Risk drifts from banks to govts to you, me

Mark Gilbert LONDON

 ANYONE who lost money in the collapse of Lehman Brothers Holdings should probably be reaching for their lawyers about now.
    Our money — yours and mine — is now keeping the global financial system afloat. In a capitulation that beggars belief, governments all around the world have pledged our money — yours and mine — to fund a "No Bank Left Behind" programme. And no matter what the politicians say, that means our money — yours and mine — is now at risk in the casino.
    So the decision to let Lehman go to the wall last month looks increasingly like (a) an experiment in brinkmanship gone wrong (b) a worthless sacrifice to the angry gods of moral hazard (c) the biggest mistake that the authorities have made during the current crisis (d) all of the above.
    The US Treasury's theory that the demise of Bear Stearns was rapid and unforeseen, whereas traders and investors had sufficient time to brace themselves for the collapse of Lehman, is undone by the chaos and panic seen in recent weeks as trading desks rush to untangle the mess of unraveling deals. Listen to any of the recent comments from European Central Bank policymakers on the topic of Lehman, and you can hear the undercurrent of puzzled anger at the decision.
    It's way, way too early to gauge the effectiveness of US Treasury secretary Henry Paulson's plan to cure the financial crisis by spending $250 billion making Uncle Sam a shareholder in thousands of financial companies, guaranteeing bank debt and buying commercial paper.
    What is clear, though, is that however many carrots the US gives to Wall Street, the government doesn't have much of a stick to flagellate the banks into replanting those vegetables on Main Street, where the real economy is facing starvation.
    "Leaving businesses and consumers without access to financing is totally unacceptable," Paulson said this week when he revealed his latest bailout for the banks. "When you give them a stronger capital position and you also provide a certain amount of government backstop to their funding sources, it's incumbent upon them to go out and continue to lend," said assistant US Treasury secretary David Nason.
    I disagree. If the alternative is lending money to businesses that are about to go bust and consumers who are about to lose their jobs, then restricting credit seems not just acceptable, it is downright prudent.
    "Will banks turn on the lending taps and will corporates fall over themselves for the liquidity? We don't think so," Suki Mann, a credit strategist at Societe Generale in London, wrote in a research note this week. "Deleveraging won't stop overnight. The cost of credit will remain high." The global effort by central banks to shore up the precarious capital position of the financial industry using our money — yours and mine — is a direct consequence of the earlier decision to let Lehman hang. The failure to prevent Lehman's collapse — sandwiched between the shotgun marriage of Bear Stearns to JPMorgan Chase and the gazilliondollar loan to keep American International Group from going pop — sapped whatever remaining confidence banks had in each other. It removed any yardstick to judge which institutions would be deemed too important to fail. Far from being a panacea, the accelerated effort to funnel our money — mine and yours — to plug the yawning holes in bank balance sheets, hasn't alleviated any of the dangers. — Bloomberg