THE scale of the turmoil on Wall Street yesterday, with Lehman Brothers, the fourth largest investment bank in US, filing for bankruptcy, Merril Lynch being sold for $50 billion in an act of self-preservation and the world’s largest insurance company, AIG, begging the US Federal Reserve for $40 billion to bail it out is shocking. Stock markets around the world have plunged in response with banks taking battering amid rumors that others are in trouble because of the credit crunch. Confidence in the banking sector is at an all-time low.
But even if there has been nothing like it in living memory, talk of meltdown is fantasy. In the US, the recession is anything but clear-cut; the luxury goods market, for example, remains buoyant. Certainly there is no chance that the US government is going to allow a meltdown. When Bear Stearns collapsed for the same reasons last March, it underwrote the buyout by JPMorgan Chase. But then it was a new situation. This time, after careful consideration, it has taken the view that it is not worth it. It would set a precedent, the costs would be prohibitive and, in any event, there are plenty of well-run banks to pick up the business. The decision just over a week ago to bail out the US mortgage giants Fanny Mae and Freddie Mac was a different matter. Although they may have deserved to go to the wall for irresponsibly accumulating vast amounts of subprime and other risky loans, their demise would have had catastrophic political consequences; most American mortgages are guaranteed by one or the other. The Republicans would have been destroyed in November.
So, will the crisis have political consequences? Will voters feel that with the economy in trouble, they want a safe pair of hands in the White House? It is also possible that in two months’ time, Lehman Brothers may be old news.
Despite the panic caused by the collapse, the response of many in the Middle East is likely to be that this is a problem for the US and the West, not for Arab oil producers. Some may even see it as an opportunity to pick sound international business on the cheap. It is already happening; the move by the UAE’s Etihad Airways to buy out BMI for $1.1 billion is not connected to the banking crisis but it is firmly linked to the fuel cost hikes that have put several airlines on the brink of bankruptcy and some over it. Arab investors, like those anywhere, are always on the lookout for a bargain that complements their activities.
The adage that when America sneezes the rest of the world catches a cold may hold true for economies fully interconnected with that of the US, such as Europe. There, as in the US, property values have fallen as banks stopped lending. But it is a different picture in this part of the world. A couple of days ago, shares in some Emirati banks dropped to their lowest in a year but that was because of falling oil prices and a rising dollar. Yesterday, banking shares on the Saudi stock market saw a 4.4 percent drop. Again, it was oil prices and (until now) the revived attraction of the dollar and had been ongoing for several days. In any event, there is not much of a credit market to crunch here; borrowing has not been a major element of the Arab financial scene. There will be Arab investors hurt in the international market turmoil. Rumors about other banks are flying thick and fast; shares will continue to drop. But the effects on the Arab market will be limited. The oil price is more important.
