– Mark Hannam is a guest columnist, the views expressed are his own. He formerly worked at the Bank of England and Barclays. He is currently chairman of Fair Finance, a microfinance company –

Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.

Public anger at the recent failings of many of our leading banks, while justified, is not a sound basis for future policy. The temptation facing policy makers — that of failing to distinguish between better capitalized, better managed banks and under-capitalized, poorly managed banks — should be avoided.

The period leading up to the financial crisis was characterized by an insufficient differentiation of risk in the financial markets. Across many asset classes risk premia were compressed to such an extent that the difference in price between low-risk and high-risk assets was insufficiently wide.

Prices are signals and in the past few years they have signaled incorrectly.

Public policy that treats all banks as if they were the same perpetuates the problem of erroneous signaling: JP Morgan does not have the same problems as Citibank; Barclays’ prospects are not identical to those of RBS.

The stress tests in the U.S. — however crude and dubious in methodology — are likely to demonstrate this. We can and should distinguish between those banks that benefit from general government support for the financial system and those that require specific government intervention to remain solvent.

Last autumn, when Lehman Brothers collapsed, there were legitimate concerns that the entire financial system might disintegrate, causing sustained and substantial damage to the global economy. At that moment blanket government guarantees covering all market participants were welcome because they were necessary. That moment has now passed.

Today’s problem is not contagion, but the shortage of beds available for restorative surgery. The public purse isn’t bottomless. We cannot be sure there will be no further fatalities but we do know which banks are on the critical list and which are not.

It makes sense to clear the walking wounded out of the hospital, even though they are not yet fully recovered.

We should welcome Goldman Sachs’ and JP Morgan’s desire to pay back money to the TARP scheme, and Barclays’ willingness to sell assets to improve its capital position without taking additional government funding.

These banks have some way to go before they make a complete recovery, but at least they are making progress.

Those banks that have survived the past two years with less damage than their peer group are those that are cleverer or luckier than the average. They should be allowed to take advantage of the opportunities that the economic situation offers. They are our best hope for a return to normal activity in the financial markets, which in turn will initiate the slow process of economic recovery.

The news that some banks were able to make substantial profits in the first quarter has provoked some predictable venting of spleens: Goldman Sachs dares to be successful again!

Last year’s schadenfreude has metamorphosed into this year’s ressentiment. Whether bankers are losing vast sums of money or making vast sums of money, there will always be people who love to hate them. To indulge such hatred, at the cost of a longer and deeper economic recession, is pure adolescent posturing.

The events of the past two years have demonstrated beyond doubt that all banks depend upon governments (and therefore taxpayers) as their ultimate guarantors. No bank can avoid the consequences of systemic risk so all banks should pay for protection against them.

In the future these premia are likely to be higher than in the past and should be calculated according to the level of risk posed to the public purse.

Increased revenue from bank licensing should be invested in the reform financial regulatory system, which has demonstrated itself to be inadequate for its task. There are plenty of failed banks still to sort out and the process of bank supervision requires substantial redesign.

We need better quality regulators; but we will probably end up just with a bigger quantity of them. One lesson from the financial crisis that governments appear unwilling to learn is that size gives no indication of ability.

The stronger banks want to avoid the full embrace of the state. They appear confident that they can survive better without it. Some of them will be profitable this year. This is one of the few pieces of good news to come out of the financial markets of late.

As the Romans used to say, pecunia non olet: money does not smell. So then, two cheers for the walking wounded!

— James Saft is a Reuters columnist. The opinions expressed are his own –

Government intervention or not, banks will be cutting up America’s credit cards at an unprecedented rate, with grave implications for the economy and company profits.

The U.S. Federal Reserve last week added more nutrition to its alphabet soup of rescue programs when it unveiled the Term Asset-backed Securities Loan Facility (TALF), under which, among other things, it will lend up to $200 billion to investors in securities backed by credit-card, auto and student loans.

It did so for a very good reason: the securitization market’s freeze now extends beyond mortgages, imperiling run-of-the-mill consumer financing and making it a certainty  that many people who use credit to get them over “cash flow” situations will be, well, denied.

And even though the U.S. car industry may implode if starved of finance and many students will have to defer education, the real potential disaster is in credit card funding, which could push lots of households over the brink and in the process consumption and every business which depends on it, which would be all of them.

Put simply, even with an apparent will to try anything to bring the wheels of finance back into motion it will be very difficult for government to quickly fill the hole left by private finance. Details of the plan are still sketchy, but let’s just take it for granted that it works, even if the plan, at only one year, will give them huge fears about how they get out of their positions at the end of 2009.

Beyond that, the Fed is seeking to kick start securitization by attracting back a species of investors, leveraged ones, who don’t really exist any more.

All other things being equal, the amount the Fed is putting into the TALF should take the ABS market back to about where it was in the first half of 2008, which itself was only a third of the volume we saw in 2007.

But all other things are not equal.

The banks that provide the bulk of credit card funding  generally want to cut back, pushed by their own woes, a conservative read of the economic situation and, potentially, regulatory changes that, while intended to ward off the excesses of the last bubble, will magnify the impact of its bursting.

Meredith Whitney, the Oppenheimer and Co analyst who has so far been ahead in identifying and explaining the weaknesses in the banking system, thinks over $2 trillion of credit lines, or 45 percent of lines available, will be pulled out from under American consumers in the next 18 months, a figure that puts the Fed’s $200 billion for asset backed finance in its proper perspective.

“We are now entering a new era within the financial landscape that will be characterized by expanded forced consumer de-leveraging with a pronounced downshift in consumer spending,” she wrote in a research note.

“We view the credit card as the second key source of consumer liquidity, the first being their jobs. Pulling credit at a time when job losses are increasing by over 50 percent year-on-year in most key states is a dangerous and unprecedented combination, in our view.”

BIG BANKS ALL WANT TO CUT BACK

Whitney notes that the three largest credit card lenders, Bank of America, Citigroup and JP Morgan, who between them account for more than half of U.S. credit card outstandings, have each discussed reducing card exposure or slowing growth. Capital One and American Express, who are another 14.5 percent, have also talked about limiting lending.

That will set the tone for the rest of the industry, which will be grappling with new regulation that, if goes ahead as planned, will impair profitability of credit card lending and push more off-balance sheet securitizations back on to the banking industry’s already strained books.

Cutting back on abusive lending and forcing banks to recognize and account for the risks they take are surely good things, but will have the perverse effect of making the credit crunch worse, at least temporarily.

And looking at the balance sheets of individual Americans, there is good reason to think that the credit crunch should get worse: that they should consume and borrow less and save more. I’d argue that far from being non-functioning, financial markets are closer to pricing in the true risk of lending to consumers now with credit cards charging about 10 percentage points more than 5-year Treasuries than they were six months ago when it was only about a 7.65 percentage point gap.

But the mother of all unintended side effects is that the faster consumers cut back, the worse it will be.

The kind of consumer cut back implied by the consumer credit crunch that now looks likely would blow a hole below the waterline in the U.S. economy, and in U.S. company profits and the stocks that reflect them.

The Federal Reserve and U.S. government’s use of unconventional measures is only just beginning.

–  At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For more columns by James Saft, click here. –

For full coverage of the crisis in credit, click here.