The White Knight

Doesn’t look like we reached the next bull market yet. Paulson’s ambitious plan to perform a (roughly estimated) $700 billion bail-out of toxic assets from banks was hailed as the end of the financial crisis. Using taxpayer’s money, the US government would take on the trash and sell it back into the market over a period of several years. Last week saw phenomenal 8% gains in stock markets worldwide as markets were reassured by Prince Charming Paulson’s plan.

The key word, however, remains plan. After the violent rallies, markets have been riding a rollercoaster on doubts whether the plan will become a reality. The US Congress is quite understandably upset about shoving in taxpayers’ hard-earned cash to bail out an industry that has been known to give out billion dollar bonuses. This uncertainty has further deteriorated markets: interbank lending rates have reached record levels and even the sassy hedge funds have directed their cash to money market fund safe havens. Even Buffett’s plan to inject $5 billion into Goldman Sachs doesn’t seem to be enough to smooth this ride.

This political juggle might be the death of this white knight. Once president Bush starts citing a global financial meltdown if the plan doesn’t go through and the Congress still puts up a fight, it’s not surprising alarm bells start going off in the markets. Mr. Paulson better get the Congress on a leash before Bush’s prophecies become self-fulfilling.

What will the world look like before the next Bull Run?

Can you pay my bills, can you pay my telephone bills...

A global meltdown of the financial sector is well on its way if one is to believe the headlines. The credit crunch has claimed some notorious victories against some of the biggest names on Wall Street, with Merrill and Lehman being the latest ones to be found on their knees. If in the spring of 2007 anyone would have claimed Lehman would lose 94% of its market value in 2008 and then go bankrupt, they would have been deemed insane. Yet Lehman is only one of the victims of the liquidity crisis since the crunch began, and judging by the unravelling HBOS story it will certainly not be the last.

It is easy to get caught up in the daily or even weekly noise of the markets; an even more interesting picture lies in the long term. Looking at the wave of acquisitions and financial institutions with a “For Sale” sign hanging around their neck, one has to wonder where it all will end. Once this crisis is over, which it eventually will be, what will the world of finance look like? Will the customers of financial institutions end up scrambling for offers, where as before the crunch they could rely on shopping around for the best deals?

The talks about a merger of Lloyds and HBOS mentioned how the regulators might turn a blind eye to the 30% of mortgage market share the combo will end up with, and in stead try and speed up the deal to ensure the survival of HBOS. The question is whether consumers will suffer. Under any normal circumstance, pushing through such a merger would have taken months to be approved. Currently, it seems regulators are much more concerned about ensuring swift deals than ensuring competitive fairness.

So who will be the winners of the consolidated industry? On the other side of the pond, Goldman Sachs and Morgan Stanley are the last independent investment banks standing on Wall Street. David Viniar, Goldman’s chief financial officer, stated “When there’s less competition, that’s better for us.. We have pricing power and it gives us an even better competitive advantage”. Certainly, that seems in line with the rules of supply and demand. If demand for the services of the financial sector finally picks up at the end of the crunch, the few suppliers who have weathered this storm will be handsomely rewarded. The question is who will be paying the price?