The world changed this morning. It’s being called Super Monday. Until recently, governments around the world were mild mannered, back seat drivers. But they spent this weekend changing their attire, and this morning stepped out with red cloak flaring, x-ray eyes boring, steel in their veins.
It was perhaps the most dramatic weekend yet, and this morning will go down in history as a key moment in this saga. British taxpayers also woke up to the news that they now own RBS, and have big chunks of Lloyds TSB and HBOS.
But to tell the story of this most dramatic stage yet in this, the great crisis of 2008, let’s begin at the beginning. It is just worth remembering the sheer scale of share price losses last week. The FTSE 100 lost 21 per cent of its value, so too did the DAX in Germany. The Dow didn’t fall quite so sharply – down 18 per cent, but only because it suffered bigger losses the week before. In Japan, the Nikkei was down 24 per cent. But the losses were not restricted to the developed world. The last few weeks have seen shares crash across the world, in China, India and Russia.
Then on Friday, the IMF rattled a few nerves. Usually you have to read IMF statements two or three times before their true meaning sinks in. Not this time; they couldn’t have put it more bluntly. Yesterday (Sunday), Dominique Strauss-Kahn, the IMF chief, said: “Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.”
At first, the signs from finance ministers weren’t good. They uttered lots of soft words, and talked about a five-point plan to save the banking system, but there was no real substance. To put it into boxing terminology, they talked the talk, but they didn’t seem willing to walk the walk.
But this morning it seemed to change. And it changed in the UK first.
RBS is to be on the receiving end of a £20bn government investment. Taxpayers will then own 60 per cent of the business, so, in effect, RBS will be a government-owned bank. So the government banking portfolio will consist of Northern Rock, Bradford and Bingley and RBS. Or, to put it another way, Nat West is now a government-owned brand. “There has to be a better way,” the Nat West used to say. Well, those words may have proven prophetic in a way that just wasn’t intended.
Sir Ron Goodwin, the boss of RBS, who presided over the purchase of ABN Amro, and insisted the bank would not need to raise more money, is out. His departure seemed to be about as inevitable as the forthcoming departure of Peter Mandelson, who is bound to succumb to the new media/union witch-hunt which has already begun.
HBOS is to receive £11.6bn, Lloyds TSB £5.5bn, and assuming the merger goes ahead the government will hold a 40 per cent stake in the new bank.
Barclays, which was lucky enough to fail in the battle to gain control of ABN Amro last year, reckons it can stay independent, and is raising £6.5bn from private investors.
However, so well has the plan gone down, that it appears private investors are coming out of the woodwork, and putting up a lot more money than was originally anticipated. It seems the government may not, ultimately, put up quite so much money, and its equity stake may be smaller as a response.
It seems likely governments in Europe will be announcing similar packages soon, and probably today.
The US government seems to be lagging behind the curve, but it has hinted at a similar scheme itself.
As a by-product of all this, Gordon Brown seems to be emerging as the key international figure. As was predicted here three weeks ago, in ‘Is Brown set to see his Falklands moment?’, the British PM may be achieving something that was considered unthinkable, and is restoring his political credibility almost as quickly as he lost it.
At the time of writing, stock markets have roared their approval, with sharp rises seen in the UK and mainland Europe. Frustratingly, US stock markets are closed today, so we will have to wait until Wednesday morning to shed light on the US reaction.
The British government has played this well.
But it is a mistake to think all the problems are behind us. Sure, the possibility of a global banking crisis, creating a global economic depression, leading to all kinds of dangers, has diminished.
Neither does it mean that the good times are here again. Nationalised banks, even partially nationalised banks, are not the best institutions to sit at the core of the global economy. Banks such as Barclays, HSBC and Santander, which are able to avoid giving away government stakes, could yet scoop up the cream.
And even if the banking crisis has seen its worst – and let’s hope it has – the real economy is only just feeling the effect. Hopefully, governments have taken an important step in ensuring the world does not see economic depression, but recession is unavoidable.
On the Today programme this morning, one stockbroker talked about recession as being a good outcome. Effectively he said at least we can deal with recession, we have seen it before, and we know it will pass.
Maybe, thanks to a quite impressive government accord, the worst-case scenario is now looking less likely. But this does not mean recession can be avoided – if governments can stop that from happening, then Superman really would have to run the show.
