royal Bank of Scotland last October. Yet, looking at their share prices, a run is something that really could happen – and something no government could let happen.
The catch is that events of the last year have proved that throwing unlimited billions at American banks just doesn’t work, while the consequences of not throwing limitless billions are unthinkable.
So do President Obama and his little-known Treasury Secretary Timothy Geithner start off by closing the story of red-blooded American capitalism by nationalising outright their country’s two biggest banks?
They might do just that. Neither is an economist. Neither comes with any known ideological baggage. And they didn’t preside over the present disaster. They will be cleaning up the last guy’s mess.
That is more than can be said of our own Gordon Brown.
They might give him ideas, just the same. So far, he has shown singularly little inclination to flex his controlling muscle at the Royal Bank and the new Lloyds Banking Group. Yet the hard fact is that he (well, we) is the controlling shareholder and can do precisely what he likes.
Remember, though, the last newly-elected President to nationalise his country’s banks was Francois Mitterand. It ended badly.