Bailouts breeding bailouts

At some point over the past weekend I saw a piece on the financial crisis on one of the 24-hour news stations. The story was about the latest injection of public funds into Lloyds Bank, and the visuals were.....a shot of the Lloyds insurance building in London. It's good to know that the media are doing their homework at this perilous time.

Anyway, Lloyds Bank investors are reported to be "incandescent" over the latest bailout of their firm, though I'd bet they're not angry enough to subscribe to the new share offering, which will be made available to them before the Government steps up to the plate again. In return for giving the government an bigger stake in the bank, Lloyds gets insurance for about £250 billion worth of toxic assets. About £200 billion of these came into Lloyds' possession through its recent, government-brokered takeover of the benighted HBOS. If that takeover hadn't happened, Lloyds would probably have been able to avoid falling into the clutches of the government. The government's half-assed attempt to rid itself of the HBOS problem directly led to the need to rescue the previously healthy and conservative Lloyds.

Given the fresh dilution, it's not surprising that Lloyds shares have taken a bruising on the FTSE this morning. Ominously, though, shares in both Barclays and HSBC, neither of which has taken any Government money so far, have also fallen sharply. Each of these banks has issues of its own: Barclays is in talks about insuring some of its riskier assets, while HSBC is in the midst of a rights issue, and is under continuing pressure from a dissident investor.

Still, you have to wonder whether banks that haven't fallen into the embrace of HM Treasury are starting to be put at a competitive disadvantage. The UK financial sector is reeling from crisis to crisis, and returns on savings are spiralling ever lower. It's becoming harder to blame depositors for preferring the assumed safety of a government-owned bank to the unknown risk of banks that are trying to make it through on their own. The case for nationalising the banks may yet become compelling.

Opponents of bank bailouts argue that all that is being achieved is the creation of "zombie" banks that are still too traumatised and too under-capitalised to function normally. They argue that clearly insolvent banks should be wound up as quickly as possible, leaving the way open for new institutions to take their place. The scale of the current crisis seems way too large for this to be a realistic solution. However, there are new players planning to step up to the plate and launch banks in the US, and there is talk of the same happening in the UK. Every silver lining has a cloud, however. Predictably, one of the front runners in the UK is Sir Richard Branson.