Are Banks Taking On Too Much Risk?

One of London’s banks could be about to pull-off the largest capital hike ever in UK corporate history. Lloyds of London is sounding out investors about raising a reported $29bn in order to escape the clutches of public control – or more precisely Prime Minister Gordon Brown’s ‘expensive’ asset insurance scheme.

Here in the US the ‘big government’ debate seems even more visceral. Beyond healthcare, the role of the Treasury Secretary - even at the height of the crisis – could elicit four letter expletives from Wall Street CEOs, according to a new book by Andrew Ross Sorkin.

Question: how far would executives at America’s banks take their determination to regain control of their businesses and escape government regulations attached to TARP? Could the current political bandwagon aimed at reforming Wall Street pay be squarely back-firing; encouraging exactly the sort of short-term risk taking it seeks to avoid?

The big banks need lots of cash – now. If that ‘enthusiasm’ runs through every sinew of their organizations would it not be logical to send proprietary trading desks into hyper-drive? Artificially swollen with as much cheap liquidity from Washington as they want, they might seek to generate abnormally large trading profits by aggressively chasing any game that’s heading north. The buying of one bank might support the next – all underwritten by the Fed.

The result would be the serial creation of bull markets – regardless of economic conditions - from stocks to gold.

Next week on CNBC it’ll be fascinating to watch how bank CEOs detail their bumper Q3 profits. And what their comments imply for market levels - and people investing their own money.