By PINCHAS LANDAU
The banking sector continues to be the focus of greatest concern with regard to the American and European economies - and with good reason. The financial sector - which encompassed institutions formally recognized to be banks, as well as "nonbanks" such as GMAC, GE Capital and other companies that conducted financial activities such as loans on a huge scale but were not licensed as banks - was the epicenter of the crisis that began in 2007. If and when this crisis reemerges, it will again begin as a financial upheaval and spread outward to the rest of the economy.
It is thus only to be expected that the financial sector, which had been the leader and prime beneficiary of the boom, has also been its leading victim. But, in the same way as the banking and other financial subsectors of the overall share market were the hardest hit in the slump, they have also been outstanding performers in the rebound in equity markets that began in March.
That is one important reason why some analysts believe that the rally is over: because the financial sector has stopped leading the market higher and, if anything, seems ready to lead it lower as soon as any signs of weakness emerge. Interestingly, this holds true for markets across the world, including Tel Aviv, which underlines the degree to which markets in general and the banking sector in particular are interconnected.
But the performance of bank shares is only a symptom of, or proxy for, the state of affairs within the sector. The underlying reason why bank shares crashed was because many leading banks were in existential danger, which meant that the entire financial system was teetering on the verge of collapse. Those threats triggered intervention on an unprecedented scale by governments, including direct support for specific institutions that otherwise would have been unable to continue functioning. The mere fact that these government efforts enabled the banks to survive was reason enough for a dramatic increase in the value of banks' shares.
But the government support went much further: By bringing short-term interest rates to near-zero levels and flooding the markets with liquidity, which inevitably ended up in bank deposits, the governments of the US, Britain, Japan and other advanced economies enabled the banks to earn effortless profits - by paying their depositors next to nothing and investing those deposits in government bonds yielding one, three or even five percent.
This effective rigging of the capital markets to enable the banks to recapitalize themselves after suffering heavy losses is not new. Former US Federal Reserve chairman Alan Greenspan did it very successfully in 1991-93, after the savings and loan crisis - and he did not invent it then, either. Most citizens would be furious to learn that monetary policy is regularly used to ensure that banks make easy profits that help them write off the losses of past stupidity - but most citizens have tended to remain blissfully unaware that this is how things are done.
This time, however, may turn out differently. The main problem is the sheer magnitude of the banking sector's losses, which have already required the provision of support (aka "bailouts") on a scale never before seen - and which threaten to continue and to increase for some time to come. Government efforts to help other hard-hit sectors, primarily real estate (through offering tax breaks for home buyers) and automakers (ditto for car buyers), have also been of considerable help to the financial sector.
All these moves - and the deliberate suspension of more stringent accounting rules, giving banks more leeway in how they present problem loans - have helped the banks post profits again in the second and third quarters of 2009. But such fickle profitability has been unable to generate any confidence among the investing or the general public. That is part of the reason why investors have their fingers on the trigger to sell bank shares as soon as they suspect the market may have run out of steam. But only part of the reason.
There is also the matter of bankers' salaries, bonuses and overall "compensation." As predicted here many times, this subject will not go away. The supposed geniuses in Goldman Sachs, who are determined to reward themselves in their customary manner by showering billions on themselves, were shocked to find that the furor over bankers' pay would not die down - so they offered to make hefty donations to worthy causes. This noble gesture succeeded in touching many people: touching a raw nerve, apparently, and touching off a renewed torrent of anger and scorn.
This has proved two things: that the bankers, led as ever by Goldman Sachs, are totally divorced from how the general public feels and thinks; and that public anger at the financial industry is so great that no amount of ransom money can assuage it.
The latest Treasury proposal, to cut the salaries of state-supported banks by up to 90%, shows that the politicians have got the message, even if the bankers haven't yet. If this is the mood when the banks are making profits and things are looking up a bit, what will happen when the banks' still-unrecognized losses drive them into the red again and send their bosses back for more bailouts paid for with public money?
landaup@netvision.net.il
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