Tracing the Bank Bailout

[danalwyn]

We've now begun the long and lengthy process of recapitalizing American banks by buying up preferred stock, and injecting capital directly instead of merely buying up bad assets. This is probably a good thing, as nobody seems to have suggested a better plan (other then the Chicago people - whose plan requires a great deal of temporary wishful thinking). I'm not entirely happy with it, but I'll live with it.

But how did we arrive at this point when the most powerful man in America, Hank Paulson, claimed that he was in no way going to resort to this just a few weeks ago?

Now that the dust has settled, it becomes possible to trace back a bit of a trend. The Americans did it, of course, because the Europeans did it. And the Europeans did it because the British had already started out by introducing a massive bank rehabilitation package. And the British? Well, they did it because the Irish had already guaranteed 400 billion euros from their six largest banks.

Think about that. The Treasury Secretary of the United States of America, arguably the most powerful man in the most powerful country on Earth, was just forced to spend, against his will, hundreds of billions of dollars to recapitalize some of the largest financial lenders in the world, because of a decision made by a nation with the population of Alabama. That's kind of impressive.

Welcome to the new global economy.

Comments

[madra-liath.livejournal.com]

I hope you're being sarcastic because your chronology is off. Like, way off.

[danalwyn.livejournal.com]

Maybe I have my chronology wrong. I have:

The Irish original plan becoming public either on September 30th or Oct 1st (depending on how plugged in you were - most of the news articles 2nd came out on the deal on the 1st - although rumors were prevalent before), and then passing the law on the (late at night).

Worries about capital flight rumbling through the financial sphere shortly thereafter leading to some minor bailouts, mostly throughout Europe (summarized more or less by the Economist's "Beggar thy neighbor" article on Oct 6).

On Oct 8th, you have Gordon Brown unveiling Britain's new policy, which would eventually lead to the massive RBS/HBOS bailout.

Then I have the Europeans following suit with a massive, British-like bailout on Oct. 13, following the EuroZone weekend summit in Paris.

Only after which, on Oct 14th, did a very upset Paulson finally decide to use capital from the bailout plan to recapitalize banks instead of simply buying some pieces of bad mortgages.


The weakest causality link, of course, is the one between Ireland and Britain, in which it could be argued that Brown would have had to propose a massive bailout anyway, given the bad state of RBS/HBOS over that week, but I'm more inclined to think my way. There's a strong school of thought leaning toward an enforced causality, that once Ireland had guaranteed their investments, a subsequent British bailout was going to become mandatory. Other experts don't agree, of course. But there's a pretty big line from thereon after, given Brown's pushing for a EuroZone follow-up to his bailout, followed by the immediate commitment of American cash.

But I thought I had the chronology right. Did I not?

(Sorry I took so long to get back. I've had my mind on other things).

[danalwyn.livejournal.com]

I should add that yes, the Treasury was considering buying equity stakes directly in US banks as early as the 9th (the day after Britain unleashed their plan), but the Treasury appeared against it until the 14th (at least as far as we could tell. They may have simply been waiting for the Paris meeting consensus).