Their crisis, but we all pay
WALL STREET had its worst fall in share prices in nearly seven years yesterday, as US authorities tried to arrange a $40 billion rescue package for American International Group (AIG), the country's largest insurance company, after it went to the Federal Reserve warning it was facing bankruptcy.
Earlier bankers Lehman Brothers, the fourth biggest investment banker, collapsed with $613 billion in debts, said to be the biggest bankruptcy in US history. Merril Lynch, a global investment banker offering "financial management and advisory services", and active in more than 40 countries, was rescued from collapse by a hurried $50bn takeover by Bank of America.
By the close of trading in New York, the Dow Jones industrial average was down 504 points to 10,917 - its steepest points decline since the day markets reopened after the September 11 2001 attacks.
This was not just America's crisis. Shares fell in Tokyo, Paris and London, where the FTSE 100 index, at one stage down 291 points, ended 190.70 points lower at 5,204.20.
HBOS, owner of the Halifax and Bank of Scotland, fell as much as 40 per cent at one stage, 102.4p, to 179.6p before recovering to close down 49½p at 232½p. As the Times noted: "HBOS is the British institution with the biggest exposure to mortgage-backed assets, the toxic instruments that proved fatal for Lehman".
"Royal Bank of Scotland slipped 29¼p to 210½p and Barclays fell 34½p to 316p. Alex Potter, a Collins Stewart analyst, said that, with banks unwilling to lend to each other after Lehman’s collapse, Barclays was more exposed than RBS because 13 per cent of its loan book was not covered by deposits and securitisations, compared with 7.7 per cent for RBS".
Having failed in a bid to take over Lehmans, Barclays had been hoping to snap up some of its subsidiary assets, but its own incoming capital is looking shakier. Insurance companies are also being hit following AIG. Friends Provident was the London index’s worst performer, down 17.6p at 81p. A large part of its business is insuring people’s mortgage payments and it was AIG insuring mortgage assets that led to its massive losses.
"Insurers have also bought unquantified billions of dollars of derivatives from Lehman Brothers to help them to guarantee customers’ pensions. This worry hit Prudential, down 51p at 500p, and Aviva, off 44p at 489½p".
With the rising tide of repossessions in Britain following America's way, estate agents crying hardship and closing branches because buyers can't get mortgages, and the CBI saying Britain is entering recession, one does not have to be a jeremiad preacher of doom to acknowledge that yesterday's stock falls were no temporary blip in an otherwise booming success story. As for any schadenfreude at the thought that fat cats might feel financial worries like the rest of us, and show a bit less cockiness, this is far outweighed by the sure knowledge that it will be working people who lose their jobs, pensions and, if they haven't already, homes and mortgages. The big boys will survive with the help of government, the same government whose "interference" they often decry, in other words, of the taxpayer, even as our public services are cut.
People already had a rude shock awakening to the nature of the system this month when an estimated 85,000 holidaymakers found themselves stranded abroad by the collapse of XL Leisure Group, following on that of Zoom budget airline. The Civil Aviation Authority said 10,000 of these would have to pay for their own flight home. A further 200,000 people who had made advance bookings learned that these were now worthless. With £143 million in debt, XL must have known it was in trouble, yet it had carried on taking bookings, only to end up with flight staff hearing in mid-air that they no longer had a job, and airport staff having to tell bewildered passengers that the company they had trusted had gone bust.
It is no good blaming the travel operators alone for this debacle. As an editorial in the Morning Star explains, banks which moved into the oil trading business a few years ago to profit from soaring prices have then pulled the rug from under XL so far a finance goes to meet rising fuel costs, then moved in to buy up its still-profitable French and German subsidiaries. (Madness of the Market, MS September 12).
It's not just new names hitting headlines. Alitalia, Italy's flag airline was next.
An estimated 15,000 people could be stranded, and a further 100,000 left with worthless tickets. A million travellers would have to make new bookings. A union leader predicted that 30,000 people would directly or indirectly lose their jobs if Alitalia went under. Berlusconi's government - dedicated to free-enterprise, union bashing, and flying the flag -is intervening to try and rescue the airline, and seeking help from foreign airline companies and union support.
Lehman Bros wa not a new kid on the block. Dating back to 1850 when the brothers, immigrants from Germany (whose family name long disappeared from its board), made their money trading slave-produced cotton, it survived the civil war, and more recently losing its head offices in 9/11, only to flounder when it invested too heavily in sub-prime mortgages, that is, in other people's debts.
BBC travel correspondent Simon Calder surprised news programme presenters the other evening by arguing that the headlined travel firm collapses were not bad news for the travel industry as such, because where one firm collapsed another would expand. There's surely a more general truth hidden in this, that whatever happens to one firm or even an industry - particularly one catering for ordinary consumers' wants, whether holidays or homes - others will survive and even do well. The best way to weather the recession, as a Conservative paper candidly remarked, is to have plenty of money to begin with. Some will even get richer during the depression.
(see Seth Freeman in the Guardian -
Even if some capitalists go down, capitalism will go on, so long as the burdens of suffering can be passed down to ordinary working people. As we saw after the 1930s depression, if the worst comes to the worst, there is always fascism and war.
On TV the other night I watched Tory Michael Howard sneeringly asking what had happened to Gordon Brown's promise to end "boom and bust". Of course, no amount of clever management and prudence by Brown could prevent Britain feeling the global recession, or experiencing once again the problems we had under the Tories (so much of whose policies have been continued) And Michael Howard didn't even pretend to have any answer. Brown's Chancellor Alastair Darling has promised hard times ahead. With people who were led to expect classless affluence beginning to feel the pinch, and racialists shouting the odds, these could be dangerous times. When democratic politicians shrug that they can do nothing, while the public says something must be done...
One of my Facebook friends, a young Labour Party member but decidedly on the Left, remarked yesterday that "capitalism is doing a good job of overthrowing itself". It was an amusing remark, and I applaud his wit. But as we know, capitalism will do its best to destroy us, and even the planet, rather than destroy itself. It can only be destroyed by its opposite, the working class. And whereas the system can carry on unconsciously, we its opponents need our unity of purpose and consciousness.