T Nation

European vs American Bank Bailouts

So as most of you should be aware, quite a few European banks have been bailed out by their respective governments in the past 2 weeks or so.

I have a deep curiousity into the methods that those governments took in bailing out their banks as compared to the US. Does anyone have some good resources as to the plans enacted by the Europeans, how much stake they have in the banks, how they plan to recoup their Euros, etc?

I think it can be an interesting side by side comparison as to the methods, reasoning behind them, and obviously how successful each group is in restoring stability to their respective financial structures.

The Europeans have big problems. There is talk about whether or not the Euro or even the EU will survive this crisis.

ie They don’t know if the German banks are going to be willing to bail out Spanish mortgages.

In Britain they are going to pour 500 billion pounds into the banking system with no guarantee they won’t have to pour in more. The pound is worth $1.80 right now so it is more than the US is putting into the bailout.

Plus they are theatening to raise taxes even though they already have the highest in the developed world.

[quote]Sifu wrote:
The Europeans have big problems. There is talk about whether or not the Euro or even the EU will survive this crisis.

ie They don’t know if the German banks are going to be willing to bail out Spanish mortgages.

In Britain they are going to pour 500 billion pounds into the banking system with no guarantee they won’t have to pour in more. The pound is worth $1.80 right now so it is more than the US is putting into the bailout.

Plus they are theatening to raise taxes even though they already have the highest in the developed world.

http://www.dailymail.co.uk/news/article-1073130/16-000-EACH-Thats-pay-Great-Bank-Nationalisation.html [/quote]

Does this mean that we Americans will finally be able to get the half price sale like the Europeans have had for the longest fucking time (USD > Euro sometime)? =D

[quote]Sifu wrote:
The Europeans have big problems. There is talk about whether or not the Euro or even the EU will survive this crisis.

ie They don’t know if the German banks are going to be willing to bail out Spanish mortgages.

In Britain they are going to pour 500 billion pounds into the banking system with no guarantee they won’t have to pour in more. The pound is worth $1.80 right now so it is more than the US is putting into the bailout.

Plus they are theatening to raise taxes even though they already have the highest in the developed world.

I heard it was only 50 billion.

http://www.cnbc.com/id/27079070

[quote]Ren wrote:
So as most of you should be aware, quite a few European banks have been bailed out by their respective governments in the past 2 weeks or so.

I have a deep curiousity into the methods that those governments took in bailing out their banks as compared to the US. Does anyone have some good resources as to the plans enacted by the Europeans, how much stake they have in the banks, how they plan to recoup their Euros, etc?

I think it can be an interesting side by side comparison as to the methods, reasoning behind them, and obviously how successful each group is in restoring stability to their respective financial structures.[/quote]

The big difference is that American financial institutions get bailed out, but European ones get nationalized.

The white house is considering ownership stakes in banks, who knows if that will work.

Sidetrack: if they bailout parts of the insurance sector (AIG)because of pressure from foreign governments, do they have any interest in running the industry themselves?

In some European countries, the public gets their insurance from the government. There is no way that would happen in America this decade. In Hungary and Brazil, the government is everybody’s home lender. Maybe this is the direction that the US will be forced to take.

[quote]archiewhittaker wrote:
The big difference is that American financial institutions get bailed out, but European ones get nationalized. [/quote]

Uhh…the Fed just took over 2 banks in the last 2 weeks. How is that not nationalizing an financial institution? The Fed just passed a $850 billion bill to take over the subprime mortgage industry. How is THAT not nationalizing financial institutions?

The US government is already in the insurance business. From federal flood insurance to federal crop insurance.

You need to keep up with the times, kiddo. You are swinging way too late to make the team.

[quote]rainjack wrote:
archiewhittaker wrote:

You need to keep up with the times, kiddo. You are swinging way too late to make the team.
[/quote]

Please, coach! Let me play, I’m ready!

Federal crop insurance? I meant auto insurance, life insurance etc.
Nationalizing means public ownership of the corp.
I can’t see the government owning a corp on behalf of the U.S. population. There has always been a power center that runs finances, the power is NOT spread out. The public does not get to influence decisions made.

In Britain, mergers and takeovers in the banking sector are common and the role of the bank is usually larger than in the U.S. meaning that stakeholders are less prominent. U.S banks are better off in that sense seeing as they share less risk.

…what i’ve gathered from the Fortis situation is the following: due to decreased consumer confidence that led to withdrawal of savings and decrease in overall business, Fortis faced implosion. The company however is healthy and profitable. The dutch government bought Fortis on state loans, not tax money. When the markets have gone back to [somewhat] normal, selling Fortis may lead to a net profit. All in all a different situation than in the US, but i’ll gladly admit my knowledge is cursory at best…

[quote]rainjack wrote:
Sifu wrote:
The Europeans have big problems. There is talk about whether or not the Euro or even the EU will survive this crisis.

ie They don’t know if the German banks are going to be willing to bail out Spanish mortgages.

In Britain they are going to pour 500 billion pounds into the banking system with no guarantee they won’t have to pour in more. The pound is worth $1.80 right now so it is more than the US is putting into the bailout.

Plus they are theatening to raise taxes even though they already have the highest in the developed world.

I heard it was only 50 billion.

http://www.cnbc.com/id/27079070[/quote]

It’s kind of both - the government is buying £25 billion in preference shares (which is 50% of the stock market value of the banks involved I seem to recall) with an option for a further £25 billion. There’s £250 billion in loan guarantees, and £100 billion in short term loans on top of an existing £100 billion in loans already in place.

UK tax rates aren’t the highest in the “developed world”. Belgium, France, Greece, Germany, Netherlands, Portugal, Spain and a few other European countries all have higher tax rates.

[quote]rainjack wrote:
archiewhittaker wrote:
The big difference is that American financial institutions get bailed out, but European ones get nationalized.

Uhh…the Fed just took over 2 banks in the last 2 weeks. How is that not nationalizing an financial institution? The Fed just passed a $850 billion bill to take over the subprime mortgage industry. How is THAT not nationalizing financial institutions?

In some European countries, the public gets their insurance from the government. There is no way that would happen in America this decade. In Hungary and Brazil, the government is everybody’s home lender. Maybe this is the direction that the US will be forced to take.

The US government is already in the insurance business. From federal flood insurance to federal crop insurance.

You need to keep up with the times, kiddo. You are swinging way too late to make the team.
[/quote]

LOL, finally someone who sees it for what it really is.

[quote]ninearms wrote:
rainjack wrote:
Sifu wrote:
The Europeans have big problems. There is talk about whether or not the Euro or even the EU will survive this crisis.

ie They don’t know if the German banks are going to be willing to bail out Spanish mortgages.

In Britain they are going to pour 500 billion pounds into the banking system with no guarantee they won’t have to pour in more. The pound is worth $1.80 right now so it is more than the US is putting into the bailout.

Plus they are theatening to raise taxes even though they already have the highest in the developed world.

I heard it was only 50 billion.

http://www.cnbc.com/id/27079070

It’s kind of both - the government is buying £25 billion in preference shares (which is 50% of the stock market value of the banks involved I seem to recall) with an option for a further £25 billion.

There’s £250 billion in loan guarantees, and £100 billion in short term loans on top of an existing £100 billion in loans already in place.

UK tax rates aren’t the highest in the “developed world”. Belgium, France, Greece, Germany, Netherlands, Portugal, Spain and a few other European countries all have higher tax rates.
[/quote]

That isn’t what the IMF said two years ago. Either way European rates of taxation are far in excess of what we suffer in the US.

European politicians love to take money away from the people and lavish it on their pet projects. There is not a strong tradition there of fiscal prudence in government.

Europeans have been completely in denial about the realities of the global economy that they are not in. It looks like their rude awakening is finally going to arrive.

The British are fortunate in that they still have their own currency. If they had gone into the Euro they would be in an even worse situation.

Here is an article about what is happening with te Euro.

Better late than never. A half-point cut in global interest rates may not halt the slide into a debt deflation, but at least we can hope to avoid the errors of the Great Depression. The slump �?? remember �?? had little to do with the 1929 crash.

What turned the mild recession of 1930 into the sweeping devastation of the early 1930s was an entirely avoidable collapse of the banking system in both the US and Europe.

The culprit was tight money, made worse by beggar-thy-neighbour policies. The key levers of power in Western finance were held by the sorts of people who now think it is a good idea to drive our banks over a cliff.

Thankfully, wiser heads are in charge this time. Yesterday’s move by the US Federal Reserve, the Bank of England, the European Central Bank (ECB), the Canadians, Swiss and Swedes �?? with Chinese help �?? is the first time in this sorry saga that the big guns have joined forces in monetary policy to arrest the disintegration of the credit system.

The Fed and the ECB are no longer fighting. That alone is a massive change for the better.

However, the failure to offer a lifeline to distressed banks across the world earlier by cutting rates is unforgivable. The G7 bloc of economic powers is in recession or on the cusp, including Japan �?? where the Nikkei index fell by 10 per cent yesterday. American consumer credit is contracting at an annual rate of 7.9 per cent, the most violent squeeze on record.

The Baltic Dry Index measuring freight rates for shipping has fallen 70 per cent since May. The whole nexus of commodities except gold, now a super currency, is in freefall. Oil has fallen by 41 per cent from its peak, copper by 38 per cent, wheat by 50 per cent.

Few with their finger on the pulse of global commerce now think the threat of inflation is remotely credible. Tesco’s Sir Terry Leahy says food prices are now deflating at two per cent in his stores.

My view is that Washington has done what is needed to prevent the collapse of the US economy. It has taken over the entire credit system, after all, surpassing Roosevelt’s New Deal.

The US has guaranteed the $3.5 trillion money market funds. It has nationalised the $5.3 trillion pillars of the mortgage market, Fannie and Freddie. The Fed is accepting any junk as collateral at its lending window.

This week it went the whole hog after panic hit the $1.6 trillion market for commercial paper. It is now offering loans without any security at all. The US government has become a bank. Yes, this is US socialism. What is the alternative?

The $700 billion Paulson rescue plan should put a floor under the colossal dung heap known as “structured credit”. It is a bad plan, since it does not target the money on the recapitalisation of the core banking system. But it will help refloat lenders by raising the price of beaten-down securities somewhere nearer their true “hold-to-maturity” worth.

An ugly recession is coming, as debt leverage kicks into reverse. The purge will be slow and punishing. Some 12 million Americans are already trapped in negative equity, but at least they can see where this might end. After much drama, the US institutions have risen to the challenge.

The Fed, the Treasury, and Congress have managed to take some sort of coherent action. The jury is out on Europe, where the hurricane is now smashing the banking system.

Those such as German finance minister Peer Steinbruck �?? who thought the sub�??prime crisis was just an “American problem” �?? have had a rude shock. The collapse of Hypo Real with �?�400 billion of liabilities has made him face the unsettling truth that German banks have played a big part in this $10 trillion speculative venture undertaken by the whole global banking industry.

Europeans borrowed vast sums in dollars in the offshore money markets when dollar credit was cheap. This was leveraged by multiples of 50 or 60 to fund whatever craze was in fashion �?? Russia, Brazil, infrastructure. The credit crunch has left these banks floundering.

They have to pay back a lot of dollars, yet the underlying assets are crumbling. They are caught in a self-feeding spiral of “deleveraging”. Even those European banks that stuck to stodgy investments are caught in a vice, since many rely to some degree on three-month loans for funds. That market is jammed shut.

They cannot roll-over their loan books. This way lies sudden death, as Hypo discovered.

Who in the eurozone can do what Alistair Darling has just done in extremis to save Britain’s banks, as this $10 trillion house of cards falls down? There is no EU treasury or debt union to back up the single currency.

The ECB is not allowed to launch bail-outs by EU law. Each country must save its own skin, yet none has full control of the policy instruments.

Germany has vetoed French and Italian ideas for an EU lifeboat fund. The former knows exactly where that leads. It is a Trojan horse that will be used one day to co-opt German taxpayers into rescues for less Teutonic EMU kin. One can sympathise with Berlin.

But sharing debts with Italy and Spain was implicit when they agreed to launch the euro. A shared currency entails obligations. We have reached the watershed moment when Germany has to decide whether to put its full sovereign weight behind the EMU project or reveal that it is not prepared to do so in a crisis.

This is a very dangerous set of circumstances for monetary union. Will we still have a 15-member euro by Christmas?