Following the US bail-out of Freddy Mac, Fanny Mae, AIG and the more debatable grant of a Federal guarantee to Goldman Sachs and Morgan Stanley Europeans intervened over the week-end with the U.K. nationalisation of the real estate bank Bradford & Bingley and the acquisition by the Nederland, Belgium and Luxemburg of 49% of the Fortis banking network: the stock of the first had already lost 93 % in one year and the second some 80%…
Sorry for them owners of bank stock will be the first to pay for this big credit crisis which was predictable since years and which central bankers and regulators have not grasped on time. Shareholding remains the adjustment variable of the market economy and it is the honour of equity investors to accept their loss when they have bet on lousy horses.
If the universal bank model currently provides some relief to big European banks it is precisely the interests confusions generated by this universal bank model which in turn generated this world crisis. Management of big banks is also responsible as they only criticized IFRS methods for its marked to market accounting but despite our repeated warnings since ten years never questioned this confused economic model and its «sustainability».
It is therefore stimulating to observe that the Benelux States have chosen to bail-out only the deposit and credit branches of Fortis. The universal bank licence allowed to pile up short-term businesses such as investment banking, arbitrage, insurance, derivatives on top of and thanks to the long-term sustainable credit and deposit business. But these more speculative businesses which do not serve large public needs do not deserve the tax payers support: they should have been left to the open competition and never allowed to the "true banks". Some conservative true banks have refused to move to these sexy businesses, they should come out stronger from this crisis.
This is what makes more acceptable the Lehman Brothers collapse, a highly leveraged investment banker: the favoured treatment of Goldman Sachs and Morgan Stanley exchanging a Federal guarantee in exchange for some new controls is a shame. By contrast the Fortis case the continental states accepted to invest only in the "true bank" and valued for a total of € 22B the branch networks while according to the press BNP Paribas had offered 2.15 M for the entire Fortis group which had been valued at € 5 B by the market last closing.
Let us remind that it is certainly bearable to live with a nationalized banking system : after all the French socialists did in 1981 for only ideological reason and at the wrong time. A temporary acquisition by the states of the credit and deposit system is not the worse investment for the nations : clearly as other business it is usually more efficient in private hands, it is a stable business profitable in the long term. The State bail-out and the acquisition of banks is a necessary evil and therefore a good thing for the long term.
However governments should not over-generously offer the tax payers money to save former risk takers. It should limit its intervention to the deposit and credit business and if it thereby helps the rest of the bank to survive - as in the Fortis case - it should request a first guarantee from these financial groups.
Politicians should insure that the privileges be paid first on bonuses and out of the money stock options. The needed public confidence will come back only if new risk takers are treated in priority as "senior" to the former fund providers. At the equity level shareholders first hit must accept the necessary dilution, at the debt level, similarly, new lenders should come senior to relieved professional lenders, at the same level, "pari-passu" with individual deposits.
Finally the multiple confusions of interests of investment banks should be addressed, and all the numerous abuses of not respected "Chinese walls" including the recent over-selling of bank shares by the networks.
All this requires a bank governance "new deal" from the States, starting with the non payment of unfair golden parachutes but also the replacement of non independent directors associated with these confusions of interests. Institutional investors should prepare for this and oppose more than ever to conflicts of interests at the time of the companies Directors election.
Pierre-Henri Leroy
Le Monde, October 2nd 2008