State equity ownership

So markets are clapping their hands, if no longer roaring their approval, at the latest proposals to end the financial crisis. Yet policy is still being made on the hoof. Optimists hope that, after a number of false starts, authorities around the world are closer to finding the right means to restore calm. Learning from their mistakes, officials are adapting. But that is hubris. The reality is that questionable decisions are just as likely now as three months ago.

Worse, experience risks being swamped by rushed initiatives as the sense of panic builds. Just imagine how many communiqués are being written deep into the night in order to hit the TV screens before the opening bell. Certainly, the latest announcements in the US that the Treasury will start buying equity stakes in banks seem to be a reaction to the stock market plunge last week, not to mention the praise for a similar move in the UK.

Sure, the authorities have to help restore confidence in financial markets. But worrying about stock prices is a mistake however nice it is to reassure taxpayers that they may share in any gains. After all, companies, including banks, can technically exist with negative shareholders’ equity. And perspective has been lost amongst all the huffing. The US government only proposes to own stakes in banks equivalent to between 1 and 3 per cent of their risk weighted assets. With asset prices still falling, that can be wiped out in no time.

As before, then, only banks with the strongest balance sheets will survive. More important is that the state guarantees of senior debt and loosening of collateral rules required to borrow from central banks will help lending. Besides that, banks were up in the US on Tuesday, but the market as a whole was not. This suggests that the broader economy remains the bigger concern.

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