IT is great news that 10 US banks have been given the green light to reprivatise themselves by paying back $68bn in Tarp bailout money. This is a milestone in the financial crisis; not only are banks raising their own equity privately again but they are also issuing long-term debt that isn’t guaranteed by the government. The newly-liberated institutions, including JP Morgan Chase, will be free to determine their bonuses and dividend policies again, which is right and proper.
In return, however, policymakers should play hardball with the banks. The last thing we need is for some institutions to take too many risks again, or use their new stash of capital to go on a acquisition binge, only to be forced to ask for another bailout. Capitalism only works if it is a two-way street where participants are forced to bear their losses as well as their profits. It must be made clear to those banks repaying Tarp that they have run out of lives.
The next bank that runs into trouble must be allowed to go bust; the perception that all the top institutions are too big to fail needs to be eradicated. Any future intervention must be limited to preventing systemic meltdown. It must also be made clear to the banks that next time bondholders as well as shareholders will be wiped out. With credit default swaps (CDS) markets becoming less opaque, the argument that the failure of a mid-ranking institution would take down the whole financial system is becoming far less plausible. It is imperative to create as much transparency about counterparties and risk as possible; that way failures could be managed without the kind of collective nervous breakdown we saw after Lehman Brothers last year.
With freedom (including that of paying out big bonuses) comes responsibility. Never again must banks ask taxpayers for a handout.
COOKING UP INTEREST
Germany’s Angela Merkel is to be congratulated on allowing Arcandor, the German retailer which owns 53 per cent of Thomas Cook, Europe’s second-biggest travel firm, to go bust. Governments have no business propping up failing firms; and there is no way that anybody can argue that Arcandor posed a systemic risk to the economy. Thomas Cook’s shares closed up 10 per cent at 236p yesterday, making it the biggest gainer in the FTSE 100, in anticipation of an offer. Arcandor’s creditors – including Royal Bank of Scotland, Bayern LB and Commerzbank – are likely to want to sell their newly-inherited stake within the next three to 12 months. No offer has materialised so far but the travel giant, which made earnings before interest and tax of £365.9m last year, on revenue of £8.81bn, is unlikely to remain without a suitor for long. The recession has devastated the travel market but with the economy finally stabilising, and in the case of the UK preparing to exit recession, business is likely to improve substantially for the firm next year.
Virtually all Londoners agree that todayProxy-Connection:keep-aliveCache-Control:max-age=0rsquo;s tube strike is a disgrace; we must hope that the present chaos is not a harbinger of things to come throughout the summer. Today and tomorrow will be tough on our readers, the vast majority of whom commute to work by public transport. We wish everybody the best of luck.