The Law of The Jungle

The death of Lehman Brothers has not sated the market's appetite for fresh corpses.

AIG teetered on the brink and has been bailed out, at the eleventh hour, after the US Federal Reserve agreed an $85BN bailout of the company. The deal gives the US Government a 79.9% stake, ie they nationalised it.

Somewhat ironic that the world's leading advocate of free market economics resorts to old fashioned socialist policies of nationalisation, in order to save a capitalist institution.

Now comes the turn of HBOS.

The Times reports that Lloyds TSB is in advanced talks to buy HBOS.

The disclosure followed a statement issued by the Financial Services Authority (FSA) about the strength of HBOS' business, in order to stop the 50% freefall in its share price.

Quote:

"Since the beginning of the current extreme difficulties in the financial markets, the Financial Services Authority has worked intensively with all major UK banks to ensure they have credible capital and liquidity plans.

We are satisfied that HBOS is a well-capitalised bank that continues to fund its business in a satisfactory way".

How can seemingly impregnable institutions find themselves so quickly consigned to the dustbin of history?

Confidence.

The capitalist system and banks rely on confidence in the future; when that dissipates, the bedrock on which the system and its constituent parts is based collapses.

Fear, rather than fundamental weaknesses, are eating away at the bedrock of our financial institutions.