Why are markets so down in the dumps this morning? Congress came to apparent agreement over the weekend on a $700 billion financial bailout plan, after all. Shouldn’t everybody be happy now?
Well, insta-analysis of market movements is always dangerous, but it does seems pretty relevant to note that negotiations on Capitol Hill aren’t all that’s been happening lately. Just in the past 18 hours or so, four major financial institutions have had to be bailed out by taxpayers in the U.S. and Europe. They are:
Wachovia, sold off to Citigroup with some $270 billion in FDIC guarantees.
UK mortgage lender Bradford & Bingley, nationalized by the British government and partly sold (just the deposits and the branches) to Spanish bank Santander.
German mortgage lender Hypo Real Estate, saved with a $50 billion loan from banks and (mostly) German taxpayers.
Dutch-Belgian insurance and banking giant Fortis, rescued–for now at least–with $16 billion from the taxpayers of the Netherlands, Belgium and Luxembourg.
We’ve reached the point now of winnowing the survivors from the rest in the financial industry. This had to happen, and as long as things don’t totally unravel it’s actually a pretty healthy development. But investors and creditors (a group that includes depositors) don’t have much clarity as to who’s going to survive and who isn’t, and have even less idea how exactly the stragglers will be dealt with.
At Bear Stearns creditors were protected and shareholders not completely wiped out; at Lehman, shareholders are toast and creditors are in bankruptcy court. At Indymac only insured deposits (that is, deposits below $100,000) were protected. At Wamu all depositors were safe, but other creditors got the shaft. At Wachovia all the creditors, depositors included, were taken care of.
There were reasons for this ad hoc approach. If the Fed, FDIC and Treasury had simply announced back in March who they thought was gonna survive and who wasn’t, that would have been a self-fulfilling prophecy. But now we’ve reached a point of such confusion and distrust within and about the banking system that what we may need most is simply some clarity: Who’s not gonna make it, and what will the terms of their demise be?