Oops! There goes another bank.
As the politicians debated the $700bn bail-out last night, Washington Mutual became the biggest US bank failure in history, reports Bloomberg. America’s biggest savings and loan bank – a bit like a building society, we’re talking the US equivalent of Nationwide here – was taken over by regulators after customers had yanked $16.7bn from their accounts in the past 10 days.
Savers should be fine – the group’s branch network has been bought by JPMorgan Chase (who also snapped up Bear Stearns earlier this year) for $1.9bn. And it’s not a huge surprise – Washington Mutual has been on the “next to go” list for months. Even the ban on short-selling couldn’t save it.
But surprise or no, it’s not going to do anything to help confidence…
The $700bn bail-out won’t save the US from recession
It seems that everyone is finally starting to realise that the global economy is in real trouble. It might have take a few banking failures, but the message is getting through.
Merely weeks after Alistair Darling took a kicking for ‘scaremongering’ after he suggested that things weren’t looking too rosy on the economic front, George Bush has gone on prime-time TV and told Americans – and I quote – that the US faces a “long and painful recession” unless Congress acts “immediately.” Without the bail-out, he argued markets “could slip into a financial panic and a distressing scenario would unfold.”
While I’m not a great believer in the influence of the media on markets, I’m not sure that warning everyone to panic if a deal doesn’t get done was the best idea. Because it seems that pushing this $700bn bail-out past Congress is a bit tougher than everyone thought.
The latest seems to be that the deal has broken up because John McCain has come up with an alternative idea. And not everyone agrees that there should be so much pressure to come up with a plan. A group of more than 150 US economists has written a letter to politicians, saying they disagree with the plan.
“It doesn’t seem to me that a lot of decisions that we’re going to have to live with for a long time have to be made by Friday,” Robert Lucas of the University of Chicago told Bloomberg. Others are suspicious of the freeze in the financial markets. “I suspect that part of what we’re seeing in the freezing up of lending markets is strategic behaviour on the part of big financial players who stand to benefit from the bailout,” said Washington University economist David K Levine.
But in any case, even if a deal does get done, the ‘real’ world beyond Washington and Wall Street is sliding into a recession which will be long and painful, regardless of how much money they throw at it. The US is almost certainly already in recession – unemployment is rising, while house sales are still diving, along with consumer confidence.
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And as for the UK – well, you just have to look at the latest slew of company results to realise that troubles have spread far beyond the ‘financial’ economy, as some pundits like to have it.
Already, the CBI and the Bank of England are being forced to admit that the crisis is much worse than they ever expected. Richard Lambert, head of the CBI, said that “we may well already be in a mild recession”. Meanwhile, Kate Barker of the Monetary Policy Committee said that “this has proved to be a very much more serious, and durable, shock than was initially expected when it began last summer.”
You do have to wonder – why didn’t they see this coming? Did it really never ever occur to anyone that piling all this debt onto the system might be a bad idea? That we might be setting ourselves up for a big tumble at some point?
The latest company results look grim and they will get worse
Anyway, back to the company news. The plunging value of commercial property (down a third in the past year) hammered Songbird (LON:SBDB), which owns a large chunk of Canary Wharf. The group slid to a £245m loss, from a more than £200m profit last year.
Then we’ve got nightclub group Luminar (LON:LMR). Results came in ahead of hopes, but only because expectations were so low. Like-for-like sales fell 2.4% in the six months to August 28th, no worse than the decline reported in the first 20 weeks of the same period. Apparently, consumers are “coming out less but spending more.”
So they’ll have one big night out instead of two little ones. But give it time and the big nights out will start to become unaffordable too.
And then we’ve got results from the Daily Mail & General Trust (LON:DMGT). Advertising revenue at its regional newspapers nosedived, with business down 22% in July and August. As you might expect, property and recruitment ads were particularly hard-hit.
With house prices continuing to fall, unemployment ticking higher and credit continuing to tighten, we can expect most companies to provide grimmer news over the coming months.
In contrast to what Mr Bush says, there’s no need to panic – these things happen, that’s why it’s called a business cycle. But for an idea of where you might want to put your money while we ride out this downturn, you should take a look at this week’s issue of MoneyWeek, out today. subscribe to MoneyWeek magazine.
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