Illustration by S. Kambayashi
THERE is a new kind of queue in banking, and it is not formed of terrified depositors trying to withdraw their savings. Instead banks are lining up to repay the public capital they received during the depths of the crisis some six months ago. Having met regulators’ stress tests, ten of America’s stronger lenders, including JPMorgan Chase and Goldman Sachs, won approval on June 9th to buy back a collective total of $68 billion of government shares. In Britain, Lloyds Banking Group has begun to give the state some of its money back.
It is easy to see why the banks are keen. By reducing the government’s stake they hope to reduce its influence. Paying back the state is also a way of advertising that they have regained some of their strength. In most respects taxpayers should be happy, too. With the financial system more stable and profits and share prices showing signs of life, these banks have been able to sell new shares to raise cash, and so replace state funds without eroding their capital. The returned money can be recycled into smaller banks which still need equity (seearticle) or used to cut public debt. It will be a long slog: Western governments have injected about $450 billion of capital overall. If the economy deteriorates again, investors’ appetite for buying shares will evaporate. But the process of returning ownership of banks to the private sector has begun.
At the same time, however, a worryingly revisionist history of the credit crunch is being penned. It says that some banks did not really need government help and were bullied into accepting it last year as part of a wider bail-out of their flakier peers. There is a startling lack of grace: Jamie Dimon, the boss of JPMorgan, has fantasised about sending an ironic accompanying “Dear Timmy” thank-you letter to America’s treasury secretary, Tim Geithner, saying “We hope you enjoyed the experience as much as we did.” The boss of Wells Fargo has called the solvency tests “asinine”. The aim of such behaviour is presumably to convince regulators to focus the coming clampdown on the weakest banks. JPMorgan argues that since it was forced into taking capital, the terms of the remaining warrants the government owns should “out of fairness” be eased. Other big banks make similar cases, albeit less vocally.
Despite owning hundreds of billions of dollars of hard-to-value assets, banks seem now to regard as unnecessary the American government’s scheme to purchase toxic loans and securities. Those European lenders that did not get state capital are patting themselves on the back. The message is clear: we never needed government help, and we don’t want it now.
2008 and all that
That is both wrong and dangerous. Wrong, because in the depths of the crisis the share prices and borrowing costs of all banks indicated an almost complete collapse in confidence. Some firms did perform better than others, but only relatively so. All the banks benefited from an implicit state guarantee. Even those lenders who never got capital would probably not have survived without government rescues of weaker firms to which they had counterparty exposures.
Similarly all banks are now plugged into government life-support systems. Their liquidity is supported by more generous collateral rules at central banks. Profits are being boosted by rock-bottom short-term interest rates. Some banks have managed to issue debt without public guarantees, but the system needs to refinance $26 trillion of wholesale funding by 2011; without an implicit state backstop this would surely be impossible. And the value of banks’ assets is being sheltered by central banks’ asset purchases and more generous accounting rules. The truth is that the West has a thinly capitalised banking system that is being allowed to earn its way back to health. Save for defence and space exploration it is hard to think of a privately run industry more dependent on the state.
So the revisionist version of the crisis is plainly inaccurate, but is it really dangerous? Yes, if it distorts the way new rules are drawn up to regulate banks. It would be a disaster if regulators adopted a two-tier approach, judging that those banks able to avoid or repay quickly state capital early had more or less vindicated their business models, and that only those unable to pay up required closer oversight. Although Barack Obama has said repayment does not imply “permission for future misdeeds”, banks with government stakes seem likely to be subject to different rules on executive pay.
If anything, regulators should focus not on the tardiest payers, but on those banks that are too important to fail. And the main bits of the reforms needed—more liquidity and capital, less proprietary risk-taking and better incentives—should be applied firmly and consistently to all lenders. It was the entire banking system, not a few individual firms, that failed. It is the entire system that must now be fixed.
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