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The financial animals went into the Ark, two by two

As I checked the newspapers on Monday September 8 the story of Noah and the Ark sprang to mind. Remember how the animals went in two by two?

We seemed to be seeing a metaphor for that but instead of the flood we had the liquidity crisis and instead of the Ark, in the US we had Treasury secretary Henry Paulson and over here Nationwide Building Society, with chief executive Graham Beale playing Noah.

The threatened US beasts were Freddie Mac and Fannie Mae, which have been sustaining heavy losses as a result of the US housing crisis and on this side of the pond, The Derbyshire and The Cheshire building societies.

It’s a curious thing but rescue stories about financial institutions rarely used to come in pairs and here we had news of two pairs of institutions on either side of the Atlantic being rescued, if rescued is the right word, on the same day. The demise of the building societies is chronicled elsewhere in this magazine and serves to illustrate that foolish business strategies are not the monopoly of Northern Rock, but the fallout is likely to be relatively small.

They’ll survive for a time as retail brands but by the end of the year their business infrastructures will be subsumed into Nationwide. The regional roots of the sector will have been weakened and competition will have diminished and that’s about it.

Meanwhile, the Fed’s intervention in Mac and Mae – the US government-sponsored enterprises that underpin the country’s housing market with £2.94trillion of mortgage debt between them – is on a different scale.

The £110bn US bailout dwarfs Prime Minister Gordon Brown’s £1bn housing rescue package announced at the start of September and by virtually nationalising the two businesses and putting its own people at the top, the US Treasury is ending the ambiguity of their status.

Paulson’s aim was to “ensure that the conserved entities have the ability to fulfil their financial obligations”, and that includes the losses or write-downs they might have to make as a result of the housing crisis.

Explaining the state intervention, he added: “Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are crucial to turning this corner on housing.”

So much rests on Paulson’s Ark but since then he’s also taken on board global insurer AIG while Merrill Lynch has gone to Bank of America for $40bn and Lehman Brothers has been left to drown in a sea of debt. Meanwhile, big question marks have hung over Goldman Sachs and Morgan Stanley.

On that basis Paulson’s Ark is beginning to creak at the seams, with the law of unintended consequences coming into play in the UK where HBOS saw a catastrophic run on its shares. This led to the merger with Lloyds TSB ann-ounced on September 18, changing the face of UK retail banking forever.

The deal was allegedly facilitated by Brown in a knee-jerk reaction, desperate to avoid another Northern Rock. Given his record of wrong decisions, we should all be very nervous.


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