The Prime Minister’s latest measures to shore up the banking sector will not be his last, says Martin Vander Weyer. But the market is losing patience with the government’s interventions
There is a passage in The Siege of Krishnapur, J.G. Farrell’s novel about the Indian Mutiny, in which the defenders of the British residency, having exhausted conventional munitions, load their remaining cannon with anything sharp-edged that comes to hand. In a scene of surreal carnage, a last wave of mutinous sepoys are then mown down by a volley of fish knives, sugar tongs and marble fragments chipped from an allegorical statue called ‘The Spirit of Science’ — which had hitherto symbolised the senior British officers’ attachment to rationalism.
That seems to be roughly the point we have reached in the siege of the British banking system. Except that we have no way of knowing whether this week’s desperate package of additional measures will turn out to have been a decisive improvisation by Captain Brown and Corporal Darling — who clearly abandoned rationalism some months ago — or a futile gesture before their mutinous foe overwhelm them. That enemy who once seemed to be on their side is the market; and it is terrifyingly unpredictable, because it has no commanders but almost unlimited reinforcements.
If and when the next attack sweeps in — it may have come by the time you read this — it could drive the shares of several banks to worthlessness, forcing the full-scale nationalisations the Treasury has been desperate to avoid and has no real idea how to manage. Or, as was foreshadowed at the beginning of the week by rumours of an imminent downgrading of British sovereign debt, it could radically increase the cost and limit the scale of government borrowing — throwing Brown’s trillion-pound rescue strategy into utter disarray. Within a matter of weeks it might well do both of those things, turning the public-sector balance sheet into a giant version of the crippled banks to which other banks refuse to lend. Only one thing is certain: no one — politician, economist or banker — believes that the carnage is over.
Nevertheless, let us attempt to take stock. Does the necessity for this second bail-out mean that the first one, the £37 billion injection of capital into Royal Bank of Scotland and the Lloyds–HBOS combination last October, was a failure? Not entirely: it achieved the short-term objective of saving RBS and HBOS from having to declare themselves insolvent, which would have led immediately to their nationalisation to avoid public panic. And as the Prime Minister never fails to remind us, it encouraged bank rescues by several other governments, bolstering the global banking system at a moment of unprecedented shakiness. But in doing so it took out one major British bank, Lloyds TSB, that would very likely have survived intact on its own. And it did nothing to alleviate the critical lack of credit for businesses, which is now driving the pace of recession.
Will this week’s measures turn the tide of battle, unblocking the credit system and setting the banking sector on the road back to normality? A complex range of liquidity and insurance schemes is now in place to encourage new lending and relieve the burden on banks of existing ‘toxic’ loans and investments. Asset values have been written down, Augean stables of management cleaned out. But the trouble with all this is that no sensible banker today is eager to pile on new loans of any kind, however they may be underpinned by the taxpayer, because the first priority is to hoard capital against the possibility of losses to come as business customers fall deeper into trouble and real estate values continue to tumble. This is a vicious downward spiral, and all the fish cutlery that Downing Street has fired so far will make only a marginal difference until there is a sense that at least the bottom of the property market is in sight.
So there must, I fear, be more to come: more capital injections, more vilification of the fallen RBS chief Sir Fred Goodwin and his ilk, more hurriedly conceived measures that would have been unthinkable in calmer times. We will soon see the fulfilment of the Prime Minister’s urge to order banks under his control (whether formally nationalised or not) to lend as though they were participants in a Soviet five-year plan. There is the ‘bad bank’ idea — quite a good idea, in fact — in which all the toxic stuff would somehow be parked and managed in a state-owned repository so that commercial banks could effectively start afresh. There is the ‘quantitive easing’ idea, not a bank-rescue measure in itself but a means of averting depression, once there is no more room for rate cuts, by pumping new-minted cash through banks into the wider economy.
But it is the market, not the policymakers, that holds the upper hand on this battlefield — by sheer weight of numbers and by its ruthless, unconsidered herd instinct. In the last few days, it has all but written off RBS and the new Lloyds Banking Group, neither of which can now hope to raise capital from anywhere but HM Treasury for the foreseeable future. It refuses to make distinctions between one bank and another, battering the share prices of the strongest — such as HSBC — along with the weakest. As we go to press, short-sellers (and just plain panic sellers) are driving Barclays inexorably closer to the government’s clutches — even though Barclays is adamant that it does not need a bail-out and has said that its 2008 profits, to be announced shortly, will exceed £5.3 billion after taking account of an up-to-date valuation of its bad assets.
Just before the first bear raid that wiped out a quarter of Barclays’ market value last Friday, I spoke at length to Bob Diamond, Barclays’ multi-million-bonused investment banking chief (the interview will appear in the February issue of Spectator Business). He was remarkably upbeat about his business, particularly the acquisition of parts of Lehman Brothers in New York. But the market has stopped listening to Bob and his colleagues. And Gordon Brown, I suspect, would love to take their scalps as punishment for all those bonuses and for disdaining his October offer of capital in favour of money from a sheikh in Abu Dhabi.
That last thought highlights what is perhaps now the greatest danger of this situation. The narrative that Brown wants us to believe is one in which he, and only he, has the power to defy markets, command the economy and bring justice on ‘irresponsible bankers’. But that is a truth-denying, solipsistic fantasy, and the market has seen through it. Reaction to Brown’s performance on Monday, announcing the new measures, was instantly negative and got worse as the week went on: the pound tumbled amid fears of ‘creeping nationalisation’ of the banks and doubts as to whether the insurance scheme for toxic assets will make any difference. High-profile investors, from the usually circumspect hedge-fund manager Crispin Odey (‘The country is bankrupt’) to the motor-mouth commodity trader Jim Rogers (‘Sell any sterling you might have. It’s finished’), whipped up the mood.
Almost over is the market’s assault on banks that were so critically weakened by their own misjudgments and self-indulgences. The assault on Gordon Brown has just begun — and soon we will discover just how little shot he has left in his locker.