The financial crisis continued to overwhelm individual actions by governments and their regulators yesterday, and the pressure for unprecedented co-ordinated action is growing.
Within the chaos, however, groups that are relatively lightly touched by the debacle are reaping the rewards: CBA's $2.1 billion acquisition of BankWest from HBOS of Britain is a great example.
At any other time, the price CBA is paying would be ridiculously low. But HBOS is in dire straits itself, with even its bail-out merger with another British bank, Lloyds, in doubt following the latest market rout.
Westpac is paying 2.7 times book value for St George, and CBA is paying 80 per cent of book for BankWest. St George is being bought for 16.8 times earnings, and BankWest is going at 11.2 times.
And consider this: the big four Australian banks are now trading at prices that equate to about $4 of deposits for every dollar of market value. CBA's boss, Ralph Norris, is acquiring $37 billion of BankWest deposits for $2.1 billion, or $17.62 of deposits per takeover dollar.
Deposits are the main wellspring for bank lending - BankWest is 63 per cent funded by retail deposits, and CBA 58 per cent - so CBA is effectively buying lending power at a discount.
It's a classic example of how the strong will feed on the carcasses of the weak in this crisis, in a process that is being euphemistically described as "restructuring".
The shape of the finance scene by the time it is over is unknowable. However, some trends are apparent - in early expansionary moves by groups such as CBA here and JP Morgan overseas; and, in an unavoidable byproduct of the breakdown of trust in the system, the moves by governments to take ownership of a progressively broader suite of financial securities and, in extremis, ownership or part-ownership of financial groups themselves.
Central banks have expanded the types of assets they will trade for cash. Our Reserve Bank led the way in bringing residential mortgage-backed securities (RMBS) in through its repurchase window to improve the flow of liquidity to banks, and opened the window further yesterday, by announcing it would take RMBS from the originating bank, not just third-party banks.
The new high-water mark was set on Tuesday night, however, when the US Federal Reserve announced that it was creating a special purpose vehicle to buy and hold commercial paper. Commercial paper (CP) is the default short-term funding mechanism for companies generally, and the Fed's decision to become America's CP buyer of last resort shows that the crisis is threatening to starve the entire US economy, and, by implication, the world, of the money it needs to keep operating.
The second wave involves more direct government ownership of debt. It began with sovereign fund investments in the first round of loan losses and capital raisings, expanded last month with the US Government's effective nationalisation of Fannie Mae, Freddie Mac and the insurance giant AIG, and reached new heights in Europe yesterday when the British Government reacted to stunning declines in the share prices of British banks by announcing a rescue package that involves the partial nationalisation of Britain's financial sector.
Up to £50 billion ($128 billion) will go to buying preference shares in eight major banks to boost their capital bases, at least £200 billion of emergency liquidity lending is lined up, and the Government will guarantee debt raisings of up to £250 billion.
The British Government had already nationalised two banks, Northern Rock and Bradford & Bingley, but the capital injection is even more extreme, because it transparently seeks to address systemic failure.
The sobering truth is that the deep freeze in the debt markets has reached a point in the northern hemisphere where governments and their central banks are now the only intermediators of liquidity operating, and, increasingly, governments are also the suppliers of last-resort equity capital. The logical extension of this process, if it continues, is nationalisation of broad swathes of the Western world's financial system.
Whether the British effort works remains to be seen. Like other national responses, it suffers from being geographically limited.
Nationally based responses are working better in day-to-day management of the crisis through the central banks. They are responding well overall to specific pressures, which vary from country to country, and have co-ordinated when needed on specific global bushfires, to inject liquidity into a seized-up currency swaps market, for example.
Responses by governments themselves are becoming less coherent and more reactive, however, and that is another sign, were it needed, of the gravity of the situation.
Bank deposits, for example, are now subject to a broad and fluid range of guarantees, with the blanket guarantee introduced last week by Ireland and mirrored or substantially copied by European nations including Denmark, Iceland, Germany and Austria, creating the potential for deposit outflows from nations where deposits are still only partially insured, including the US and Britain, or potentially, from Australia, where 100 per cent cover is implied.
Australia's cover is firm, in practice: legislation to define it and, in doing so, restrict it was flagged by the Rudd Government earlier this year, but will gather dust for the moment.
But as long as there are different quality guarantees, the global system is destabilised: the Irish banks are, for example, now fielding strong inflows that, by definition, are coming from some other part of the cash-poor world. A multilateral approach to deposit protection is needed - and if the crisis doesn't settle, it may need to be organised quickly.
