Further Bank Bail-Outs?

Northern Rock

So, the U.S. Treasury has decided not to bail-out Lehman Brothers bank, the fourth largest investment bank in the States.

The result? A pretty bad day on the stockmarket (FTSE100, Dow Jones), if not quite as bad as some, myself included, might have expected. But it’s likely to have further repercussions in the coming months as Lehman’s debts impact on other banks.

It may have come as a bit of a surprise that the U.S. Treasury should not prop up another ailing institution, after saving Fannie May and Freddie Mac recently, but it’s has decided enough is enough, and the banks must now pay for their mistakes. Perhaps they simply couldn’t afford to bail out another bank after keeping Fannie May ad Freddie Mac afloat?

The figures involved in Lehman Brother’s troubles put into perspective the Northern Rock saga – Lehman’s £340billion debt is a quarter of the UK’s economic output – Northern Rock was propped up by the Bank of England to the tune of £25billion.

So what would our Government do if one of the big UK banks threatened to go bust?

Whilst it is not thought that any of the UK banks have the exposure to bad debts that Lehman’s had, right at this moment it’s not completely out of the question – at one point today, Halifax shares (HBOS) were down 35%.

Would our Treasury feel duty bound to keep another bank afloat no matter what, or would they take a more cathartic approach and let them fail, sending a warning to other banks?

Of course, the fall out from letting a big bank go bust could be massive, both economically and politically, but it might also mean greater prudence from the banks. This would probably mean more woe for the man on the street in the short term, but might eventually be one positive aspect to come out of the credit crunch.

I’m not sure they would have the guts to do it though. What do you think?

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