British banks bailed out

Oh dear, does anyone care about the taxpayer?

If banks don't trust each other enough to lend to one another, why should we trust the banks with our savings?

So what bank was having the problem?

not a big surprise really. any word on what the haircuts will be?

the next bubble is us treasuries.

The patient is very ill.

New symptoms are identified all the time.

This morning's actions are like an aspirin, easing the symptoms in the short term, but not curing them.

The illness will need to work it's way through, making the patient very weak in the process.

Go Mervyn

Hmmmm......

I like the way the article has:-

"There were reports from dealing floors this morning that a big British bank was having difficulty renewing credit lines, which took it too close-for-comfort to the brink."

at the beginning, then:-

"HBOS can now be confident that it will be able to raise the cash it needs - which means that today's action by the Bank of England can perhaps be seen in part as a bridging loan to it, till its rescue takeover by Lloyds TSB is safely completed."

at the end.

Do these two statements refer to the same bank, or is another of the big 4 dominos about to topple ?

Massive so these bail-outs are, certainly from the taxpayer's viewpoint, I still think it's all too little, too late.

so basically HBOS is on the EDGE... still those lucky LLOYDS investors are happy to dive into the toilet pan with them... well thats great news...

So the Banks are able to palm off their liabilities to the tax payer - Liabilities such as credit card debt and car loans - the stuff that only remains an asset if the consumer continues to pay it off - OMG - This is as serious as it is pathetic.

WHAT BANK THIS TIME WASNT ALLOWED TO FAIL? KEPT AFLOAT WITH MY MONEY?

I take it from the hints in the last paragraph that HBOS was the bank on the brink.

More reason then for Lloyds to want to renegotiate the deal then.

One gets the impression that the bankers, politicians and others involved in trying to sort out this mess are:

a. Unable to predict what will happen next.

b. Making it up as they go along.

c. Being economic with the truth about what will happen when the firefighting fails and we enter into a new economic and social era.

I say "when the firefighting fails" because you don't need a degree in economics to realise that the genie is now out of the bottle (sorry to mix the metaphors) and no amount of spraying it with a hose will get it back in the bottle.

Is there a website which provides a rational analysis of how my life is going to change over, say, the next 5 - 10 years on the back of all this bruhaha? I don't want an hysterical, armageddon-style analysis, but rather a straightforward exposition of life from here on in.

King should resign - any prudent custodian of the Bank of England would not have touched this with a barge-pole.

Let the bad banks fail - save the good ones, it's the only way this system will be saved.

It looks to me as if the powers that be are pressing the self-destruct button

Thanks Robert for your excellent coverage. The liquidity issue is paramount yet the media generally doesn't report the situation adequately. I've been wondering where HBOS etc were getting their funds from to bridge the borrowing gap. It would be good if you could spell out what's happening to the total lending from Central Banks in the USA, UK and EU. It looks like a massive injection. How much of the short term need might it be temporarily providing?

We are coming close to the real reckoning. The big clearing banks are now in the firing line with RBS/NatWest next.

The US bail-out might just keep them afloat for a while, but the next couple of weeks will be make or break.

Will it be a 1940s style 'finest hour' for New Labour, or a 'Munich' capitulation?

who is going to bail out the Taxpayer ?

I can understand why HBOS is struggling but, as the biggest mortgage lender in the UK and being partly financed by retail deposits, surely it has enough AAA mortgages left to use as collateral without having to use other assets.

Robert,

This is your most alarming post to date. Mr King is my hero, thank goodness he is in charge, but how much of this rubbish can the Bank of England stand on its books?

I will be listening to you on 5Live this evening with interest.

#1:

Taxpayers pay taxes because they have jobs.

If you want to care about taxpayers (rather than the money they've already paid in tax), then the BoE is doing the right thing because if the banks can't provide loans to companies, companies will go out of business and jobs will be lost.

Don't mix up tax-already-paid with taxpayers.

It is like being on the edge of a precipice not just a cliff.
No longer is anyone in control. They just make it up as they go along.
Thinking on your feet is one thing but you have also to make the right decisions.
These are all the wrong decisions.
Someone somewhere is not listening to the right people.
They have now jumped off and are trying to catch onto branches as they drop to slow down the descent.

Is everyone else surprised that Andy Hornby is still CEO at HBOS?

Time to emigrate to a country that is likely to have a more lenient fiscal regime for the next 50 years. France anyone?

is it just me or does Mr King look like penfold from danger mouse.
it's a shame that in a democracy the tax payers don't have a say at all concerning these matters. maybe we can get our voices heard by delaying our payment of our council tax for a month or two.

This may sound slightly technical. But it really matters, because it makes it much easier for banks to borrow from the Bank of England, to replace the funds they are finding it almost impossible to raise from commercial sources.


You keep coming so close to hitting the nail on the head, and then repeatedly miss in a spectacular fashion! Even in your special BBC News programme ("World Economy on the Brink" or whatever it was called), you noted that banks were depsiting their spare funds at the BofE rather than lend to each other, even though it meant earning pitiful interest. You also - FINALLY! - observed that the period of excessively low interest rates had sown the seeds of the debt bubble and resultant credit crunch.

Why then can you not see (or at least state openly) that INTEREST RATES ARE TOO LOW?

The banks won't lend to each other because the returns (ie interest rates) are not commensurate with the risks. If they could get appropriate interest rates for lending their money, they would! People are happy enough to agree that "the era of cheap credit is over", but that is just another way of saying interest rates are too low!

Sping, spin, spin... still very New Labour!

(And all this money that is being created by the BofE will also be inflationary, by definition requiring higher interest rates.)

Political pressure has won out in the end.

If people had took the government up on it's offer, first of guaranteeing £35,000 deposits in British banks and then they nudged us once again raising this to £50,000 guarantee.

If we had moved our money about and the government guaged that enough of us were doing it so that the pollitical fall-out of allowing a few of the rotten bank apples to fall would not be so great, then we would not have come to this point. Everything polliticians do is not based on what is right, but rather on what loses them the least amount of votes.

Politicians were ultimately left with no room for manouver so it comes to this.

Dreams have just launched a new mattress with zip sides

£40bn a week from the Bank of England to the banks?

Well, the UK will be well and truly broke by Christmas!

addendum to #24 - the implication being that movement of money would be an acknowledgement of risk and if that is the case people expect some losses.

Point 1: "a big British bank was having difficulty renewing credit lines" - people assume this is HBOS and if it is, this is worrying for millions of people. Doesn't actually matter though since there are only 4-5 "big banks" and any one of them being "in trouble" is a big problem for us all.

Point 2: RP says "There'll be an auction of £40bn of three-month loans next Tuesday, and further weekly auctions - whose size is yet to be determined - till at least 18 November". As a complete layman/novice in these matters, where does this money, the £40bn, come from? From what RP says, there would be a potential £240bn over the next 6 weeks - I say again, where is this money coming from? What assets are the BoE taking in security against these loans? I thought the banks have nothing left... Please RP or someone explain...

#3 I would guess the bank concerned to be Lloyds itself which is now up 12% on the day since the announcement.

Obviously if Lloyds did go then they could not complete the HBOS takeover which would be the biggest splash in the markets yet and who knows what would happen then.

We are far from through this.

Could the business editor remark on this aspect please:

'what are businesses supposed to do faced with the exponentially dropping sales?'

My business is being crippled by all this malarkey. I'm sick to death of reading about banks 'in isolation' as if the knock-on effect was, er unimportant or irrelevant.

Does BBC now stand for 'Bankers Broadcasting Corporation?'

For goodness sake, Robert, tell us what to do!

Guy Croft, owner, Guy Croft racing Engines, Lincoln UK

Back in the nineteenth century an ancestor of mine was a shareholder in the Bank of England. Family history has conveyed a picture of a stubborn and often cruel man. However, as his descendants we are all very warm with our money and reluctant to lend without good interest on an easy wicket. So we are of his ilk.

I do not blame Mervyn King for pushing the banks to the limit on this and other issues and only coming round when there is clear objective evidence of trouble. Anyone can cry wolf and there has been a good bit of that lately.

This shows he continues to look after the taxpayer interest as best he can. This is his duty. It is good to know there is one public servant who continues to hold to the virtue of his office.

Clearly we live in dangerous times and the economy is in a minefield. It is best that we keep our heads despite the many aggravating factors. What did Roosevelt say ` We have nothing to fear but fear itself'. Good principle methinks.

#25 - Thank you!

You made me laugh

The workers are revolting, the banks have there backs against the wall (all their own fault some may say) but to be able to work we need the banks, the fact they haven't went belly up has saved a lot of business and kept our savings intact.
We are between a rock and a hard place.
It hurts to remember the huge pay and golden handshakes bankers were taking, but we must keep going.
I want those that gambled and those who turned a blind eye to it to have their day, in court.
I want the wrongfully gained money to be recovered.
For us to have any chance of keeping up with our commitments we need our jobs.
I will never vote Labour.
So that leaves me.........again between a rock and a hard place.

#1

Yes, that's why it is being done, to (or at least try to) protect the tax payer and their unsecured finances.

OK, banks might still go down, taking those funds with them but at least the tax payer will know that Govt. didn't just leave it all 'to the markets' as the children of Thatcher would/want - even Cameron has belatedly accepting that Govt. HAS to do this.

#12 - I'm not sure if you realise what's going on.

It's not a few bad banks that are being threatened.

It's all the banks.

So, the BoE will take (interest-free) money from taxpayers then lend it to the banks so that they can lend it, presumably for a profit, back to the taxpayers (and some non-taxpayers)? This is a stupid merry-go-round and Mervyn King is a gullible fool for falling into the trap.

Does anyone know how much the govt have spent on this so far?

There seems to be a huge hoo haa in the US about a 700 bn USD bailout, but how far are we behind that ?

If you account for NR, B+B, loans already made etc, surely we must be very close to what the US have pumped in?

Any thoughts anyone (or has anyone been keeping a tally?)

Swapping car loans with the BoE ? Sounds very very bad news. No wonder Merv isn't happy!

#3

"...what bank was having problems?"

If Mr Peston named the bank then 1/3rd of those on this blog would be asking him if he wanted to cause a run on the bank, another 1/3rd would be shouting for people not to panic and the other 1/3rd would be silent - they would not be at their keyboards but down at the bank trying to get their money out!

No. 20 - Perhaps HBOS havent got the cash to sack Mr Hornby just yet!

Just how is the BoE funding these loans? Is PSBR going through the roof? Who has the cash to by govnt stocks etc or is it a case of printing more money and to hell with the growth in the money supply.

Or (most likely) am I as sadly confused as most people!

Keeps the boat afloat but how can the BoE stump up the money to plug the hole which looks a great deal bigger than the sums bunged to date. Looks like a short term holding measure.

'Mervyn's Motors' - otherwise known as the Bank of England, will soon be stuffed to the brim with merde as 'security'. How long can this go on before interest rates have to rise?

The time for half-measures is surely over. the American Model of securitization and off balance sheet trickery is moribund, corpsed, demised, deceased, dead as the proverbial Norwegian Blue!

The real question once the current banking rationalizations, failures, mergers etc., are over is what is going to replace it.

There are too many vested interests at play here. Good old Gordon seizing the opportunity to imagine he can lead the country out of recession. One last chance to resuscitate the miracle that 'was' the UK financial sector. Too much hysteria and 'buying-in' to the discourse of systemic collapse. Too few independent voices in the media, and lastly, the slow realisation that we can't run an economy on these levels of debt ever again. Lower interest rates? Not the answer. Bail out the rogue banks (for that's what they are)? Not the answer. Increase the money supply? Not the answer. Let these failed companied go to the wall? That's the answer. There's no other way to get rid of these 'masters of the universe' who are still, to their disgrace, informing economic policy in the UK and Washington. When it's over a criminal investigation into who did what and when is needed. There must be a paper trail and there's likely to be enough evidence to start legal proceedings against the people and companies that have corrupted the financial markets with dodgy AAA rated financial 'products'.

Blackmail wins again.

Why do we allow a situation where privately run businesses are so thoroughly attached to the jugular of our society, that the moment they come under threat they bite unless we help them out?

If banks are so important and cannot ever be allowed to fail then they should be forcibly nationalized, regulated thoroughly and run with due diligence in mind, and not the pursuit of reckless profit.


One thing this current crisis shows us is where the real power lies, and it's not in Whitehall.

#15

The Tax payer (as it should be), as was always the case before Thatcher and her 'There is no such thing as society, just self, self, self' type speeches.

So the BoE fianlly acts to bring stability to the UK banking sector...Hooray!!!

Or am I along with other taxpayers being hoodwinked by this apparent sleight of hand?

Bank a takes a loan using assets that are bad and in three months time puts its hands up and says.."hey BoE, we will have the same problem that we had three months ago in trying to replace the funds borrowed from you...but please oh please!! would you write off the loan and then we can all be happy that we have a sound balance sheet once again?"

Its not a bail out...or at least not yet...and it really doesn't amount to state aid if its only a short term loan.................

The fact is this is as much a of a botched solution to a systemic problem as it is a salve for those banks and there sharelholders, whose wealth was set to dimish very rapidly.

Do the decent thing Mervyn...make the loans convertible for share warrants or pref shares and then be an activist shareholder on behalf of the UK taxpayer....don't let them get away with their fialures at our expense!!

Post # 23, YummyCarolKirkwood, you are spot on. Interest rates are, and have been for some time, too low. The forest fire that is raging throughout the financial markets was started, in part at least, because dimwits were being encouraged, by other dimwits, to borrow money at stupidly low rates.

Debt needs to be brought under control, both at personal and corporate levels.

What's next I wonder? God knows as far as the convoluted financial instruments that banks have conning each other with, but as far as personal debt is concerned, how about credit card debt. More dimwits over far too many years have been cranking up their debit balances to fund meals out, drinks down the nags head, petrol in their cars, white goods, cash withdrawals etc. And this debt just rolls over and rolls over, one of the most pernicious forms of debt yet available to the common dimwit, sorry I mean common man. How much is owed on all the credit cards in the UK, does anybody know?

An yes, post #25 made me smile too.

Pip pip!!!

The public are so easy to hoodwink. Chain them to a twenty five year mortgage, give them some shiny new gadgets and tell them they've never had it so good.

Then tell them there's a chance they could bombed within 45 minutes, or tell them they need to bail out sinking banks, tell them anything, but make sure you tell that their house, their gadgets, their very freedom is at stake, and they will jump exactly as high as you tell them.

You can make them suckers do anything.


It's a good game.

just when is this government and the BOE going to be pro-active instead of these knee jerk reactions? More money to be printed, once again at the last minute before the bank collapsed, suddenly uprating the deposit guarantee after i seem to remember GB promised this over a year ago after the NR debacle. What we need is leadership not panic!

i still dont really understand the deposit guarantee, £100,000 for joint accounts and half that for individuals, so i have an individual account of £50,000 in an online account, and £100,000 with the same bank in a joint account... am i fully covered? as my bank has no idea!

18. rhysgp wrote:
"#1:

Taxpayers pay taxes because they have jobs...

...Don't mix up tax-already-paid with taxpayers."


Don't be so glib. That tax money that has been traded for second-rate assets is now money that can't be spent on other things.

That's my money that's being used and your effectively saying that I should just forget about it because the government have already taken it.

#22

Do that and you most certainly will get a hearing, one in a Magistrates court - for the non payment of Council Tax - not sure if you'll be allowed to comment on other issues though...

The real issue here is transparency.

The banks will not lend to each other because they don't know who is holding the high risk loans. There is no chance of them all being forced to be transparent; the truth is too ugly.

Those in a strong position would publish and be proud. The fact that this isn't happening says it all ...

So who is going to be the next minister to resign ?

Smart money must be on Mandelson!

Time to let these banks fail.

Dear Robert

SO, the tax payer has bailed the banks out, curtosy of Brown and Darling, Now, can you identify the Banks, that were going under, Effectively, Briatin has done exactly the same as the USA, and bent over backwards to bail out the bankers who create this fiasco in the first case," can you tell me why for the last two years the FSTE shares index has been on a continual slide downward, so who is doing this and why."?

Robert mentions specific market rumours circulating about a UK bank with imminent funding difficulties. I am not sure how accurate that is, as the credit spreads for UK banks have not been particularly erratic today, and relevant traders I have spoken to say they have heard of no such rumour. (not to say it can't be true, however)

More broadly, its worth remembering that bank's funding needs have been driven dramatically higher in many cases over the last year by having to bring off-balance sheet vehicles back on balance-sheet. This is due to lack of investor confidence in such vehicles.

The focus has moved on from things such as SIVs (structured investment vehicles), although there was a good article in the FT about them yesterday. The sums are mind boggling. HSBC's alone was estimated at $42.5bn

This move by the BoE looks targetted at the assets formerly held by SIVs, and now held by the banks.

#4 if you want to read the technical detail regarding haircuts etc refer to the announcement on the BoE website.

https://www.bankofengland.co.uk/markets/marketnotice081003.pdf

It is sounding increasingly as if the doubts over the value of the assets owned by banks is yestersay's story - and what we have now is a credit crunch whose origins lie in the unwillingness of foreigners to fund the consistent and ever growing deficit on the country's international trade that has occurred under Gordon Brown's stewardship.

The 600 bn deficicit in the value of deposits compared with lendings has arisen in no small part due to the profligacy of the UK pubblic and private sectors as governed financially by Gordon Brown. So much for the end to boom and bust Prudence!

@ 40 - glanafon
spot on

People - Let's take this GLOBAL...

Let the UK Taxpayer show solidarity with the US Taxpayers!!!

Let's meet up outside the Bank Of England on the same day...

https://www.endthefed.us/about.html

Let the truth be free (please mods!)

FWIW

Excellent. So the banks are now so deep in the hole that the only assets they have left to swap for cash are car loans, lent to people who doubtless will soon be unable to afford them, and secured against the only asset to depreciate in value quicker than a US/UK bank.

And even this cash will not last long.

Everywhere you look, there are facts and statistics screaming that this was inevitable. These were available to regulators, to the government and to Mervyn King.

And yet noone dared to speak out against the City (presumably for fear of jeopardising those £1 million a year non-exec board posts) and to attempt to curb the excesses of lending and the unregulated and uncapitalised credit insurance industry that encouraged banks to lend so recklessly.

I would like to think that one or 2 of them feel ashamed as they pop down to their country estates in their helicopters this Friday afternoon.

Re 37 how much so far

On coarse figures then per head of population we actually ahead on liability against the US but some of the liabilities may not be very high. Can't see the US has finished yet. Question is what is to come in the UK. No way of comparing like with like.

#45

Surely if they do that in three months time they will be asking to be nationalised (lock, stock and smoking bank-vault!) as these are 'secured' loans, not a version of "The secrete Millionaire" give-away.

#30- guycroft - tell us what to do!

In a nutshell, you want to adopt a defensive posture, this means trimming costs to the bone, while squeezing maximum revenue per sale. You also want to find new ways of making money from existing assets (including customerbase), eg. create new revenue streams. You also want to diversify your sources of income and your supplierbase, so that you are not overexposed to any particular entity.

You could also look at ways of quickly adding value to your products, for example partnering with a firm in a related market, so as to gain access to new markets without having to build marketshare organically, and new products without having to develop them yourself.

If you have some spare cash you should try and plough it into research + development, so that you have some new products in the pipeline, this will keep you ahead of your competition and you'll be ready to make hay when the sun shines again.

while all this is happening you do a strategic review, that means revisiting the vision/objectives/strategies of the business, and revising the business plan and the marketing plan. This way you will have a clear idea of what you're doing, and the chances of failure due to misaligned business processes are minimised.

AFAICT, this is not the time for a retreat - if you can afford it now is the time to go on the offensive. Your ability to do this will be determined by your fiscal prudence during the boom years.

Good luck, c u on the other side.. ;)

Nice one Robert, thanks.
Everone seems to agree that it'll need a big return of confidence to help the money men out of their self inflicted holes.

But does the BOE accepting credit card debt and car loans as collateral inspire your confidence? Hmm

Anyone else think it's ironic that its now Bank employees lavish high spending on flash cars and platinum cards which their employers can now use to keep their sinking ship afloat for a while longer!

But it can't be a real crisis - Parliament hasn't been recalled - does that mean we are officially a Banana Republic?

The Financial Services Authority (FSA) has raised the limit to the amount of deposits that are guaranteed should a bank go bust to £50,000.

The new limit will come into effect on Tuesday 7 October

Why not from today?
Is it because most banking failures have happened over the weekend and they are expecting one to go this weekend
RBS shares anyone?

In the current state of things the ONLY way to stabilise the banks is to guarantee all savers and depositors like the Irish and the Greeks - anything else will continue the instability and cost much much more in the end.

It is an absolute nonsense to announce '50,000 by the 7 Oct and we will continue to consult' as has been announced today.

Monday we will have to move it to 125,000 to match the US Poulson Bill's latest limit (of 250,000 US dollars) anyway. A single simple announcement to match the Irish and Greeks position is essential, and Gordon Brown MUST negotiate this over the weekend with the other members of the EU.

(He might also like to join the Euro over the weekend too - for added stability. This is an excellent opportunity to fix the pound against our major trading partners currency and thus provide stability for our businesses during the devastating storm of the coming inescapable depression. We will need the biggest home market we can get to preserve as many jobs as we can.)

So - Goldman Sachs, mainly responsible for the speculation which sent oil prices sky high and will cause such misery, indirectly, for the cold winter future of UK pensioners is to be bailed out..nice one
Paulson, just spare us the 'on the knees' theatrics though some some might be prepared to beg for the collateral advantage he will personally receive.
Meanwhile, how many pensioners on lower income have worked out that the 'cost of living' increase is STILL being wiped out in October by the slimy Gordon's tax change?
Just check the difference between income in September and October. Banks may be gearing up for FIAT currency inflation, but at leasts pensioners and the weakest will be doing their bit for deflation.

@48

At the moment, customers are only covered for one account under each banking licence so if you have two accounts with banks that are owned by the same parent company you will only have a total of £50,000 guaranteed.

#49

It's not your money, it's our money, in other words it's the nations money - that is what tax is. Don't want your money to be spent on things you don't like then arrange your finances so that you don't have to pay tax...

rhysgp 18:

Give it a rest, you know exactly what I meant. If you want to play conceptual analysis go write an essay on logical positivism.

In this situation there are no easy decisions, no snag-free solutions. On balance, this is the right move. It also seems to have been carried out with less of the dithering that characterised previous interventions such as NR.

The government needs to explain to the public that banking is not like any other industry. The 'real' economy is critically dependent on the functioning of the banking system, dependent in a way that does not have analogies with other industries. Intervention, however unpalatable, is better than doing nothing. The resilience of our banking system is also critical to our international trade.

Of course there is a lot that needs fixing, structurally and systemically. A lot of improvements and reforms need to be carried out. But trying to tackle these now would be like deciding to rearrange the furniture while the house is on fire.

If the B of E is having to accept car loans and credit card debts then the banks really are in very deep trouble.

sorry, defensive/offensive blah blah, what I meant was, hunker down, but keep your eyes peeled for opportunities.

Agree with post 40 this does sound like re arranging the deckchairs on the Titanic.

#54

Please! The bankers have not been bailed out, the banks have - yes the bankers that have caused this should be booted out without even a handshake - never mind a golden one - but this is not the time to start that process. At the moment what needs to be done is to save the banks and thus the customers of those banks.

Banks do not equal Bankers.

If the Bank of England is prepared to bail out the Banks why are they not prepared to bail out their customers (so called) the businesses, the investors, the entrepreneurs and the institutions who bank with them. These not the banks are the employers the power house and the wealth creators of this country providing the income of the people and the tax revenues for the running of the country.
The banks act as an imposition to the operation of all these people and charge them unmercifully for their services they charge for instance according to the OFT some £8.5Biillion a year in dubiously priced bank returns and referrals letters. They claim free banking but everyone pays for these outrageous profiteering charges through the people they trade with recouping them. The banks miss-sell insurance on cards loans and mortgages not caring if the insurance company will pay out because the banks will pursue the claim against the hapless individual irrespectively.
Then they exclude the poor and the needy closing the accounts of anyone who gets into temporary difficulties. In short they do not provide a service to the Nation they greedily exploit every member of the community they belong to with bad products, improper lending and then disguise their implication by selling on to debt collectors and other institutions they laugh at the regulators as one said to me we make more out of interest in one day on insurance premium sales than we have been fined by the regulator for inappropriate selling.
For Years our banks have had no need to listen to customer, regulator, government or the bank of England most of whom they treat as beneath their contempt until they get into trouble. Then they want us, even blackmail us into bailing them out threatening great economic catastrophe will ensue because they will hold onto the money and not trust anyone to invest in.
Well yes, I say, they can be supported Ibecause I believe in my country and its people and want to support not exploit them.
Unregulated banks have exploited us all, so for the Banks this time it has to be unconditional that they will support their entire community and they will act within strict regulations to ensure that they carry the proper interest of the countries in which they operate and will fulfil a unified and agreed prescription for taking the whole community forward without gung-ho speculation and buccaneer attitudes that lead to boom and bust of their countries economies and the deprivation of the citizens they sponge and coheres money from and please just once from these tight lipped fat cats could we have a public promise to do better in the future and a public apology (if not a refund) from every banker manager or investor in every financial institution who earned over £250,000 in the last twelve months before we part with a penny.

here is a short explanation of what is going on.

there is a liquidity crisis amongst the banks that is threatening to spread to the rest of the economy. this crisis is indiscriminate - the loss of liquidity (ready cash) is a problem for all the banks and an increasing problem for companies too. this is happening irrespective of whether those banks and companies are profitable or not.

the boe's interventions are designed to ease the liquidity crisis by temporarily pumping loads of cash into the financial system. it is a short term measure. it in no way stops the inevitable slowdown in the economy, the credit crunch (i.e. reduction in long term lending) and the probable bankruptcy of many companies (and maybe some banks) that genuinely are unprofitable in the coming recession.

failure of the boe to intervene at this point could lead to serious brain damage in the uk economy.

what the boe is doing is making very short term loans to banks in return for receiving collateral from the banks. the question at issue is what collateral owned by the banks is acceptable to the boe.

please note (1) these loans are not funded by the boe borrowing or by the taxpayer as the boe can simply "print" the necessary money, (2) these loans are not (hyper)inflationary insofar as they are loans that will eventually be repaid (and the cash therefore taken back out of the system).

the risk with the collateral arises if (a) one of the borrower banks goes bust and (b) the collateral turns out to be worthless. in this case we really do have a problem for the taxpayer (if the losses are funded through taxes) or with inflation (if the losses are funded through printing money).

the banks have a lot of assets, more than equal to the value of their liabilities (i.e. their deposits, and those interbank loans that are rapidly drying up). when the banks offer these assets as collateral to the boe, the boe applies a "haircut" to the amount it is willing to lend. so e.g. if the banks provide £100 of gilts, the haircut might be 10%, so the bank receives a loan of £90. the more risky an asset is, logically the bigger the haircut should be.

because the banks are so desperate for cash now, and because they have run out of "quality" assets like gilts (or even mortgages - itself something the boe would not normally accept) to offer as collateral, the boe has been asked to accept even riskier assets, including corporate loans and commercial loans. these assets may be more risky, but to my mind the issue is not whether these assets should be accepted, but rather how big the haircut should be.

even with these assets being accepted, if the haircut is very big (say 50% or more), then there is still a risk that some banks may not be able to raise enough liquidity to meet the run they are experiencing in the interbank market. and if there is a run on deposits as well, then the banks are totally screwed.

One really has to wonder just what an effect the internet, the readiness of information and this blog inparticular are having on this situation. If the information weren't so readily available to the general public then I'm pretty sure things wouldn't be quite so bad. I'm not condoning censorship, no more I I condoning sensationalism. Is Robert striving for something personal, or is he truly doing us a service?

$59
" I would like to think that one or 2 of them feel ashamed as they pop down to their country estates in their helicopters this Friday afternoon. "

I doubt you need to trouble yourself thinking about that one.

To Boilerplated post 38

But Robert - and the BoE - DID name the bank when it was Northern Rock. What the BBC and the BoE and others have to explain now is : why the double standards? Why when the issue arose one year ago was the focus exclusively on NR whilst the bigger picture was brushed under the carpet?. A number of folks on these blogs are now congratulating Robert for highlighting a story that is over a year old and that he missed altogether at the time (i.e. that the same problem would hit other banks- just a bit further down the line).

It is not hard to see why the BoE, the FSA and Alistair Darling preferred to focus on NR in order to detract attention from the problems facing the entire banking industry- but what was the BBC's incentive for doing so?

#18
... "because if the banks can't provide loans to companies, companies will go out of business and jobs will be lost."

Banks are not the only lenders.
Banks also charge for this "service".
Not ALL banks would fail (We hope).
Not ALL companies require loans.
Why saddle the companies with high service charges from bad banks ?
Good banks will be more than happy to service solvant companies.

Insolvant banks should go bust.

We can always bypass the banks altogether and use BoE directly. I mean why have a bunch of companies with a monopoly of base interest rate money that can't risk manage and end up costing the country dearly on a regular basis ? It seems to me Mervyn King knows what is good and bad debt. Perhaps he should be put in charge of all banks ASAP.

Some UK banks are not fit for purpose - get rid of them ASAP before they cost the country even more money !

I've begun praying to god (Mervyn King) to set this country on the straght and narrow. Don't worry Mervyn, the public have faith and support you ! I applaud your efforts on behalf of the country ! GO MERV !

No-one could be more annoyed than I am about the sheer idiocy that has got us into this mess. High profile idiocy from a small number of greedy, self-interested bankers. Lower level (but more numerous) idiocy from those who borrowed much more than they could afford, or who lied about their incomes so they could just borrow even more. The idiocy of a 'me-me', 'I want it now' culture, that has put greed before common sense or higher values.

But we need to think pragmatically. The City doesn't just employ a few thousand ludicrously overpaid and incompetent fat cats. That's the caricature. It employs over a million people, most of whom don't earn huge sums. The broader financial services sector employs even more. Financial services generates huge tax revenues, and huge overseas earnings, which pay for our imports of food and energy, of manufactured goods. This huge fiscal and trade dependency on financial services isn't a good place to be, but it's where we're starting from.

Retribution, reform and regulation can all come later, and must. But the rescue of the system has to come first.

The question I want to know the answer to is whose is all this money that the Bank of England seems to be able to call upon at the drop of a hat? and where does it all come from ? Is it government money kept in trust by the BoE? If not government money whose is it? Also, how does all this tie in with what financial commentators call the national debt ? It is all very puzzling ! I just don't see why if all this money has been stashed away all this time why successive governments have felt the need to constantly raise taxes as if they were on skid row, why they ask people to tighten their belts etc etc when we now know all billions of pounds have been there all along. Sounds a bit to me too like the account in the bible of the parable Nathan the prophet said King David -in effect taking from the poor to fund the rich who already have more than enough thank you very much. Can Mr Peston do a blog please to answer these questions - am sure many will be grateful if he can - Thanks in advance

#46

Economically correct but political dynamite for a government that wants to get re-elected.

Hang on a minute ... wasn't the BOE given "freedom" to set interest rates for the long term benefit of the economy and not short term political objectives ?

I take back everything I said about Merv this morning.

He has gone to the dark side and is now an accessory to the covering up of monumental government incompetence.

It just goes to show how independent the BoE really is(n't).

I'll be taking my car loan, HP agreements and loan shark deals that I can no longer pay up to Threadneedle street tomorrow to cash them in.

This is not the way to recover the economy, this is not the way to make sure it doesn't happen again.

It's simply sending a signal to financial world that everything that has happened in the last 6 years is acceptable.

The government no longer speaks for the people. It has become a totalatarian state.

30: Guy Croft

Post #62 has given you some great advice. The only thing I'd add is to think about the nature of what you sell:

If possible, emphasise the things that customers HAVE to have, and not the things they'd LIKE to have.

This is a key business factor right now. Imagine that someone spends 50 percent of their income on essentials and the other 50 percent on discretionaries, things they want but don't actually need.

Now their income gets reduced by 10 percent. The original 50 percent still has to get spent on the essentials, so the 50 percent spent on discretionaries gets cut by the 10 percent, this being a 20 percent reduction (from 50 to 40). And so on. I call this "non-discretionary leverage".

You can see this in the stock market. Share prices of companies producing things we need to have, have held up relatively well - oil companies, utilities, pharmaceuticals, food retailers. Companies selling things we like, but don't need to have, have fared much worse - leisure companies, airlines, pubs, hotels and so on.

The message is, in so far as you can, to concentrate your business on selling essentials, not discretionary purchases.

Now let's get this into perspective: over the last seven years British banks have actually financed the housing boom, shareholder payouts and bankers' bonuses not by making profits but by borrowing and currently owe 625bn GBP.

That's $1.2 TRILLION - nearly double the US bailout figure.

Who honestly thinks the US bailout is going to make any difference at all - other than raise the share price sufficiently for bankers to bailout of their stock options?

Bankers had better start jumping from high windows (thanks, purpledogzz) because it'll be a lot cleaner end than the grizzly mess that the mob will leave when they come after them - and they will.

76 benagyerek:

Absolutely brilliant explanation. Everyone should read this post.

@ 77 idromaine

> One really has to wonder just what an effect the internet, the readiness of information and this blog inparticular are having on this situation. If the information weren't so readily available to the general public then I'm pretty sure things wouldn't be quite so bad. I'm not condoning censorship, no more I I condoning sensationalism.
>


Yes, this is a valid point to make - although it is difficult to uninvent technology.

How do you feel about the years in which the public have not so well-informed about what the 'economic miracle' was built on?

What has the prolonged and excessive use of business jargon (which appears designed to cloak simple fact) helped to do to us all now?

The UK should join the euro NOW- if they will have us, of course- and immediately start to decouple from the US economy. If we don't, we're heading straight down the pan with the Americans. Their empire is toast, time to join another.

#77

Never mind the Internet, what about the (1986) "Big Bang" and electronic trading, the old systems might have been dated and slow but due to both those factors there was always time to take a deep breath and clear the head.

Re 30 Guy

Sorry Guy no obvious answer. Expect you have looked at it more than anybody else. A niche based on a specialised product is a strength and a weakness. If there is no obvious diversification then it is very difficult to see what movement you have. My guess is you are looking at 12 months to 2 years before substantial pickup but I don't know your sector so perhaps it is just a short blip of a few months. You said you went thru the 90's dip so you know how it goes. I have known even big firms offer loss making services on the basis that it is better to make a small loss and stay alive than make a big loss and go bust but it becomes a death by a 1000 cuts unless you are careful. The big danger is the bank, who will not be above calling in any debt at 24 hours notice if it suits them. One day on the phone offering more, next post a letter saying end game.

Robert, perhaps Mervyn reads your blog and acts accordingly!

Thanks 22, that joke gave me a good laugh

#79

why the double standards?

Exactly because of what happened a year ago, if you think it was bad then it will look like a chimps tea-party should panic set in now - in fact rather than just being a run on one bank there could be a total meltdown.

Well well well. We really have got ourselves into the poo.
By we of course I actually mean those of us that know what is going on. Has been going on. Most of us are in ignorance of the shenanigans that have been going on. The bankers however knew exactly what they were doing. They were doing deals and making money.
The deals relied on confidence.
The wise, experienced bankers knew just how much they could push the system limits. The really clever ones thought that they could push the limits even further without there being a loss of confidence.

Everything works as long as everything works.

An almost exact analogy can be found in Radio 4's "I'm sorry I haven't a clue" programme where they play a game called "Mornington Crescent"

That game of course has no rules. But the players pretend it has. The winner succeeds by general acclamation.

The same with banking. As long as a banker's peers think everything is OK then everything is OK.
The difference with banking of course is that once the cover is blown then the underlying impossibility of fractional reserve banking is laid bare and poor Mervyn is left to try to instil some confidence into hard nosed bankers who know what is going on.
Best of luck Mervyn!

#11 - I can answer that....

1) Taxation up
2) Public spending down
3) Endless news reports talking about 'the green shoots of recovery'
4) Higher crime
5) Higher unemployment
6) Higher inflation
7) A new war around 2018 to boost the flagging US economy
8) The demise of the US as a economic superpower, to be replaced by China, India and the Arabian world (probably Saudi Arabia)
9) Memoirs from every politician involved which point the finger elsewhere - it was the white rabbit wot dun it.
10) Increased voter apathy as the country finally realises that nobody has actually ever been in control - it was all a big con.

#74 - Boilerplated

The Banks = The Bankers until the Bankers have been matched off the premises.

As it stands, the same execs and analysts who made the mistakes and took the huge bonuses are now telling us they need the taxpayers bail out money as they're "so important" to the economy and are perceived as benefitting from this too. An awful situation for the average taxpayer! If they weren't clever enough to stop their banks from failing, then why should we believe they know what to do now?

Every bank in receipt of these funds needs a new Board asap, conditional on release of the cash.

Worked a treat, kicking Applegarth / Baker / Ridley out of NR... Public perception was that those responsible were gone and move on.

The Bank isn't bailing out the other banks. We are!

But the MP's have just forgotten to mention it and how much it's going to cost us all in extra taxes!

Your pension and savings have been gambled away and the heads of your bank are going to get away with it.

Any one else would be arrested and banged up for fraud!

Let's hope that on Monday we are all using the Euro!

When NuLab have to reposssess all the dodgy house and car loans dumped on the taxpayer they now have just the person to run the sale.

Peter Mandelson.

Clever move by Gordon.