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