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British £1.9 trillion bailout denied. So what are they really planning?

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Paul Mason | 11:37 UK time, Thursday, 2 October 2008

The most significant economic story this week was the scoop by Benedict Brogan in the Mail yesterday, that Gordon Brown is considering an Irish style £1.9 trillion bailout. It was the kind of scoop that makes the rest of journalism gasp because, without naming any sources, it suggests the entire economic policy of the UK is about to be junked and replaced with a state-backed banking system. Here is just one quote from Mr Brogan's article:

"The Treasury is working on a proposal that could insure a staggering total of £1.9trillion in deposits in UK banks and building societies, said officials."

There is more of this in today's Guardian, with the usually well informed Larry Eliott explaining why it is unlikely to happen. I understand at today's lobby briefing for political journalists it was explicitly ruled out by the Prime Minister's Official Spokesman.

Nevertheless, there is clearly a lot more going on than the public is being allowed to know about. The British way is to do through private channels everything that's been done in the USA through semi-official ones. Clearly on Tuesday Brown and Darling saw Mervyn King on more than one occasion; following that Alistair Darling was "locked in with Mervyn and the bankers". At the time clearly the fear was that the HBOS deal would unravel - which now seems to have gone away.

Here is my best surmise of what is going on: and why do I have to surmise? Because of the total untransparency of the process - even in the USA it is fairly obvious that Hank Paulson's people were briefing the WSJ and NYT after the bell each day. Nevertheless its an educated guess:

They are trying to design and bank-by-bank recapitalisation programme using the February 2008 Banking (Special Provisions) Act. This would involve factoring both public and private sector money into the UK banking system to recapitalise it. The limitless deposit guarantee is a sideshow, I think, because it's implicit already in the UK.

With the private sector what could the sources of capital be? Clearly sovereign wealth funds are flush. Actually so are many oil companies and not all of them have the same reputation as Somali pirates. But cajoling the private sector into an injection of new capital into the British banking system requires that the toxicity be expunged and it is not clear that it is. HBOS is on life support from Lloyds TSB but the size of the hit to LloydsTSB is not calibrated.

With the public sector, I am told the Treasury does not like either the Irish apporach (the universal guarantee) or the American plan (the taxpayer bailout). Fundamentally because both outcomes take systemic risk onto the government balance sheet. Anyone who knows Gordon Brown and those around him know that they will be looking for a sophisticated, multi-faceted, implicit and if possible off-balance sheet solution.

Already the Northern Rock liabilities are accounted for as temporary by the ONS on account of their extrapordinary nature - but I doubt any government will get away with putting public money into the banking system without taking a stake: this is the vicious logic - and it's pure capitalist logic. If you want to save the banking system in a way that protects the taxpayer then the taxpayer must take a stake - that's what they are grappling with.

As I am writing the news comes through that Gordon Brown will head for Paris at the weekend for a summit on the Euro-bailout. This will be a vital meeting and here's why:
as HBOS found out, if there is going to be a queue for capital it is best to get at the front of it. Ireland put itself at the front of it yesterday.

But if the EU is able to come up with a coherent recapitalisation plan for Eurozone banks then suddenly the UK is trapped between two very strong currencies (the dollar, the Euro), two competing financial centres (New York, Frankfurt), and both of them will have put massive state money on the line.

If Britain does not do likewise it is taking a big gamble, even if the piecemeal, bank-by-bank approach is the one most sensible in national circumstances (by the way I don't know that to be the case because I have not seen how white is the skin on the knuckles of the UKs regulators and major bankers).

We're in a strange situation: this is the week the British financial establishment is trying to decide the shape of the bank bailout. The poltical truce called on Tuesday also, I am sensing, goes deeper than just £50k guarantee. Yet nothing is happening - there are no bank bailouts or busts, no market crashes, not even parliament in session; the only interviews are the kind where they call you in and give a statement to the camera. It's like the start of a war, or a coup - and in fact there are aspects of both these things in the reality of the situation.

So I make a blatant appeal: will anybody who really knows what is happening start talking! The reason people are taking their money out of banks and putting it into Northern Rock, or under the mattress, is because there is more concrete information coming from taxi drivers than from the government and that cannot last.

Despite the denial I still think there is something in the Benedict Brogan story. Even if it is only being considered as a final option to unleash, Stalingrad style, when the enemy is about to take the tractor factory, it ought to be the subject of informed public debate, as it is in the USA.

Comments

  • Comment number 1.

    read soros in yesterday's ft:

    http://www.ft.com/cms/s/0/d68e10cc-8f45-11dd-946c-0000779fd18c.html

    let's hope brown and the eu come up with something along these lines, and the eurozone lets sterling hitch a ride..

  • Comment number 2.

    Hello,

    Our financial system is obviously no longer fit for purpose. I have found a website http://www.prosperityuk.com/
    who seem to be proposing an alternative. Please could you investigate and report?

    Thank you.

  • Comment number 3.

    The pursuit of credit or the bond market is where the truth is. James Tappan has just done another interview on Yorba TV [see archive]. Because he watches debt and has done for decades he got out of Lehman bonds etc over 12 months ago. He explains how he knew to get out of Lehman.

    so why study bonds?

    If you knew the personal debt situation of everyone in the bbc how powerful would your decision making be? Would you be deceived by their 'front' or what they say? Of course not. So those who watch and understand bonds can see the debt levels of every bank, company and govt in the world.

    mention the libor rate and eyes glaze over. but today it is at the highest rate ever. this rate tells you what bankers REALLY think regardless of the 'public face'.

    So what is going on is not opaque but in openly public sources if one knows where to look?

    As to what 'they' are planning? Tappan identifies the root problem. He says the imbalance is between short term debt [too much] and long term debt [not enough] . That is the fault line.

    Which would suggest some kind of 'out' through long term debt. Which is what the paulson plan is. Taking negatively marked [through the mark to market rules] mortgages funded by short term debt and funding them by long term debt [by the govt]. So whatever way the different countries do the rebalancing that is what has to happen. The move to long term debt [prob. funded by the public]

    the bond market is the 'all seeing eye' [if there is one] of capitalism?

  • Comment number 4.

    One would have more faith in one's political leaders if one wasn't sickeningly aware that one's country was being run, not for the benefit of the one's fellow citizens but for the benefit of overseas investment banks, driving all government policy in one's country, and referred to, as though it were a benefactor for people and for jobs, the 'financial services industry'.

    One certainly doesn't want one's country to be in hock to sovereign wealth funds - effectively to states that have blatantly upped the price of oil just to achieve such control.

    This one certainly doesn't.

    When did we have open debate about anything in this country? Never till now.

    When will we have it? When the media forces it.

  • Comment number 5.

    HEATED RESPONSE (#4)

    Hi stayingcool - I think you will wait a long time for media to force anything (except perhaps Paxo's affront).

    MPs, money, and media are all 'inside the lie'; debate is 'measured' to fit, just like the Emperor's New Clothes.

    I have said before: we need a champion from outside the lie (or willing to step outside) who will risk all to take a small step for mankind.

    The closest I have seen was when the Kogi Chief came down from the High Andes, as our kindly big brother, and told it (our disgrace) like it is.
    He was, of course, ignored. We, the immature 'little brothers', have such dearth of wisdom that his words could not take root. I suspect he was the last of his kind.



  • Comment number 6.

    I think your best bet is scrutiny of what is already being done.

    The queue idea captures it well, but the free pass is what is firing this copycat phenomenon and exciting the political
    classes to a coup-like frenzy.

    Whatever subject you decide to treat this evening, could I ask that a few points be borne in mind concerning the not-the-largest-single-day-movement in the history of stock prices which was followed by the recovery of two-thirds of that loss (within a day) and which now serves as concrete proof of Paulson's pricing model for quant-defined special-purpose investment vehicles?

    Some points to consider US-wise:

    (1) What trading volume was associated with these price swings?


    (2) If a substantial, market-shaking volume of market transactions was involved, what funded these transactions? Since all
    transactions are fuelled either with cash or credit. So was either a mountain of cash involved, or a mountain of credit?
    Which can be made available at short notice to panicky stockbrokers belonging to iffy firms, who in a climate of doubt can
    all be said to have dodgy investments to offload in a desperate bid to shore up their tottering balance sheet?

    (3) Are these temporary prices - all prices are temporary - being decided by bicycle repair men yelling into Motorola bricks?
    Or the bail-out candidates?

    (4) Have the statements of a presidential candidate regarding the frozen credit of "the nation's largest drive-in restaurant
    chain", cited as a victim of the credit crunch, proven to be slightly unreliable on the detail front (understandable in the spreading confusion) and had to be repudiated by the company itself? Maybe someone will be able to contact for confirmation the student going to technical college in Milwaukee who can't get a student loan.

    (5) Wherever the credit freeze isn't just paranoia, what institutions do these hyper-cautious loan officers work for? Do they
    work for the bail-out candidates (mainly, post-Paulson, now transferred and embedded in commercial banking conglomerates), or for those in a fiduciary relationship with bail-out candidates?

    (6) You're an honest loan officer, trying to establish a line with the international capital market on behalf of your decent,
    hard-working clients. If you were in the capital business, what would you do now? Loan the same money to asset-light Joe
    Public (and his regional bank) or into guaranteed, high-earning government securities coming soon to an international capital market near you.

    (7) On the nature of the fear seizing corporate officers, it must be noted that a warrant is not a stake in a company. It is a right to take up a shareholding in a company, exercisable at a strike price. So the State is buying a multi-billion-dollar right to buy shares in return for further dollars. The famous "stake" in the potential gains has been turned into a warrant. And the strike price is negotiable and likely to be quite non-zero. And no public official is absolutely required to even bother with obtaining a warrant. All in return for saving your bacon and high-powered job and your full control of the company. Come on. (Icing on the cake: Non-voting shares. One would have to wonder at the degree of "panic" in company boardrooms to hold out for niceties of that kind.) That is some impressive steely reserve.

    (8) Exactly how much money is the U.S. Government planning to suck out of circulation from the open market, to languish and wait on a 5-man panel to dole out again over the next six months?

    300 billion dollars. Five-man panel. Largest economy in the world*. Just as well it occurred to them a single man couldn't
    efficiently or safely handle it.

    A myriad of commercial banks, thrifts, mutual funds, county employee pension funds, manufacturers, corporate treasury
    operations like the finance arm of the Pennsylvania Widget Company, etc.

    The resource contention is going to be inconceivably fraught. It hasn't been done since Lloyd George or Brezhnev (neither of
    whose parties escaped defunct status).

    To recap: A giant big-bang bond issue. Six months or more to disburse the proceeds back into the market. And a structural
    incentive to play havoc with the money system to qualify for access to the next 400 billion. What could go wrong?

    P.S. Check out some US-way corporate mathematicians. What's their latest brief that cropped up during the past year? Instead of wargaming a flashpoint in the Korean penisula or West Berlin, they were tasked to judge the resistance/compliance of the US taxpayer to a sharp increase in the number of arbitrary tax demands. The PhD-festooned whiz-kids insisted the validity of the model couldn't hold up under the stresses posed on, say, residents of New York. Guess the governmental sources who requested the model went for some empirical data. The 'suit' presiding over the unit did bring up 'ethics' in that "have-to-mention-it" way. Wargaming the US public. Plus, now, non-voting shares. And stump speeches about farmers without a cash float for crop fertiliser. Is it possible that some people are completely out of control, acting without proper oversight?

  • Comment number 7.

    ...What trading volume was associated with these price swing...

    the volume is low so its not a wash out. Serious traders are sitting on the sidelines.
    We have to break the previous major high [say 6000 for ftse] for bulls to be interested again. Seasonally oct usually marks a low followed by the xmas rally.

    however given huge number of traders have been wiped out the market the old patterns are not as reliable anymore. which may explain why gold has missed its seasonal rally this year?

    the bottom will come when the wealth funds think its gone low enough and the consolidation of companies has ended and start buying bargains?

  • Comment number 8.

    Thanks for the update. Will the "Dead Cat Bounce" turn into the "Dead Cat Sink"?

    The question:

    Why can't they get the backing of the ranking minority Senator on the Banking Committee for this move? Check out his "we've chosen panic" quote. Or of key Ivy League Economics Professors? Is "martial law" really the next step if they can't buy diamond-studded dog-collars anymore?

    The upside:

    Some "quantum of solace" has been accomplished so far by a parliamentary system which admits scrutiny and requires assent:

    (1) Oil has dropped below $100. How much was lost on betting? On driving it up to levels a European airline boss described as
    unrelated to supply and demand and unsustainably high? And who lost those bets? And what previously funded those bets? Anyone need cheaper energy?

    (2) The direct bailout amount involved has been reduced, albeit leaving an "immoral hazard" overhang of another few hundred
    billion.

    (3) The President-come-January, whomever he is to be, had to come out and "explain" that the money can be expected to be
    recoverable in some measure and will prevent an uncomfortable degree of economic damage. Otherwise, the laconic assurance "...or could even turn a small profit for the taxpayer" will end up in a Groundhog loop with "Read my lips, no new taxes".

    That "or" will be edged off down the line, but both candidates have vociferously defended the measure. Now there is a
    modestly more acute need for it to end up being defensible. No one expects the incumbent to trouble himself with being in a
    defensible position in 2012, coup-like climate or not. But for his successors, the determination to prevent "Dead Cat Sink"
    will grow. Do they know the right moves? Or, to take the question of Sen. Richard Shelby today when the Senate passed the
    latest attempt at a bill, is support for this bill the informed decision?*

    * “To the extent other options exist, however, I believe we failed the American people by not examining them. And we are
    doing something in haste,” he said. “Many around here find comfort in the notion that something is better than nothing. I believe that is a false choice. The choice we faced was between pursuing an informed response, or panic. I think we chose panic.”

  • Comment number 9.

    Paul,

    "The limitless deposit guarantee is a sideshow, I think, because it's implicit already in the UK".

    I do not understand this. Can you explain for the less economically literate?

  • Comment number 10.

    it means the government would never allow a run on a major uk bank and everyone knows it

  • Comment number 11.

    Peanuts: Try this on for size:

    Global Derivatives Market now valued at $1.14 Quadrillion!

    The Bank of International Settlements, which seems to be the only institution that tracks the derivatives market, has recently reported that global outstanding derivatives have reached 1.14 quadrillion dollars: $548 Trillion in listed credit derivatives plus $596 trillion in notional/OTC derivatives.

    Yes, that is Quadrillion. One and 15 zeroes!

    http://jutiagroup.com/2008/07/24/global-derivatives-market-now-valued-at-114-quadrillion/

    Now if I were a tax collector I'd be suggesting to my legislators that trading derivatives might be a very cheap (to collect - like stamp duty), popular and just tax that voters might not cry about.

  • Comment number 12.

    I've ended up here because I've been impressed by Paul Masons stuff on Newsnight - we are'nt missing Steffi 'two brains' Flanders at all :-)

    One point 'mark-to-market' reminds me of the pensions FRS17 rule - it has produced some unexpected negative consequences and maybe should be modified such that pricing way out from the mean does not cause market distortions to occur.

  • Comment number 13.

    Furthermore, I think that in the last resort, the Government would use taxpayers money to take a stake in these banks.

    The rationale would be something like 'these bankers have proved to be somewhat untrustworthy, so we are going to protect the taxpayer by taking a stake in these enterprises and nothing will be permitted to happen without our explicit say so'.

    It has often been said that banks are a 'special case', so maybe they do need 'special handling'.

  • Comment number 14.

    I said Gordon Brown would be forced into matching the Irish solution, as soon as the Irish solution became known - it is a question of the way the market works.

    So also will the ECB and other European National banks. With a free flow of funds there is absolutely nothing to stop savings moving - except matching the Irish solution. The longer 'we' hold out the greater the potential fro catastrophic damage!

  • Comment number 15.

    The limitless deposit guarantee isn't a sideshow. Anyone with savings is going to be heading for an Irish bank and taking nothing for granted.

  • Comment number 16.

    What has surprised me is the number of bloggers on this site that has suddenly woken up to the fact that Capitalism is a dead duck.
    Harry Shutt, ex.EIU wrote in the '90's the "Trouble with Capitalism" and then in 2005 "The Decline of Capitalism" and even reading the first few chapters it is though you are reading the current tabloids.

    Therefore before you all blog on telling us something which we already knew but nobody wanted to hear, I suggest you get hold of a copy and start to educate youselves.
    just a few quotes:-
    "bad debts crippled the banking system" (Japan-circa 1990)
    "led to pressure on Governments to cut corporate tax levels severely and offer tax brakes which they can ill afford". Now where have we heard that, this week? Tory Conference and MFI give you a clue?
    "Americas new economy was shown to be a mirage"
    The whole book may have been written today in its predictions which have turned out to be totally correct.
    The tories locked in Labour into an economic sysyem it set up in the '70's and 80's as predicted in the book by John Ross "Thatcher and Friends" written in 1984.

    The Tories have the gall to blame Labour on a system they set up and much to its discredit Labour failed to modify or scrap.

  • Comment number 17.

    # 16

    I disagree and think that it is just this version of capitalism that is a dead duck.

    A shiny new 'interim' model will evolve and further down the line, another that is not based upon perpetual growth (assuming we have not escaped planet earth to exploit another place).

  • Comment number 18.

    Paul

    By "untransparency", do you mean opaqueness?

    Anyway, just for the record, I'm in the "we-ain't-seen-nothing-yet" camp. As I watch the contortions in the banking industry I take the view that either we delay the inevitable (by pumping cash into the money markets), or we bite the bullet (and let some banks fail).

    By "inevitable" I mean arriving at a situation where we live within our means (nationally and individually) and end the nonsense of living in a monstrous debt-bubble which bears no relation whatsoever to wealth created.

    Bearing in mind too that, as someone once said, to create wealth you have to dig it up, grow it or convert it to add value. Anything else is just moving it about. Since the British economy has involved "moving it about" for a long time (the so-called financial services "industry") we're going to get hurt badly in all this.

  • Comment number 19.

    PEDANTS' SOCIETY OR SOCIETY OF PEDANTS? (#18)

    That's a nice trap you have there Mark!

    I think the word you are groping for is indistinctitude.

  • Comment number 20.

    ma @ 18

    i agree "we ain't seen nothing yet"

    but i don't like it when people take a cavalier attitude about banks going bust. the disruption caused can be catastrophic for the economy if it is not allowed to happen in an orderly fashion.

    financial services are absolutely essential for wealth creation. you can't grow anything if you don't have access to water.

  • Comment number 21.

    !!!SECRET BBC TRANSCRIPT TO BE USED IN WAKE OF FINANCIAL ATTACK!!! (prepared by the BBC and the Cabinet Office in Oct 2008 and released in 2038 under the 30 year rule) http://news.bbc.co.uk/1/hi/uk/7648042.stm

    "This is the Recession Broadcasting Service. This country has been attacked with inter-continental financial instruments. Credit has been severely disrupted, and the number of casualties and the extent of the damage are not yet known. We shall bring you further information as soon as possible. Meanwhile, stay tuned to this wavelength, stay calm and stay in your own homes.

    "Remember there is nothing to be gained by trying to get away. We are in a globalized world. By leaving your home you could be exposing yourselves to greater danger of repossession. If you leave, you may find yourself without food, without water, without accommodation and without credit. Radioactive fall-out from toxic sub-prime loans and collateral damage from collateralized loan obligations which follows a credit explosion, is many times more dangerous if you are directly exposed to it in the open market. Gold and diamonds offer substantial protection. The safest place is in the Cayman Islands.

    Make sure gas and other fuel supplies are only sold at exorbitant prices and that all fires in the British credit markets are left to burn. If Chablis is available, this can be used for fire-fighting. You should also refill all your containers for after the fires have been put out, because the City bars’ alcohol may not be available for very long.

    Cash must not be used for flushing money markets: until you are told that it may be used again, other credit arrangements must be made. Use your cash only for essential champagne drinking purposes. Remember: Krug means life. Don't waste it.

    Make your stocks and shares last: ration your supply, because it may have to last for 14 years or more. If you have fresh shares in the house, use this first to avoid wasting it: stocks government bonds will keep.

    "If you live in an area where a devaluation warning has been given, stay in your negative equity room until you are told it is safe to come out. When the immediate danger has passed the sirens will sound a steady note. The "all clear" message will also be given on this wavelength. If you leave the negative equity room to go to cash point or replenish claret supplies, do not remain outside the room for a minute longer than is necessary.

    Do not, under any circumstances, go into the credit default swap markets. Financial fall-out can kill. You cannot see it or feel it, but it is there. If you go outside, you will bring danger to your family and you may die.

    Stay in your room until you are told it is safe to come out or you hear the "all clear" on the sirens.

    Here are the main points again:

    Stay in your own homes until the bailiff arrives, and if you live in an area where an economic fall-out warning has been given stay in your negative equity room, until you are told it is safe to come out. The message that the immediate danger has passed will be given by the sirens and repeated on this wavelength. Make sure that credit supplies are turned off and that all financial fires are left to burn themselves out.

    "Champagne and claret must be rationed, and used only for essential drinking and cooking purposes. It must not be used for flushing lavatories. Ration your food supply: it may have to last for 14 years or more.

    "We shall repeat this broadcast in two hours' time. Stay tuned to this wavelength but switch your radios off now to save your batteries until we come on the air again.

    "That is the end of this broadcast."

  • Comment number 22.

    Worrying isn't it. Government and opposition suspend the usual antagonisms upon which our democracy rests. Plans being laid which must involve taxpayer funds but no one is telling us the poor bloody electorate what is going on. The suggestion that Brown may be putting our whole future as a nation in hock to SWFs is chilling to the bone. The Americans have put us to shame. There, democracy has seen Bankers challenged and may yet scupper their self-interested plan to use taxpayers money to alleviate their self induced distress. Here our elective dictatorship allows government to ignore the people, keep them in the dark and do what it likes.....

  • Comment number 23.

    Hi Paul

    I have just drafted this as a letter to my local paper, the Leicester Mercury, but would welcome some comment from an expert.

    "The current crisis in the financial system puts ordinary people’s jobs, pensions and savings at risk, through no fault of their own. For this reason government intervention is clearly called for, but lets not allow the bankers to blackmail us into bailing them out, with the false suggestion that this is the only way to prevent disaster for ordinary people, which is what seems to be happening in the US.

    The US “rescue package” will save rich bankers from the consequences of their own greed, by using vast sums of taxpayers’ money to buy up worthless debt, at way above its market value. Many US Republicans, at least being consistent in their free market beliefs, have opposed the plan on the bizarre grounds that bailing out rich bankers is somehow “socialist”, but it doesn't have to be a choice between doing nothing, or rewarding greed.

    Rather than handouts for bankers, governments could take advantage of the crisis to take over failing banks for next to nothing, including still profitable assets. They could even seek to deliberately drive down the price of bank shares even further, by announcing their intention to buy just enough shares to take overall control and to then pay no further dividends to any remaining shareholders. This would then allow them to abolish obscene bonuses, guarantee ordinary people’s savings, make investment decisions in the interests of society as a whole and use all future profits to the benefit of us all. This could include protecting the pensions of those whose pension funds had shares in failing banks, but could also include ensuring decent pensions for everyone else as well.

    Given that uncertainty and cash flow problems have probably driven the short term value of many assets below their long term value, the tax payer would be getting a bargain and, although some of the mortgages being taken on would be defaulted on, in this country many would be on speculative buy to let properties, which could be repossessed and made available for social housing. Owner-occupiers in difficulties, on the other hand, could be dealt with sympathetically.

    In the current climate the security provided by state owned banks would also help relieve liquidity problems, by attracting depositors from other banks".

    Malcolm
    Leicester

    P.S. I thought that Live Working or Die Fighting was great and have been recommending it to everyone.



  • Comment number 24.

    I know what is really happening:

    ** Our entire debt based monetary system is a pyramid scheme and it is collapsing **

    Please view these videos here:
    http://www.silverbearcafe.com/private/moneyasdebt.html
    http://video.google.com/videoplay?docid=7065205277695921912

    The real leaders, (not our elected officials) have used this pyramid scheme to control society and syphon off wealth for hundreds of years.

    Please watch the videos above, and educate yourselves.. before our leaders start Bretton Woods III and install another global solution and power base.

    Open your eyes.

    Please.

 

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