Jeremy Warner: WaMu may offer template for B&B solution

Click to follow

Thank goodness for Jamie Dimon, the chairman of JP Morgan Chase. He seems to be one of the few bankers still capable of instilling confidence. More importantly, his bank is one of the few in the US to have escaped largely unscathed from the present maelstrom, and he therefore finds himself almost uniquely well placed to take advantage of the myriad opportunities it presents for consolidation.

First he picked up Bear Stearns for a song. Now it's Washington Mutual, one of America's largest retail banks, that he has saved from oblivion. With deposits heading out the door at the rate of more than $1bn a day, the Federal Deposit Insurance Corporation was forced to act and take the thrift into public ownership. A deal was quickly brokered to sell WaMu on to Mr Dimon for next to nothing, which is just as well, for if it had come to having to pay out to depositors under insurance arrangements, the $188bn involved would have bankrupted the FDIC too.

The WaMu "solution" provides a possible template here in Britain for dealing with Bradford & Bingley, the last of the converted building societies still struggling to find a home. Northern Rock was nationalised, Alliance & Leicester was sold to Santander and, fingers crossed, HBOS has been parked with Lloyds TSB. What, by the way, an unmitigated disaster building society demutualisation has been – but that's a story for another day. Despite the Financial Services Authority's best efforts to find a buyer for B&B, no one has yet stepped up to the plate. The way things are going, the Government may have to pay to get the likes of HSBC and Santander to take B&B off its hands. In any case, it is looking increasingly unlikely that anyone is going to pay good money for it. As with Washington Mutual, this is a major problem for regulators. The consortium encouraged by banking regulators last April with $7bn of new equity – some $2bn of it coming from Texas Pacific Group – has now lost the lot. The same fate looks likely to befall the bankers and investors dragooned just two months ago by the FSA into providing B&B with £400m of new capital.

If investors doing their public duty in coming to the assistance of regulators are going to find themselves repeatedly wiped out in this way, it is not so surprising that nobody is willing to pay a penny for these banks when they come back for more. It is one thing to allow existing equity holders to be "punished" for the folly of their ways, quite another to shoot those manning the lifeboats too.

The whole banking system urgently needs to be recapitalised, but there is fat chance of persuading the private sector to do it with governments so apparently willing to nationalise without compensation. In finding a solution to this crisis, this problem too has to be addressed.

It is too late now to do anything about "mark to market" accounting, whereby banks have had to mark their loans down to the levels they are trading at in the markets, thereby creating a vicious cycle of fire sales, asset destruction and capital impairment. Any attempt to interfere with these rules now would only further damage confidence in the quality of banking balance sheets.

Yet, in time, this problem has to be addressed too. Held to maturity, much of the "toxic" debt now complained of will be worth considerably more than it is trading at, assuming it can be sold at all. Obviously there is a problem, particularly among US householders, but, even on the most extreme assumptions on the likely level of default, it is not nearly as bad as the distressed state of the banking system would suggest, unless of course the present maelstrom makes it so.