The about turn by central banks and governments show the depth and breadth of the crisis facing global finance and capitalism. They went briskly from taking toxic assets off the banks’ books – so that trust could be restored between financial institutions and lending would free up not just between them but to individuals, corporations and local councils and states – to pouring money into the world’s major banks as many of them were on the edge of bankruptcy.

The banks’ tier one capital which is essentially the cash in their tills they need to meet their day to day bills and cover any losses was being rapidly run down. This is because the banks have negative exposure to a global slump which most economic commentators are now predicting. Banks to varying degrees and mixes have exposure to:

US Sub-prime mortgage backed securities;
Their domestic mortgage market;
Private equity schemes;
Corporate finance; and
Bankruptcy insurance (credit default swaps).

As we enter into the recession and the US housing market continues to fall as well as domestic housing markets, the banks will have to take losses each quarter as they value the assets on their books. These losses don’t just disappear but are written off against the cash the banks hold (tier one capital). Also, their private equity schemes and corporate loans are going sour with defaulted payments and the original loans unlikely to be repaid in full as the value of stock market falls and business activity slows down rapidly.  This will lead to further right downs or losses at each quarter end – the next one is at the 31 December 2008.

The bankruptcy insurance (credit default swaps) sold by many banks – up to $60 trillion has been estimated to have been sold – leads to daily losses each day as this insurance is going up in value to those who have bought it – pension funds and insurance funds. Each day the banks must make daily payments to these funds and as a consequence are haemorrhaging money. The Royal Bank of Scotland is one of the major players in this market and this is why the UK government had to give it cash to replenish its tier one capital.

However, worse is to come because as companies go bankrupt then the banks must pay out on the unrecoverable debts of the bankrupt companies. For example just 10 cents in the dollar was recovered from Lehman’s bankruptcy where as the banks had been estimating 60! As we are going into a deep slump and major companies will go down – General Motors and Chrysler are on bankruptcy watch by the credit rating agencies. This will lead to large payouts by the banks as well as the daily losses they are incurring because the value of this insurance goes up as the full depth of the slump becomes apparent. Undoubtedly, governments will have to step in with fresh cash again at the start of the 2009 with many being forced to take over their banks completely. This is likely to happen in the UK. But the government will be saddled with almost unlimited potential losses which we will of course pay for with tax rises, public spending cuts and real pay cuts.

We are likely to see a largely state owned global banking system by the end of 2009 but one run by government appointed bankers and carrying on business as usual.

We want to own the banks but under peoples control and run in the interests of the people with our money being used for socially useful projects to create affordable social housing, schools, hospitals and free public transport.