By many measures, the economy in the UK may be worse off than the US, at least up until now. The government has dealt with that by becoming more aggressively involved in the financial industry with each passing day. Many of the measures that the US is considering to fix its credit markets are already in place in Britain.

The UK as already taken a 70% stake in RBS (RBS). The bank was in such trouble that it needed huge sums of public cash. In exchange, it lost its independence. Rumors are that Barclays (BSC) may face the same fate.

According to The Wall Street Journal, "Government regulators and two of the country’s biggest banks face a difficult battle to keep the U.K.’s latest financial-rescue measures from turning into a full-scale nationalization." Those firms are RBS and Lloyds.

If the credit situation worsens, the Bank of England may have no choice other than to provide sums so large that these financial enterprises and others become wholly-owned parts of the financial branch of the UK government.

The same concerns about the banking industry are a part of the sell-off in shares of Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC). Some economists, with the remarkably pessimistic Nouriel Roubini at the front of the pack, believe that there are another $1 trillion or more in losses awaiting banks. If that is true, what happens to US banks, which now have market caps of $30 billion or $40 billion, when they take in capital in the hundreds of billions of dollars?  Do they become wards of the state?

US regulators and Congress will do whatever they can to keep America’s private banking system private, that is, until they see a better solution. If that better solution works in the UK, the pressure to follow that lead will be extraordinary.

Douglas A. McIntyre

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