大象传媒

Time to drop ABN bids?

• Robert Peston
• 7 Sep 07, 01:45 PM

Imagine two Premier League teams playing a high pressure football match when an electrical storm strikes. The onset is rapid and two players on each side are hit by lightning and are stretchered off.

What do you think would happen? Would the game be continued or would it be abandoned?

Well there is something of a storm in the banking world. And in a way it is worse than my fictitious one, because it is not only curtailing the career prospects of bankers but is wreaking havoc on the value of banking assets.

However and a consortium of banks led by have not abandoned their big match.

They continue to battle each other to acquire control of another big bank, of the Netherlands.

Are they right to continue? Shouldn't their non-executive directors and shareholders be asking some challenging questions about whether it is sensible to contemplate the substantial management challenge of integrating ABN - a huge and complex international bank - at a time when valuing even their own assets is tricky.

RBS can't argue that the risks are significantly less for it than for Barclays just because it would carve up ABN and share the bits with its two partners, and . The part that RBS would retain is the division of ABN in the eye of the storm, its global wholesaling and investment banking operations.

Charting the storm

It is probably worth rehearsing the nature of this storm again, though I have charted its course in a series of blogs over the past eight months.

Its most conspicuous current manifestation is that banks are reluctant to lend substantial sums to each other, they are hoarding cash. As a result, interest rates in the interbank market - the price of money borrowed by banks from banks - has risen sharply, so that they are much higher relative to official lending rates than they would be in normal circumstances.

That is gradually filtering through to tighter credit conditions and higher interest rates in what we think of as the real world, viz the price for loans paid by you and me.

Underlying these strange climactic conditions is a collapse in investors' confidence in certain kinds of loans, known in banking parlance as assets. These are loans to US homeowners with poor credit histories, the infamous sub-prime loans. But also they are loans to companies bought with buckets of debt, typically businesses acquired by private equity.

But that is only half the story. These rather basic loans have been converted by investment banks' alchemists into all sorts of other forms of debt, often via so-called structured credit vehicles called collateralised debt and loan obligations.

And in the process of finding buyers for these newfangled securities, the banks have doubly exposed themselves by guaranteeing much of it, either through underwriting the original debt or by providing borrowing facilities to purchasers of it.

Foolishly they have encouraged the acquirers of these securities to buy them with more borrowed money. Debt has been purchasing debt.

What the banks have helped construct is an inverted pyramid of borrowing. By way of an image, think of a tiny cone of equity supporting a colossal and rickety edifice constructed out of loans of varying maturities and degrees of risk.

As more and more debt has been heaped on top, there has been a corresponding rise in the danger of the whole thing imploding.

Greenspan's False Confidence

To put it another way, securitisation - the process of converting loans into securities for sale to investors - has not insulated banks from economic shocks in the way its advocates (led by the legendary Alan Greenspan) have claimed.

In fact securitisation, with loans made in one country sold to investors in another, is actually causing the current shocks to ripple far more widely than would have been the case when banking was a simpler business.

In particular, as I pointed out in my blog Liars' Loans, the collapse in value of many of these tradable loans or securities has led to a very serious run in a huge debt market, that for asset-backed commercial paper.

This commercial paper is being redeemed on an unprecedented scale. In just the coming week, the banks will be asked to stump up 拢65bn to refinance European commercial paper - or risk seeing a firesale of other assets that would have dire consequences.

Warning for Barclays and RBS

Make no mistake, I am not forecasting that any big bank will become insolvent. Please don't panic. But the probability of a serious worldwide financial crisis has risen.

One possible ghastly outcome would be similar to what happened in Japan in the 1990s. Banks would be forced to hold assets they thought were sellable as long-term loans on their own balance sheets. That would tie up their capital resources and prevent them extending credit to perfectly decent borrowing prospects. And that would significantly depress economic activity.

I don't think anyone can assess with accuracy the likelihood of the financial system seizing up like that for months or even years. But if that risk is a serious one, shouldn't the management of all big banks be devoting their efforts to ensuring their own institutions are in the best possible shape rather than embarking on new adventures?

In these testing times, no banker would surely want to double the strain on their resources and resourcefulness by merging with a bank of similar size to their own. But that is what Barclays and the RBS consortium apparently still wish to do, in their pursuit of ABN.

But for how much longer, I wonder?

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