BBC BLOGS - Newsnight: Paul Mason
« Previous | Main | Next »

6pm. Bank bosses to meet Darling

Post categories:

Paul Mason | 13:12 UK time, Monday, 6 October 2008

I have learned that Alistair Darling has called in the UK's banking bosses to 11 Downing Street at 6pm this evening. I am presuming they are not getting together to watch World Grand Prix Darts on Sky. As I write RBS is down 15%, Barclays 12% and they are supposed to be the good ones. My editor has asked me to come up with a simple explanation of "bank recapitalisation". Can anybody help me?

Comments

  • Comment number 1.

    Incidentally, I have solved the bank crisis. It is simplicity itself. Governments and central banks are paying attention to the wrong end of the horse. They are applying the bucket to shovel around the rear instead of feeding it at the head by throwing good money at the banks themselves or buying toxic debt.

    This palliative may save banks from their own folly BUT will not stimulate affordable lending.
    What they should do is guarantee not individual deposits but future inter bank lending - providing it is applied to new credit including mortgages. New lending (without the premium charge) will get the market going and this in turn will erode negative equity and ease their non performing debt portfolio which is buggaring up the arse end of the system. Why shore up the past?

    Similarly, having created a new market in LIBOR the central banks should provide a securitised underpinning of the market by itself obtaining deposits (which is all the guarantee that is needed) including from financial institutions which (having added 100% security to the product) it then lends to banks at the proper rate- limited to those which are offering to provide credit and mortgages at less than usurious rates.

    There is no need, in this scenario, to pledge tax payers money or pump cash into the system via distressed banks (which sit on it or just repair their balance sheets) yet does not stimulate their propensity to lend.

    Equally, reductions in interest rates by this measure can be with assurance be passed-on to the borrowers rather than just used to increase bank profitability. The market will take-off and the problem diluted at a stroke

    Job done. Now I will rest!

  • Comment number 2.

    bank recapitalisation = throwing good money after bad

  • Comment number 3.

    "Bank recapitalisation" is where the government agrees to pump money into a bank in return for an equity stake and presumably a degree of control.

    The effect of this will be to hugely dilute the value of existing shareholders holdings and in the extreme case, cause them to lose all their investment. It will however potentially prevent complete financial melt-down which has much wider consequences for the rest of the economy and all of us in the UK.

    Given the government potentially doesn't actually have to hand the vast sums of money needed to do this on a grand scale, the option of printing new money and devaluing sterling remains a distinct possibility since borrowing the sums from (say) Europe is probably equally difficult.

    Much tighter regulation of the banks can be expected in the future.

    brancusi


  • Comment number 4.

    So far the ‘credit crunch’ has focused on mortgage lending; and especially on sub-prime mortgages. In this context the banking system has, it seems to me, probably been saved; albeit at a very high cost. The remaining problem in the sector, that of Credit Default Swops (CDS) which are much larger, will take years to work out. The chances are that, given this time, they will eventually balance out.

    But that is not the end of our problems. The focus has now moved on to the other risks; those involved in risky borrowing by commercial organisations. The age of easy credit seduced many organisations into taking undue risks, much as it seduced homeowners. At its extreme were the private equity operators - who were so active until a few months ago. Their business model was based on ridiculously high financial leverage. This was fine in the good times, when it meant that putting in a few per cent of capital enabled them to take massive amounts of profit. In bad times, however, it means they are effectively bankrupt; but it is their banks, which foolishly authorised this leverage, who will pick up the debts. The size of the problem is to be seen in Iceland which effectively bet the whole country on this private equity boom. Now the whole country is bankrupt; though, fortunately, there are few other countries who are as exposed – though I do wonder about Dubai.

    Perhaps we should now start to talk about this next stage of economic collapse!

  • Comment number 5.

    I believe it means "nationalisation".

    New labour = old labour.

  • Comment number 6.

    [i]My editor has asked me to come up with a simple explanation of "bank recapitalisation". Can anybody help me?[/i]

    Giving (tax-payer) money to the banks for an equity stake.


    Trouble is, with the fiat monetary system pyramid collapsing as we speak. This could very well bankrupt the UK. You really need to understand the fiat money system (a pyramid scheme) and fractional reserve banking.

    While you are listening, please please have yourself or one of your researchers view these videos.. it is of great importance, and time, particularly now, is of the essence:
    http://www.silverbearcafe.com/private/moneyasdebt.html
    http://video.google.com/videoplay?docid=7065205277695921912

  • Comment number 7.

    "6 pm 'this evening'". Come on, you can manage better than that. What's wrong with "6pm today" or "at 6 this evening"?

    The report itself is not news so get the journalistic stuff right, please.

  • Comment number 8.

    The problem as I see it is that the Banks' have borrowed lots of dosh (£650B) much on relatively short-term contracts. Trouble is, their lenders (who usually roll over these loans, if requested) are refusing to roll them over at end of term. Thus the reason there is no capital in the UK banking system is that our banks are deprived of this short money and thus the Govt is bailing them out. More trouble is that the Govt want assets as security and the Banks are down to dodgy car loans, let alone sub-prime. This scenario repeats itself each month with no short-term loans and only the BofE to provide. Thus all 4 Uk banks should in theory go bust shortly. This also explains why their is no money to lend for mortgages - its because there isn't any!

    6.00PM nationalisation (whole or part?)

    However, investors will have confidence in UK govt which took 6 months to make a decision which should have been taken in 3 days (Northern Rock). They are dithering again.

  • Comment number 9.

    Our banks should be forced to publish their present liabilities and assets. They could also publish details of what loans are outstanding and when these will be due for redenmption. This would provide all the "confidence" that lenders might require won't it? If they won't do this then its obvious they are NOT sound institutions and must be allowed to fail, not be bailed out by taxpayers yet again.

  • Comment number 10.

    You could try asking Robert Peston - he clearly has a better handle on these things than Yvette Cooper, judging by her execrable performance on the 'Today' programme.

    Her motto should be 'First I screwed up HIPs, now I'm screwing you..'

  • Comment number 11.

    Since capitalisation is pumping liquidity into it, recapitalisation is replacing the liquidity which has evaporated. In the case of International Moscow Bank in 2000, this was a straight trade off for ordinary shares.

    However, there is a problem. If resources have 'evaporated', one would assume that this is due to the toxicity of existing lending. The Paulson formula assumes that the toxicity is a temporary problem and, as recovery occurs, the Treasury Department will end up with assets. People will continue to pay their mortgages and use their plastic responsibly. If, instead of buying toxic debt, the state starts to acquire share capital, there is a suggestion that some of the toxic assets are not recoverable. If there is a growing perception that it is OK to allow borrowing to fall into delinquency because the state is going to make it good, is there not a danger that people will start to willfully default and leave the taxpayer to pick up the tab?

  • Comment number 12.

    "bank recapitalisation"?

    Having a forced whip-round down at the workhouse for the fat cats who lost all their money gambling in the plush casino.

    Outrageous ! Does the small business get bailed out? No. What happens is that the small business (or the average Joe) has been basically forced to give a bunch of money to the banks in the hope that the banks will graciously lend some of it back to them at interest.

    Bunch of Ponzis !

  • Comment number 13.

    At 2:55pm on 06 Oct 2008, BliarWatchProject wrote:
    The problem as I see it is that the Banks' have borrowed


    Why a capital "B" for banks, and why oh why the plural possessive apostrophe ?

  • Comment number 14.

    ARE YOU A PARENT PAUL?

    Many parents have one child (or more) who drowns in easy debt. We then 'recapitalise' - and pray.

    It is often said of bulimia and anorexia that the problem arises from the fact SOME food is essential. Now that the very air we breathe is infused with debt, a similar pressure to go off the rails is ever present.
    But SOME air is unavoidable.

    I have said before: the root of the current malaise is in money itself. We are born with it all around, but do not understand what it is.

    In passing: Now that reality looms, has anyone re-visited the crass error of a government determined to send 50% to university, while inducting them into the perils of incurable debt?

  • Comment number 15.

    Banks have leant more money than they have got. In order to stop them going pork side up, the Great British Tax Payer will give the aforementioned banks some money in return for a bit of their badly managed business. As a result, we are now all bankers. :o)

  • Comment number 16.

    Maybe he has got them round to organize a whip round for Peter Mandelson's next leaving drinks?

  • Comment number 17.

    As I understand it (largely from reading these blogs!) the banks have been making use of loopholes in the financial system (ie use of CDOs, SIVs etc) to lend much more than their existing capital base should have allowed. As the risk of these loans defaulting has increased, starting with the sub-prime problems, it has become apparent that at least some of the banks may now not have enough capital to cover the potential losses on these loans - ie they are not just suffering liquidity problems, but solvency problems.

    A few months back, they were being encouraged to go for rights issues as a means of increasing their capital, but it's hard to see that working now, so I assume what is being talked of is the Government giving them the capital in return for an equity stake. Partial nationalisation in other words.

    The question is how much capital needs to be pumped in, given how risky some of the loans made by the banks have been (in housing, private equity etc). It may be that full nationalistion might be cheaper for the taxpayer.

  • Comment number 18.

    It is apparent that we are without leadership and have been for some time. The only member of the MPC that saw this coming was David Blanchflower and he should be at this meeting.
    Then perhaps we can have the two recently nationalised banks allowed to open for business and make profitable lends to sound businesses and individuals. This can be done at non penal rates.
    The MPC can cut rates aggresively and we can try to trade our way out of this position. It is not the banks that concern me any longer but the wider economy that is in recession and has been for months. Technical recession or not I know when the economy is shrinking and it has been for approximately nine months.

  • Comment number 19.

    Tim Congdon explained something about this recently in The Times. Paraphrasing him(and responsibility for inaccuracy is mine):

    Banks lend their deposits to make profits: all they need to hold themselves is capital to cover occasional bad debts (which depositors shouldn't have to pay for directly) and the required reserve may be as little as 5% of overall assets.

    But the crunch comes when the value of assets comprising that reserve falls. A drop in the value of assets of 2 per cent wipes out 40 per cent of the capital of an organisation such as a bank that is only 5 per cent owned by its shareholders.

    In this position banks must either shrink overall assets (i.e. sell things) to meet the new lower capital value they hold, or to avoid this, 're-capitalise' - which is a bit like a whip-round on the bus to meet an unexpected fuel / repair / whatever bill, if the trip for which it was booked is not to be lost.

  • Comment number 20.

    The simple answer is nationalisation.

    The major housebuilding companies are defacto owned by the banks, so government gets a publically owned banking and building industry in one fell swoop.

    Mutual banking, mutual mortgage companies . Keyensian housebuilding projects ..............

    Back to the future ?

  • Comment number 21.

    the 'business' of banks is lending money.

    They now [according to the mark to market rules] don't have any but sit with big losses on the books.

    So they cannot do business and loan out money and so make money resulting in the credit crunch.

    If the govt gives them long term money they can use that to loan out to people/firms and so restart the system.

    which is called bank recapitalisation.

    Further by taking off the bad loans either through accounting rules [like south american crisis] or by nationalisation [northern rock] they restore confidence that loans are not being made to, in effect, an insolvent society.

  • Comment number 22.

    Perhaps they should watch the darts, would teach the lads basic numeracy skills, as well as how not to go bust !!

  • Comment number 23.

    "Okay,you guys! I've given you money and other support. Now get banking. And if you don't want to, I'll have your authorisations back. You've got 3 weeks."

  • Comment number 24.

    So if we nationalize, are we going to consult with Europe? :)

  • Comment number 25.

    Forget worrying about defining 'bank recapitalisation'. I suggest (seriously) that ordinary folk like thee and me should proceed to the nearest ATM for the next 3 days in a row and make your maximum daily drawing of cash. Stick the cash under your mattress and thus be prepared for when the whole banking system siezes up - which seems to me to be pretty imminent.

    You can then persuade Tesco to sell you the bare essentials for a week or two until sanity is restored, or at least until the helter-skelter opens again and we can all continue the downward slide into oblivion.

    Isn't this fun?

  • Comment number 26.

    Something is wrong when free-enterprise is nationalised it is usually the Tories who do it. (c.f. Rolls Royce (1971) Ltd.) There again, New Labour is rather Tory!

    Seriously, the problem of capitalisation, or lack of it, is not apparent from the accounts of the Banks and there is the biggest problem. Something is seriously wrong with accounting because it has permitted all of the ruses and subterfuges that keep the assets and liabilities away from the accounts (just like Enron, but with huge festering pustulant knobs-on). This is fine so long as confidence remains high but catastrophic when confidence slips. Hence the problem we have.

    Recapitalisation - or throwing money at the banks - can only 'work' if real accounts are kept - but I very much fear that the off balance sheet stuff is gigantic and tens if not hundreds of trillions of pounds in the case of some banks. No government anywhere on earth can possibly chuck that sort of money about without destroying the whole World's economy for decades. Any solution needs smoke and mirrors and will take a long time.

    I have heard that the sort of figures that are floating about off balance sheets are in the region of 500 trillion pounds globally. (400 times the UK's GDP - clearly a non starter - we could not even manage 50 trillion pounds or even 5 trillion pounds. The UK banks are probably between 5 and 50 trillion pounds based upon their relative sizes.)

  • Comment number 27.

    just finished reading an account of the attempts at recapitalisation in 1930-31 (at google books, a history of money and banking in the US)
    Didn't work then, led to a run on the international system in the summer of 1931.
    Milton Freidman is spining in his grave at these attempts at reflating the banks.
    let them go!

  • Comment number 28.

    Paul, suggest you take Gordon and Alistair to Sweden where they had a similar crisis some years ago. They solved it by buying bank bad debts using taxpayers money thereby providing capital to the banks and freeing the banks to start lending and borrowing among themselves again. The bad debts were housed in a new government owned company and in due course, over the years, when the market recovered, the debts were sold in the market place at little or no loss after which the government owned company was dissolved.
    OK, that's probably an oversimplification. But in our current crisis, somehow the banks have to be recapitalised and it will take tax payers money to do this, however unacceptable this is for the politicians and the tax payers! Paul, you deserve a nice trip to Stockholm to see how it was done.

  • Comment number 29.

    I think I have got 'Bank recapitalisation'

    A bank without money is usless.
    A bank with money is dangerous.
    So we give them shedloads of money.

    Try to do a better this time old chap.

    See it's not complicated at all.

    Chancellor A. Darling

  • Comment number 30.

    recapitalisation actually means throwing *bad" money after bad. The tragedy of it is that there is no alternative, other than the liquidation of assets and capital, which is probably worse. Paradoxically, the problem is not the lack of money but its excess. If we take the Kondtratieff theory of long waves in economic development as our starting point then this crisis is a fairly standard winter collapse after an autumnal credit financed boom (and, by the way, was entirely foreseeable). The bad news is that they generally last around 15-20 years (i.e. 1929 - 1949 last time round) and as this one has actually been going on since 2000, there is still some way to go down before we will come back up again. If we have learnt the lessons of the past we might be able to avoid the worst effects of the depression and avoid fascism and war this time but whatever we do, we are in for a long and nasty winter in which a lot of people are going to get hurt.

  • Comment number 31.

    Littlekeefer, the problem in 1930 was that the attempt at recapitalisation was half-hearted and largely scuppered by market fundamentalists such as yourself and Milton Friedmann. It is of course a valid economic solution to just let them go - after all that is what a market economy is and those who live by the sword etc... - but the political and social fallout of doing so would be horrendous. As I said above, there probably is no way out of the crisis in which we are now immersed, but there has to be a socially responsible way to manage the decline and the recovery. And I say that as a recovering Trot in whom a little piece of an old dream is rejoicing and waiting for the revolution to start.

  • Comment number 32.

    About 15 years ago the, then, retiring leader of the CBI (cannot remember his name) said in his retirement speech that he had, "Grave misgivings about the morals of the City". The City of course being London. I have during these 15 years been in London now and then and have had the opportunity to observe the attitude and behaviour of many of our city bankers. Putting all this information together it seemed to me that the UK was on its way to financial ruin at some time in the near future because of their doubtful practices. After all could anyone trust the City when a banker's worth was measured by the size of his annual salary. I am not being wise after the event, I have been advising my family to buy gold for over 2 years now. Also telling my daughters not to contribute to any pension fund for their retirement but again, invest in gold. .
    I won't go into Hedge Funds or PFIs.
    Here is my next prediction. All young people born after a certain date won't qualify for a state pension and so to find other means of providing for their retirement many have invested in a second property to rent out. Regardless of the state of the housing market at the moment this seems at first glance to be a good idea. But what happens in the future when, say around a million property owners retire at about the same time and put their second property on the market to realise their investment. Not to forget that there will already be property up for sale and more to follow in the ensuing years. Its not too difficult to predict that the housing market will be swamped with obvious consequences.
    One thing I don't understand though regarding the present financial crisis. What have we been paying all these financial experts and advisers for? They are invited to speak on the telly with boring regularity. I have been jumping up and down with rage and frustration for over 3 years now seeing this crash coming. Why couldn't they! I don't really care if anyone believes me or not, the sound common sense is there for anyone to see if they care to look.

  • Comment number 33.

    Here's an Idea.! Why don't we all change our names by deed pole to, perhaps, Mr and Mrs Northern Rock or Bradford -Bingley? Perhaps Heir Chancellor Darling will give us some of our tax money back?

    I am almost lost for words at the bare faced cheek of these bankers.

    One things certain. Noo Labor votes seem as safe as? well, money in a bank.

  • Comment number 34.

    Re starcaspio #32

    Amen!
    I wonder if the politicians pension funds are safe?????

 

More from this blog...

Latest contributors

BBC iD

Sign in

BBC navigation

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.