Lehman Brothers, the third largest investment bank in the US, has gone bust. The US authorities refused to bail them out because Lehman hadn’t taken advantage of previous chances to sort themselves out. The word on the (Wall) street is that the regulators were making an example of Lehman to show American banks they aren’t going to flash the cash when things go tits up.
Meanwhile, the Bank of America has bought Merrill Lynch for $44bn rather than let it go under. Merrill Lynch said, only a few days ago, that it had 110% of the capital it needed to remain solvent.
AIG has asked the Federal Reserve for a $40bn emergency loan to stave of bankruptcy and has been given permission to borrow $20bn from itself. Not quite sure how that works but it sounds suspiciously like the kind of pyramid scheme that comes back to bite you in the arse when it’s rather inconvenient.
The FTSE fell nearly 213 points on the back of these American banking disasters and shares in UK banks have been badly hit. The Bank of England has responded by magicking another £5bn worth of currency out of thin air to stabilise the banking sector. The problem with this, of course, is that it devalues the pound making imports more expensive at a time when cheap imports start to become more important than exports – an economy in recession becomes more insular. Federal Europe has only put in €30bn (about £23.7bn) to shore up the euro which is unlikely to make a significant difference to the eurozone economy which has been pulling itself apart for a while now but will help to bring the pound and euro closer to parity.
Now is not the time to start buying shares in banks!