A Guardian article written by Chris Hamnett, entitled “Fannie Mae, Freddie Mac and a nightmare on Wall Street” concerns the present financial crisis within the financial markets.
Mr. Hamnett writes:
… “Why are governments rescuing banks and institutions whose gung-ho lending triggered the credit crisis?”
Writing in response …
SIMPLY to prevent a wider collapse of the liquidity markets. In many instances, though, it is throwing hundreds of billions of pounds of good money after bad. Failing to support the market at the current moment would ignite yet further economic turmoil.
The concern, though, is how the Central Banks money will be paid back by those institutions seeking assistance. With lending rates, in such circumstances, up and above LIBOR, I would envisage many more financial institutions folding before this deep credit crisis is over.
…
WHILST I SHARE some of your stronger sentiments, in how you write throughout your post (a respondent to the Guardian article), the failure of many financial institutions in not having full-proof credit rating systems, is a major contributory factor in the chaos that transpired within the financial markets; a point borne-out by the FSA when they undertook a review of financial regulations. Because of this failure, how were banks able to readily prove that an individual, or couple, had the ability in repaying back loans and mortgages advanced? Moreover, many sub-prime outlets - the very crux of the problem - were advancing up to five times an individual’s salary, high risk based on hedge funds and derivatives trading.
Of concern, too, is whether the amount of bad debt provision made by High Street banks, in the immediate aftermath of the credit crunch, was enough. High profile reports such as that of the Royal Bank of Scotland that wiped millions off its value and its subsequent scrip issue of shares in raising liquidity was, unusually, an isolated report of proper accounting. I fear that many financial institutions are merely window dressing, in an attempt and hope that economic conditions will improve in the near future. The sad fact is, though, that many banks, and some building societies, are either facing amalgamation through mergers or closure altogether. Much of this is due to irresponsible banking practices and shoddy management that is still surfacing.
Speculation has it that a deepening economic recession is just weeks away. The Central Banks lending policy to those financial organisations in deep trouble needs to be reviewed and re-assessed. It is not the responsibility of the British Taxpayer in hoisting up failed banks, whether any particular bank, like the Northern Rock, is taken into public ownership. Shareholders of banks require examining the performance of senior executives without freely being blinded by lame excuses. An economic crisis, or not, bankers are professionals that must take account of their actions.
© Mark Dowe 2008: all rights protected
References:
- Chris Hamnett, “Fannie Mae, Freddie Mac and a nightmare on Wall Street”
http://www.guardian.co.uk/commentisfree/2008/jul/14/stockmarkets.useconomy
- Guardian Editorial, “Financial markets: Too big to fail”
http://www.guardian.co.uk/commentisfree/2008/jul/15/banking.regulators
