By Michael West
The US Government did not rescue a single bank last night. It was a good sign, though no doubt fleeting.
A 4% rally in the S&P should deliver some welcome relief for the share market today - albeit relief tempered by anxiety over what might be coming next.
In Europe - hard on the heels of Monday's rescue of Fortis - the French, Belgium and Luxembourg teamed up to bail out Franco-Belgian Bank Dexia. A 6.4 billion euro ($11.4 billion) package appeared to quell the nerves.
Along with the rise in the US, European stock markets managed a decent bounce too after the biggest one-day drop on Wall Street since the October 1987 Crash.
Still, the crisis remains at extreme levels as banks continue to horde cash. The LIBOR rate on overnight dollars shot to its highest level ever at 6.9%, way above the 2.5% levels of a couple of weeks ago, while the TED spread (which measures gap between US treasuries and the rate at which banks lend to each other) pierced 350 basis points for the first time.
Meanwhile the US Federal Reserve jacked up its currency swaps facility with foreign central banks from $US290 billion to $US620 billion, raising the spectre of pressure from the US for a global round of interest rate cuts. The short-term dollar shortage has never been so critical.
The trust factor remains the overweening concern. Fearing counterparty risks, banks are loath to lend to each other. Throwing taxpayer money at Wall Street's toxic assets is not likely to solve this problem.
It may prop up investment bank shareholders and unsecured creditors but there is simply no guarantee it can restore confidence.
Clawing back
Indeed Wall Street merely clawed back the losses today which it had chalked up before the shock no-vote on the Paulson bill from Congress yesterday morning. In other words, in anticipation the bill would be passed, the US share market had still shed three per cent.
Zero confidence in the Bush administration and a widespread feeling that former Fed chairman Alan Greenspan's appeasement of Wall Street, by keeping rates at 1% for so long, do little to enhance the appeal of government initiative generally.
Then there is the response to the ad hoc bailouts to date. The market tanked 5% after the $US85 billion ($108 billion) rescue of insurance giant AIG. Neither did the $US200 billion bail-outs of Fannie Mae and Freddie Mac, or the seizure of Washington Mutual, deliver a floor under stock prices.
Such is the velocity of the crisis that large near-death experiences are a daily thing and some of the bank-for-bank rescue deals may yet fall out of bed.
Shareholders of Bank of America for instance are still to vote on the $US50 billion scrip acquisition of Merrill Lynch and may yet balk at the premium on offer - especially as big, cheap, distressed banks are a dime-a-dozen.
Citigroup has agreed to stump up just $US2 billion in scrip for the US's eighth largest bank Wachovia and its $US53 billion in debts. JP Morgan is forking out $US1.9 billion for WaMu's deposits.
European woes
Across the Atlantic, the HBOS experience is telling. UK bank Lloyds TSB had agreed to by the foundering HBOS but Lloyds shares rose 3% last night and HBOS was hammered 13% on speculation Lloyds could press for a renegotiation.
Why wouldn't it? Lloyds is proposing to pay 9.8 billion pounds ($22 billion) but HBOS is now fetching just 6.4 billion pounds. The embattled HBOS is the UK's largest mortgage and deposit bank. This is a vital deal and one which has drawn the intervention of the Prime Minister Gordon Brown.
There is now however a stark 35% discount in the HBOS share price to the Lloyds' bid. Given HBOS is so reliant on funding its mortgages from wholesale markets - and wholesale markets are in a state of panic which has rendered new funding simply uneconomic - Lloyds is overpaying.
Moreover, housing markets are in disarray and the prospect of recovery in both housing and bank profits has now stretched out to 2010.
Australian fallout
The implications of all this ring loud for Westpac and its $17 billion takeover offer for St George. Like HBOS, St George is highly dependent on wholesale markets for its funding and in the absence of the Westpac bid would now be in strife.
Although the deal is still likely to proceed, much cost and effort having been sunk already, it is now clear that Westpac is paying top-of-the-cycle prices for an asset which it could have picked up a lot more cheaply. Great for St George shareholders, not much good for Westpac.
That CBA kept its powder dry, and sensibly shied away from a shot at investment bank ABN Amro, puts it once again in the box seat for dominating the banking sector in the next cycle. While Westpac's Gail Kelly will now be bedding down the overpriced acquisition of her old alma mater, CBA's Ralph Norris and his gang can relax and wait for a bargain.
No doubt the investment bankers will be endeavouring to tee up a deal for CBA to partner with an insurer the likes of QBE to split up the struggling Suncorp.
mwest@fairfax.com
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