Banks' big bailout
The Bank of England's Special Liquidity Scheme has rewritten the rules of how it provides help to the banking system.
First, the scale of the financial support it's providing is immense. It says discussions with the banks suggest they will initially swap about £60bn of their mortgage assets for nine-month Treasury bills worth around £50bn. But the banks tell me that in the coming months they expect the swaps to rise to well over £100bn
In other words, the Bank of England is becoming the market for mortgage-backed securities. This is a banking-market bail out of an ambition we haven't seen in this country since the early 1970's and possibly longer than that.
Also, this is no quick fix. The Bank of England is no longer hoping that all will be back to normal in a matter of days or weeks. The support will remain in place for three years.
The scheme is so substantial that the Bank of England has had to be indemnified. So taxpayers will be at risk.
But the primary purpose of this scheme is to prevent another Northern Rock. Or to put it another way, taxpayer support is being provided to minimise the risk of huge future losses for taxpayers from another banking collapse.
It's a crisis measure to prevent the mess in money markets precipitating further financial calamity and a very serious economic downturn.
But it won't lead to a sudden re-awakening of banks' desire to lend as much to us as we want as cheaply as we want. Credit will remain relatively tight.
And don't expect the downward trend in house prices to be reversed.
UPDATE 10:40: I forgot to mention that banks can also swap their credit card loans for the Treasury Bills - which underlines the magnitude of what is being attempted here.
As expected, all these loans - mortgage ones or credit-card receivables - will have to be converted into AAA-rated securities before they can be swapped for Treasury paper. But that's a relatively straightforward technical process.
But all these mortgages and other loans will only be eligible for the swap if they were made before the end of last year - because the bank does not want to use public money to stimulate new lending, only to replace the funding that disappeared when money markets seized up last August.
UPDATE 11:44: If this liquidity scheme had been in existence last summer Northern Rock would not have been saved by it - or so the authorities are saying. Why? Because it was too dependent on the sale of mortgage-backed securities, in the Bank of England's view.
Or to put it another way, its business model was too risky - and therefore the Bank of England would not have given it access to the mortgage-for-bonds swap (even though the Financial Services Authority was desperate for the Bank of England to provide just such a bail-out).
I'm 
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This is amazing.
Far further than was ever needed to provide limited liquidity to Northern Rock before the bank run.
The incompetence is monumental.
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There is no credit crunch for the UK banks if they wer not so greedy.
If I could get 6.5%AER paid monthly on call and without penalties from a big 5 bank, I would move my money from the ING etc tomorrow.
In Australia you can get 8.2%APR (higher than the Aussie libor). This is from an instant access cash management accounts and it is paid monthly.
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To paraphrase bill maher, if you default on your mortgage you're a deadbeat, if you default on a ten thousand mortgages you need a bailout.
Unbelieveable.
One rule for..
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Moral hazard be damned!
The report mentions that "Financial markets are not working normally", but during the period where the markets were dominated by "irrational exuberance", there were no measures proposed by the Bank of England to bring the market back to earth.
I am gobsmacked at the fiscal shortsightedness of this measure, effectively kicking the problem into the long grass as taxpayers shoulder the risk burden built up over years of overlending by the banks.
What we have witnessed is a normal functioning of the credit market - a retrenching of the price credit after a period of largesse. What we are also witnessing is the Bank of England furiously rooting around in the cellar then demanding the taxpayer off license open early so that they can buy more free beer to keep the party going.
In centuries past there would have been riots on the streets. Look up the 1815 Corn Laws for a precedent.
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I don't understand this, I didn't buy a house, I was responsible, not greedy. I was priced out of the market by greedy, irresponsible lenders (and borrowers). I am a taxpayer, but why I am I being asked to pay for other people's mistakes? Let the market correct itself, so that we can quickly return to economic normalcy, please?
Please allow proper natural consequence, an economy with government funded bailouts when things go wrong is immoral and distorted. You can't always just have the good, when things go wrong, then investors must feel the natural consequence of their actions.
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Before the Bank of England accepts the banks mortgage assest they should agree a mortgage risk category system and then only accept new mortgages and re-mortgages from the top tier. The Bank of England should also have the right to call in the swaps at short notice. Such measures would ensure the Bank of England have a sophisticated enough tool to control their lending of last resort.
By only accepting new mortgage business as security the Bank of England will be able to protect themselves from having fast-track and other sub-prime loan books dumped on them and it should encourage lenders to offer new deals and compete again effectively for new business.
When the Fed began accepting mortgage backed securities, a hedge fund that owned them with money loaned from the banks had their loans called in and assets seized as banks were better off taking those mortgage assets and putting them with the fed. Such unintended consequences only harms investor appetite for mortgage backed securities.
Insisting on a new tiered mortgage rating system should go someway to restoring investor confidence and allow them to be traded and benchmarked against each other and by only accepting new mortgages the Bank of England could then stimulate sectors of the market that need more help, such as higher LTV products for first-time-buyers.
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Whilst the Bank of England begins its proposed £50-100 billion bail-out of the banks.....
What do you think the impact, financial, political or otherwise, would be, on the banking sector, 'if' it became known that one of the Banks has committed serious criminal acts, viz. the forging of client mortgage statements to cover up false accounting and unlawfully concealed charges, which in turn inflates the Bank's profitability base ?
And 'what if' that Bank then used contrived and falsified evidence, even before the Court of Appeal, in order to prevent a landmark judgment against the banking industry ? The result of which would lead to £100's of millions in refunds to secretly overcharged customers !
How far would the FSA and the authorities conspire to ensure this scandal never came to light ?
Should this be dealt with first - before the bail out by the Bank of England - to relieve customers from unlawful undue debt ?
Kenny Aymes, London
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Agree with Post 3. The old truism seems never more apt.
Owe the bank a thousand pounds and worry about the bank, owe the bank a million pounds and the bank worries about you!
Owe the bank a billion pounds and Gordon Brown worries too!
If the bail out can include credit card loans then things really are bad! Just how many people with 0% deals won't be able to get them and will take out an IVA this year? I imagine tens if not hundreds of thousands.
It would appear cash is once more King.
http://news.bbc.co.uk/1/hi/business/7357940.stm
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Again it seems that the city looks after its own at the expense of the people.
Will we as a society every have the courage to curb these city slickers from stealing our money - now even our elected government has proved itself incapable of standing up for the interest of the people.
There must be a quid-pro-quo of curbs on the appalling excesses of the banking industry otherwise the people who have lost their 10% tax rate end up financing the millionaires in the city!
I await to read full details of the scheme with interest and I only hope our, so far supine press and news media, stand up for the people - something that neither Brown nor Cameron seem willing to do.
1968 was not long ago and it is still in living memory and unless our elected politicians act in the best interests of the whole of the people I fear the consequences.
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It seems that a lot of emphasis has been placed on the fact that only "AAA" debts will be considered, but as I understand it, part of the credit crunch problem was that sub-prime loans were repackaged/bundled and mistakenly categorised as "AAA". What steps will the BOE take to ensure that they are really "AAA", or they to rely on a third party's recommendation?
It is no wonder the banks are so happy with the proposal - The BOE will enabled them to hide their losses under the guise of "AAA", so both the taxpayer and shareholder are shielded from their incompetence.
Another piece of creative accounting straight from the government spin machine.
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Oh dear!
I can't see this going down well with the public who often feel fleeced by the same banks that are now accepting a massive slug of the nations finances, to save them from their very own incompetence. The lower paid, made worse off by the removal of the 10p tax rate will be delighted at the prospect.
And if it doesn't work they receive further bail outs - incredible.
It is time the politicians and the BoE set out a limit as to much public money they are prepared to risk in order to prop up banks from their own irresponsible lending as well as supporting the housing market and whether the level of financial support provided by the state will be matched by shareholders.
The benefit to borrowers and mortgage holders also appears negligible - can't see any prospect of this leading to lower rates, perhaps just lower saving rates as the need for capital is reduced.
A very sorry state of affairs! For the Labour Party's sake this has to go well otherwise the next General Election will be a total disaster for Brown.
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Robert,
Would it be possible to speculate in a blog the real alternative to all this and its consequences. ie. imagine a full-scale meltdown or crash of the international banking system?
Do we know exactly who we are protecting in all this. Would everyone be left worse off if the banks collapse or just savers and property speculators?
Would all the personal debt that has been built up be wiped out or would the liabilities of the institutions as well as the assets be sold or passed on to the government or future bankers?
Would the banks or the government have the right to force possesion of people's houses to realise these assets to cover their own unmanageable debts?
Are we all going to end up as Chinese citizens, economically if not politically?
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I'm worried and confused. Why are banks getting what seems to be a huge big bale out? (but actually isn't apparently enough according to some to make any difference). Why won't it make any difference to people like me trying to get on the housing ladder? (I thought that was partly the purpose behind it).
While feeling incensed and confused by all this, I realise there is no benefit to the general public by making high street banks go to the wall. If that happens everyone will financially suffer for the bank's greed and incompetence.
Retribution would therefore seem to be pointless, if we actually want to make things better for everyone. But perhaps I've missed something...
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The shareholders have had the benefits of risk-taking ownership by way of dividends and share price. If the banks need more capital and cannot sell assets, they should be canceling the dividend and asking the owners for more capital.
Taxpayers are not risk takers and do not partake of the rewards.
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I don't claim to be a financial genius, but as I understand it, this whole credit crunch/crisis was caused by the World's banks buying and selling packages of dodgy mortgages?
How will the problems be solved by the Bank of England doing precisely the same?
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There is no doubt that the Government and BoE needed to act to frre up a market that has frozen itself rigid due to a fear over the quality of the debt banks have taken on.
However, as other commentators have said the support for the banks, a better word being largesse is distasteful. Gross incompetence and greed has led to worthless debt being packaged and dealt across the globe by bankers who swept up vast fees and bonuses in the process.
Governments blinded by a free market ideology did nothing except when that ideology was seen to be utterly false and lo' and behold government intervention suddenly is actually quite a good idea!
And one last comparison, fare pack! The poor actually commit themselves to thrift saving a regular amount from a low income base and get ripped off (free market so one cannot intervene!!) and then just to add in some salt they are abandoned by the government in terms of compensation. Disgraceful.
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I can't concentrate at work this morning because I am so incensed by these developments. I'm absolutely furious.
To echo another commenter, I have been prudent with my borrowings, I haven't maxed out any credit cards and I haven't got any debt other than a modest mortgage. Yet I, as a tax payer, am now going to bail out the idiot banks and the idiots who have lived beyond their means.
It's a disgrace without precedence and if this doesn't bring this government down I'll eat my hat.
Quite incredible.
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Outrageous, social justice completely distorted. Maintaining the interests of the rich/irresponsible and simultaneously using the additional taxes gained from the poorer taxpayers to fund fatcattery.
How can we have faith in such a political system?
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A Treasury source was quoted on the front page of today's Times as saying Mr Darling 'wants to do everything he can to help people get on the property ladder'.
Well stop meddling and let house prices fall then!
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Well, well. A Labour government bailing out the inept financial institutions who no doubt will continue to pay themselves billions in salaries and bonuses. Funny old world. And the rest of us pay more tax, and bear it. Better a credit crunch, reduced consumer spending, and a realignment of the economy, even if it does involves some painful readjustment. It has to come eventually anyway. But Government does not want the pain until after the next general election. So much for Prudence Brown. Do we really get the politicans we deserve? What have we done to deserve New Labour?
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Isn't Jackchad007 the greedy one? He wants the banks to pay him a higher rate than they would pay another bank for borrowing the money on a small account he can chop and change on a daily basis? So a bank can borrow say £100 million at 6% from another bank but actually they shouldn't be so greedy and should borrow lots of small amounts of money from the likes of jackchad007 at 6.5% ?!!!
I think Crash_Gordon has the pulse of this crisis spot on. Look at any bank's balance sheet: they borrow from customers and they borrow from each other. Now they're less willing to lend to each other and they're also worried that when they need funds the money won't be available. So they're all paring back. Base rate has become fictional, house prices are falling and the government want to keep the party going.
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I didn't realise if i made investments in property and risk-taking banking equities my investment would be protected by the government.
Lack of consequence is a huge problem here, they (banks) win we (taxpayers) lose, or we both lose together.
Merely offsetting a problem to the tax-paying public, looks like a mess the tories will have to sort out.
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Having looked at the BoE news release and briefing note, it seems that their terms for accepting swapped debt from the banks are reasonably severe?
Having learnt about CDOs and SIVs, the general public are now going to have to understand about 'haircuts'.
Robert, are the BoE's proposed levels of haircut sufficiently punitive? Or will bankers be laughing their way to the barbers?
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The High Court has not made a decision on the bank charges yet, Guess What? It is all going to go, in the favour of the banks.
When are people going to learn that the banks run the Government?
The government is not helping the banks? there letting you think they are just to get paying back all the charges to customers. The banks and the government have created a false credit crunch to miss lead the public.
Wake up and smell the coffee!!!!!!!
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and yet again..this morning the tv is flled with rubbishy..not to say dated property programmes!!!!!!!!!
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I thinks its digraceful Government bailing out banks. They were trying to increase their profits and bonuses, it went wrong so why should we now step in? Is anyone in the banking secter going to take the blame?
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How about bailing out the poor mugs who took out endowment mortgages 20 - 25 years ago with the promise it would pay off ALL their mortgage and leave them with "a nice little nest egg" these are the people we need to be helping not the greedy banks who funded this deceitful practice.
My mortgage is coming to the end of it's term in a couple of years and my endowment won't even cover half of it I'm left to find a lot of money at a time in my life where I don't have the prospect of earning a lot of money.
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If anyone knows somebody with a LLoyds platinum tsb credit card, inform them they are being upgraded to the air miles / American express card without there permission. I bank online so I spotted it this morning, They are transferring money owed on the old card to the new card which has a new number. So your getting an extra credit card even if you do not want it. They will change it back, but they were quite sulky about it. I am curious to see if there are any charges on this action.
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Robert - in your view, does this means that the situation is now controlled or at least adaquately contained? I know 9 month paper keeps it off the government's books, but does the timing have any further significance?
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Hoorah! We have a country in the grip of a credit crunch brought on by the "generosity" (read greed) of the banks. When they run out of money because they where to "generous" (read greedy), what happens?
The governments and central banks and traders worry about what? "The state (read direction) of the economy". Is there anyone worried about the people living off borrowed money (read time).
Is there anyone worried about the fact that our country imports more than exports and the cost of this is mounting up in mortgages and credit cards.
Has it not occured to any of these useless decision makers that they can't build a sustainable business on debt.
They should be bending over backwards to turn England into a producer not a consumer. This is the way forward not bailing out irresponsible lending (to promote more consumption)!
This is really bad form (But not very surprising).
Frankly I think the government should be absolutely ashamed of themselves as they are twice as bad as any business. More than likely they need us keep spending so their shameless waste of tax payers money can continue, on budget. How emabarrasing would it be if they broke their own fiscal policy by borrowing irrisponsibly (on Taxi's and family wages).
People have been saying for years that house prices shpould be part of the inflation indicators. It takes this before they think it it might have been essential!
It takes money problems!
What about family problems? Mortgages (read debt in general) should never have been based on two peoples earnings.
First and foremost this inflated house prices. Now the next generation cannot get on the housing ladder.
The killer knock on effect is this. It changed two people working from "a lifestyle choice" to an absolute necessity.
The family unit has suffered (just how many are left?). Future families will suffer. Does anyone worry about this, or is it all about money?
Bottom line. With the biggest houshold expenditure being the house itself this was where debt needed to be controlled the most. It's no coincidence that it took a housing crisis to start a global credit crisis.
I say let the housing market suffer, learn an important lesson, correct the mistake. After all EVERYONE needs somewhere to live.
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Banks should only receive money on this basis where:
(1) The value of the swap is substantially lower than the face value of the loans they are swapping
(2) The rates reflect the risks
(3) The directors of the banks are held personally responsible for the debts - they often demand such security from small business people.
(4) No further bonuses or large salaries are paid to the directors of the various banks
The is communism in the form of capitalism, except that it is the rich who are receiving the greatest benefit.
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The end is nigh! At least RBOS are doing the decent thing and going to the shareholders to bail them out. Why should the taxpayer bail out the excesses of the banks? Never thought I'd see the day a labour govt would bail out banks with the 10p tax money from the poor. Unbeleivable
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Unbelievable! For years these banks have been overlending and mismanaging with the government happy to sit back and marvel at its economic miracle.
Along comes the crash, and its financially astute people with no personal debt such as myself who are being called on to bail people out through taxes!
Hey Gordon, do you want my pension too? There's not much in it thanks to you and your BoE lackies so called IR management.
I have a jar of 2p's too somewhere, and I am sure there is a 50 pence piece down the back of my sofa. It's yours. The economy is screwed Gordon, you can try to fudge it this and that, but you are just doing a GTPE (Giant Turd Polishing Exercise)
With every boom there is a bust, history dictates Mr.Brown. Let it go. Let the natural correction occur, let the greedy and stupid suffer. As for you, resign, go home and write your PM memoirs (should fit in a pamphlet), relax, watch American TV.....
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I see nothing here about the banks agreeing to curb their greed or ludicrous bonus schemes that encourage gambling with little thoughts of the losses. Neither do i see that the senior management will lose any pay or perks:-( so where's the incentive not to do it all again next time round?
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It looks like there is pretty much uiniversal disdain for this move by the Bank of England. I have to agree, what we are seeing now in the credit markets is a natural reaction and reversal of the excesses of the early 2000's. On a global basis, the reserve banks and commission driven brokers provided too much credit, too easily, to too many people with scant regard for their ability to pay the debt back.
Explained another way, what we are seeing now is the first stage of a cocaine addict coming down from his/her high and having to re-adjust to normality. By providing addtional 'cocaine' the BofE is merely prolonging the painfull process of normalisation.
I also object to the BofE playing loose with my tax so that bonuses in the city can be maintained.
But hey, by nationalising Northern Rock they have done it before, so what's new?
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This is a £50 billion to bail out banks who continue to pay huge bonues despite failure, and who do not raise more capital but prefer taxpayer subsidy, and who continue to pay out healthy dividends to the rich and wealthy.
In contrast, my 80 year old mother suffers because she is prudent but has a modest income - and the 10% tax band withdrawal hurts her.
Is this really a LABOUR government?
Is it ethical and legal to forfeit prudent policy in order to try to buy an election win through huge lendings designed to defer/mitigate house price falls in Labour strongholds?
disgusted!
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While there is some justification for supporting the banking system in the current crisis, I don't see why the banks should not be penalised financially in some way for any scheme underwriten by the taxpayer. There is simply no incentive for banks not to set out on another lending spree once their asset bases have recovered. There is no mention of increased regulation as a quid pro quo for the taxpayer underwriting some doubtful debts.
The lending excesses in the banking sector have been so great that the economy has been put at risk of a major recession and the government sees no other strategy but to bail out the banks - moral hazard lives!. The banks, not the Chancellor and the Treasury, seem to rule our economy, and they know they can hold the Government to ransom - so much for democracy.
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The message here is that if one bank is greedy and incompetent it will be, in effect, nationalised and its senior managers will do very nicely out of that deal, by and large. Yes, the shareholders will squeal too but no-one will be unduly disturbed by that.
However, if a large part of the financial services sector is greedy and incompetent it may rely on the government to exploit taxpayers to protect it, and shareholders, from itself.
Is there any risk a bank can take that would rebound solely on its board, management, regrettably its employees and its shareholders or does the 'law' of the market not apply to them?
How about a large proportion of future bank profits being paid directly to taxpayers in respect of their involuntary goodwill involvement in bailing out the system today?
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how a government can reward the profligacy of the banks with tax payers money is beyond all reason. the banks gambled and lost, if i stick all my money on the 3.30 at Plumpton and lose will the government to make good my loss?
lets face it there is only one reason for this bailing out of the greedy banks, that is to try to preserve gordon brown's reputation as the "greatest chancellor" in reality he was one of the worst chancellors and is is showing no improvement since becoming PM.
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What beggar?s belief is that Gordon Brown, who was Chancellor while the seeds of the current crisis were being sown, was apparently blind to the inevitable consequence of greed and debt that seemed to stave off recession ? until now.
While "We" wait for a surge in unemployment to deliver the Coup-de-Gras "He" may like to consider Stable Doors and Bolting Horses.
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Hmmm, such poor publicity for conventional banks eh?
Maybe more folks will take a look at some of the alternatives now.
For instance, 'virtual' banks on the web e.g. Zopa, which rather neatly cuts out the middleman i.e. a conventional bank.
I predict we'll look back at this age and see that it was the beginning of the end for conventional banks.
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Well I don?t know what a shambles, the banks have been making billions of Pounds a year out of its customers, and now the taxpayer is expected to pick up the bill for the greedy ways it has done business, we were always told to put a few pounds away for a rainy day. Perhaps the Banks and the government should heed this advice
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House prices look as though they might drop 10-30%, so the Bank of England intervenes to try to stop that happening by releasing liquidity into the mortgage market.
Can we assume that when we get to the next boom and house prices look like they will rise 10-30%, the Bank of England will step in and take liquidity out of the market?
Of course not, that was the sort of thing we did in the bad old days when the Bank controlled the credit in the system.
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Robert, will we see you laying into the BOE/GOVT tonight on the news? Or will they get an easy ride.......again!!!?
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I doubt I'll ever fully understand the technicalities of this. I doubt we are meant to any more than anyone can ever understand how credit card interest works.
What I do fully comprehend is that there are a group of bankers based all over the world who have made millions, if not billions before the brown stuff hit the fan. They get to keep it, pay little or no tax and sun them selves somewhere safe. While the tax payers of the UK and the poorer families in the US being kicked out of their homes, go short. In the UK it's mainly buy to let lenders who didn't do their due diligence who are loosing money here but in the US it's familys right on the breadline being made homeless.
Banking has become another word for piracy and, basically stealing from the poor to give to the rich. It's way out of control and the UK is not going to be able to keep the bankers in their bonuses forever.
I am beginning to believe that without some proper revolutionary behaviour from the citizens of this country, a restructuring of the money markets and possibly sacking this government there will be an even smaller percentage of the world in pocket.
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So the BOE is taking credit card loans as collateral but considers the case with Northern Rock to be special because they relied too much on mortgage backed securities.
Pardon me if I'm obtuse but does it mean that the BOE considers mortgage backed securities to me more risky than credit card loans?
Unbelievable.
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Having read the BoE details, the scheme doesn't sound like a hand-out to me. The BoE imposes a heavy haircut on the securities swapped (10-30%), the banks themselves have to replace securities that become lower rated than AAA, and (this seems especially significant) no securities backed by US mortgages will be accepted.
There are risks for the taxpayer, but controllable if the BoE's spiel is to be believed. If anything, I suspect the banks might not find it sufficiently attractive to take advantage of.
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Typical Peston.
He is fueling problems in the economy much like northern rock. He is so doom and gloom.
Why does not he present news with balance and unbais.
Much like todays news.
Take a chill pill
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DOn't be decieved and make this a Labour/Tory issue. It's not even a government issue.
To the poster asking if it would be better to just let things crash and wipe out debts, I suggest you learn a bit about how money is created. Our entire finance system is based on debt, as this move shows. There is nowhere near enough money in the world to payoff all the debts in the world, no matter who's money or debts you're talking about.
Effectively, a customer went to the bank to get a £100k mortgage which should be borrowed from the bank. Instead, the banks can take that mortgage note and swap it for £100k of government bonds.
The government is obliged to pay interest on it's bonds, so the banks are in a total no-risk situation. If the customer defaults on the mortgage they don't care, as they have the govt bonds and earning the interest off them (which again is taxpayers money).
And where does this money come from? The govt doesn't have £50bn lying around, so they have just dumped £50bn of made-up money into the system. Inflation, anybody?
Be afraid people, be very afraid. We've been living beyond our means for far, far too long and it's now starting to unravel.
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"Robert, will we see you laying into the BOE/GOVT tonight on the news? Or will they get an easy ride.......again!!!?"
Unlikely, given the BBC is in effect state media. They will never criticise the government to the required level, because the government can just threaten to remove the licence fee. I wonder whether this will even get posted.
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A prediction :
12 months from now most of the major UK banks will have spokespersons on radio and TV shows explaining how the fact that they made 4.5 billion pounds profits in the past year was both fair and reasonable (and good for everybody). Mark my words !
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I've never any comment before on any website, but this bailout of the banks has made my blood boil.
Over the years I have acted diligently and with prudence, I live within my means. What reward do I get for such responsible action? - NONE
The BoE have reduced interest rates. As a saver I now get less, as a house buyer this encourages prices to rise and remain unaffordable. Result I can't buy or have to take out a large mortgage.
Why should the taxpayer bailout banks and individuals as a result of their greed.
If banks are that desperate for cash, the dividend should be cancelled and the salaries and bonuses of senior managers cut.
Let banks and individuals pay for the consequences of their greed, not me!
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For the Govt its not really a question of bailing out the banks with taxpayers money but trying to bail out the taxpayers out with newly created money.
Probably its the right thing to do in an awful situation
The real scandal will be to allow the architects of this calamity to escape home and dry with their outrageous, ill-gotten gains The law should be employed imaginatively and ruthlessly to hound these people into penury and/or jail.
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Gordon save our gracious Banks
Long live our noble banks
Gordon save our banks
Send them victorious
Happy and filfthy rich
Long to reign over us (and you)
Gordon save our banks.
(there'll be a nice job waiting when you finished at no 10..nudge nudge)
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This is communism in the form of capitalism, except that it is the rich who are receiving the greatest benefit.
So no change there then!
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The current 'Credit Crunch' was American made by greedy investment bankers on Wall Street. The effect on the American homeowner is akin to a financial nuclear bomb with the human misery every bit as devastating. The subsequent radioactive financial fall out is being felt on a global basis.
The banks have proven once again they are not to be trusted as they continue to put the interests of shareholders ahead of the end user. Ridiculous short sighted lending policies, LTVR's and the desire to make hay while the sun shines is exactly the same mindset that preipitated the Dot Com crash.
Until mortgage lending policies are standardized throughout the mortgage lending industry this cycle of greed will happen again. In regards to bailing them out - I would make this conditional on the banks implementing a 1-year moratorium on foreclosures to give families the time to adjust with dignity to these unfortunate new realities.
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from march 2007 .....
"Despite the US problems, HSBC's profit performance brings the combined pre-tax profits posted by the "big five" banks to £37.3 billion in the past two weeks."
thats right, last year the top five Uk banks posted £37.5 billion in pre tax profits! So why is the british taxpayer now having to bail them out?
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I agree totally with points 17 and 27
As Joe Bloggs in the street the control that the instituitons have to inflict whatever penalty on the individual that they deem fit should you make a mistake or behave as they determine irresponsibly is something we just have to accept. The institutions however make a mistake or behave irresponsibly and yet we have no recourse and worse still we are expected to bail them out so that they dont suffer at all.
"The banks are now paying a price for what's happened before. They are going through a painful adjustment"
Mervyn King, Bank of England governor
What a joke! What painful adjustment?
I had a friend who made a mistake and behaved as some believed irresponsibly and she was made Bankrupt now SHE IS having to make "a painful adjustment"
She was told by these institutions that when she was doing very well and making huge profits she should have made provision for the tough times and she now has to live with the consequences as no one was there to bail her out.
I would say the same to those institutions, you should have made more provision during the good times for the tough times as we are not going to bail you out!
She lost out on the value of an endowment that would have allowed her to bail herself out. Where were the financial institutions that mis sold her that investment when she needed them.
Are they going to go Bankrupt are they going to lose their fat cat bonuses are they going to lose their big houses and big cars...I DONT THINK SO!
So now as a taxpayer again she is expected to bail out the institutions that showed her no compasion or tolerance, how gaulling is that! She made a mistake and had to pay for it. The Banks have made a mistake and she along with the rest of us pay for it. The injustice makes me so angry. Will we get a share of the profits when they find their feet again.....NO CHANCE !!
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Why should the taxpayers bail out the Banks?
After all, the big banks only paid about £10 bn in tax from profits last year, leaving aside the income tax paid by their employees, VAT etc.
Let's punish them and that'll mean their profits will be well and truely clipped. The hole it makes in the exchequer can be easily filled by putting up everyone else's taxes.
When will the idiots the have posted blogs to date stating how outraged they are, actually put their brains in gear and realise that, yes the banks have made big mistakes, but allowing the markets to seize up won't help anyone.
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So now the bank of England has a another mandated responsibility. As well as keeping headline inflation within one percentage point of the 2% target, they now also seem to be tasked with keeping House Price inflation at the target rate of 10%!
And for some reason the people who are ruling the country think that this is sensible.
The mind boggles.
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Darling says 'I cannot change the budget'...unless you are a non-dom. King, well, what was he doing last year. The Bank collapse started to surface 18 months ago. Brown, well lets take 7B pounds from the poor and give 100B to the 'Non-Risk Taking shareholders who will get a dividend at the end of the year".
The level of incompitence is really staggering. Oh, I forgot the bit about cheating the expenses, who was that now?
We used to have words like honesty, integrity, proffessionalism, competence....and the most magic of them all responsibility.
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I am a straightforward guy, 39 single and without kids. I would like to buy a 1 bedroom flat in South London in the area I was born and brought up. I earn around £20,000 pa in training.
I am completely unable to begin comtemplating having my own roof over my head as lending and property prices have been allowed to escalate for 10 years plus, far outstripping earnings.
When a country (government) abdicates responsibility for the well being of everyday people it begs the question, whom does government serve?
I am a pretty easy going person, but I am increasingly incensed by the mismanagement of ministers and greed of those in the property market. I am not a radical by nature, but I would now seriously consider taking up this cause or lending my support to remove this system of government from power (both Labour and Conservatives seem culpable).
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The B of E's intervention (actually, it isn't really the B of E: it's the Treasury) is justifiable only if you believe the credit markets are in some mysterious sense "frozen", and that capital markets are mysteriously "not working". But none of this is so. Global capital markets are broader, deeper, and more ruthlessly efficient than any of us can begin to imagine. The banks are broke. End of story.
Sovereign wealth funds have massive holdings of government debt; their collective balance sheets dwarf the balance sheet of the B of E. If swapping this debt for mortgage based assets was "risk free" then the sovereign wealth funds, and others, would be doing it. No need for the B of E. The fact that they are not doing it means that it is insupportably risky. But it is only risky if the banks are broke AND mortgage based assets are still massively overvalued. So, at minimum, the banks are broke.
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Armaddeus - you are so right.
A moratorium on forclosures as part of the deal would be both sensible and at least have a veneer of social responsibility.
That is the most sensible suggestion I have seen for a long time.
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Unfortunately the banks and financial institutions have failed to see themslves as providers of a service.
Bank are an essential part of our commercial infrastructure, providing support to the wealth makers in our economy.
We the tax payers who are now supporting the banks. The insolvent banks should reap what they have sown and suffer the punishment they have meted out to manufacturing sector during the UKs transition from once a great manufacturing nation to a provider of State backed financial services.
Let the fittest survive and put the insolvent to the wall.
The question now is who's running the asylum.
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I have a cheap fixed rate mortgage on my home - so I have benefitted from the "greed" of the wicked banks when they have competed too fiercely over the last few years for all the closet Socialists on this blog.
If you read the terms of the bail out ( and don't just accept at face value the biased reporting that appears in the media) you will see that the risk to the Government is minimal - and it stands to make a profit of over £100m/year from this (ignoring any beneficail effects on the economy that may be created by this).
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So much for an independent Bank of England.
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I thought if you made bad business deals (ie gave out high risk loans) you have to accept the good and the bad. It now looks like this goverment will help you recover from mis (dare I say greedy) management. As a 40 something voter I have lost all faith in the running of this country and probably will never vote again. It is one rule for a select few and joe public has to struggle with the normal rules and struggle to pay the ever increasing cost of living.
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Bring forth the guillotine.
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I have no problem with the BoE intervening to stop a systemic crash as that would be in no one's favour.
BUT - it shouldn't be a cost-free bailout. There should be a large haircut on the loans as there can be little confidence in the rating system. Plus, if banks can still pay out dividends they are not short of money - therefore, any bank that takes advantage of this should be unable to pay a dividend until bonds are returned.
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One (very important) thing that hasn't emerged in any of the informed comment about this issue is whether this facility is being restricted to UK banks only.
Bearing in mind finance attracts some pretty sharp characters, I don't like at all the idea of the UK tax payer being exposed to risks at banks in other countries.
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#59
The markets are seized up, but not because of themselves, it is the banks that are the problem.
Lies, lies and more lies... They cannot be honest and own up to how much of a hole they have gotten themselves into.
The problem as is, has been driven by the banks, their ineptitude and greed. That is why you see the strength of feeling against Robert's blog.
Taxpayers are angry because it is an unjust double standard, and the use of our taxes.
You mention £10billion in corporation tax... Whose money was that? It was mine, it was yours, it was everybody's who has a bank account before it was leached away in charges and margins...
A previous poster mentioned the £37.3billion in PROFITS made by banks to March 07, that is PROFIT!!!! The £10billion tax you mention should be an awful lot more than that, it should £100billion in taxes. Banks have leached on the consumer during a time of easy credit, perpetuated by the banks, and now it has gone wrong, they expect the very people that they have been ripping off for the last decade to bail them out!!!
I suggest you think carefully about calling people idiots and look in the mirror beforehand.
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I'm sure that this has been mentioned before.
The banks took greater and greater risks as they looked to extend the credit boom over the past 3 or 4 years. This strategy has now failed and the banks are suffering as an effect of the risks that they took. Thats business I'm affraid and as much as I don't like to see people suffer or businesses fail if they took the risks the consequences must be accepted by the banks.
I agree that help should be given to people who are suffering as a result this looks like it's purely bailing the banks out and I wonder how much will be passed on the people.
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Isn't this just window dressing? Swapping zero weighted assets for 50% weighted assets? Presumably they, the Government, want banks to be able to continue to lend even as their capital base is eroded through write-offs. What was the point of the Basel agreements?
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Redistribution - every plus has a minus :
Dot.com madness creates dotcom billionaires. Dot.com bubble bursts and investors lose billions.
Mortgage madness creates billions for traders and hedge fund managers. Investors/taxpayers stump up billions for losses.
Pretty simple isn't it ?
Where was the governance ?
Wrapped up in regulation instead of responsibility.
eg Don't ask people to show a Bank etc a passport, utility bill etc to counter money laundering, just institute a penalty for money laundering equal to the money that passed through the Bank.
eg dilute the Bank of England's authority by confusing everything with halfwit regulation. If this was the 70's the Governor would have had the Banks round to tea and told them to agree who was having Northern Rock before the biscuits came out.
Its so easy if you give people responsibility instead of bureaucracy.
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Where does it stop?
One word: $516 Trillion derivatives bubble! (see BIS valuation)
That's about Five Thousand (!!) £50 Billion bailouts.
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The bank missed an opportunity here too as ever. Why leave all the upside to the greedy banks. Why not follow try and get some of this like the Chinese and other SWF's are doing?
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Hello Robert. What most concerns me now is what will happen with credit defaults? In the past insitutions were reluctant to pull the rug from under a debtor unless the asset base had deteriorated drastically (witness the collapse of ISTC). But if the government is signalling that it will step in with a life belt, credit defaults could be triggered and acted upon becuase such gilt edged guarantees are in place. Again, we find ourselves back in the place that I and others commented on in November - the arena of Moral Hazard. I don't know if the government is just blind to this quixotic condition or else knows something that has not filtered into the market. I can't help thinking that the current policy is an example of the worst of all all possible outcomes - rudderless and reckless. The policy may be well intentioned but ultimately I am convinced that it will do more harm than good.
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Robert,
We are constantly being told the problem is the banks don't trust each other and won't lend to each other. QUite frankly I find this unbelievable. If Bank A has little money and Bank B has plenty, then why can't people simply get loans from bank B rather than bank A. Unless NONE of the banks have money, those with it are simply sitting on it in order to lend it at premium rates.
Secondly, spot audits of a representative sample of debt should be FORCED on the banks and published. This would show who was a risk and who was not. SIMPLE.
This bail out was NOT required, in a capitalist free market why exactly can't ALL the banks raise capital from shareholders (like RBS will do) via a rights issue?
Lastly, Directors' bonuses etc should be stopped completely until this mess is sorted.
NULABOUR, NUMESS
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Surely it is a lot simpler than this.
The cash liquidity question SHOULD be controlled by market forces.
It is being manipulated by Politicians and the BOE who must ultimately fail.
Supply and demand will ultimately dictate that the prudent who have saved should get higher interest in these times whilst the foolhardy and speculative should get their fingers burnt.
House prices should fall as a result, to the benefit of Joe Public, interest rates should rise and a natural correction should prevail. Tinkering with basic economic logic for political gain is both ILLOGICAL and IRRESPONSIBLE.
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That's right, we're bailing out the banks for their colossal greed in causing the biggest public borrow ever which is now collapsing around our ears. BUT thats OK, because we can change the rules whenever we want - so we'll back OUR lending against the taxpayer. Sorry big business money, we won't let you down again, please don't go elsewhere!
...Now then, time to prepare some hillarious and simultaneously infuriating spin which will be played off for 3 months and echoed by all our lap dog newspapers to make those snivelling pathetic little ants go back to their wage-slavery...
It's time to wake up, people... The government does not care about you or your family. Only about money.
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Consumers are not blameless in all this - having the ability to utilize their homes as ATM's to fund their high street spending sprees is insane. The banks encourage this by so called consolidation loans and adding additional debt based on inflated equity.
In the short term this seems good for the consumer but creates a ficticious economy based on ficticious wealth. This makes the government look good by providing a false sense of prosperity and it would be politically unsound to stop the momentum.
The end result is that millions are now dealing with not only mortgage debt but unmanageable secondary debt challenges. As a result, personal bankruptcies will increase dramatically over coming months which will create catastrophic damages to the familty unit.
The only reasons a mortgage should be given should be to either buy or for home improvements. Equity take outs or consolidation loans simply provides a short term fix and 90% of the people will simply go out and run up their cards again. Nothing short of a major overhaul of the credit industry will cure the ills we now face.
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I think I am underwriting my own debt? (Shame I have no assets)
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It is surely unprecedented to use public money to rescue what is in essence a pyramid scam based on fraudulent lending. The only reson for the house price bubble is the so-called "liar loans" which allowed UK citizens (not just perfidious Americans) to falsify their loan applications and take out huge no deposit loans which in turn inflated the house price bubble. This in turn provided the illusion of economic growth. Despite 5 years of IMF warnings about this cycle of fraud, it was allowed to continue. now the whole country will be robbed to pay credit card defaults and repayments on the liar loans.
I guess because UK plc has no other source of wealth or enterprise the bubble just has to be re-inflated or we face an immense social and economic collapse. Forget worries over house prices. If this fails, people will struggle to get food, heat, and basic medical care.
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This solution appears to be too simplistic and even if it does help in freeing up the money markets, I cannot help but feel that the people running these banks know they have the Treasury Department and Bank of England by the short and curlies.
In 12 months time (certainly in less than two years) I expect we will see these banks declaring huge profits and throwing money about like it was confetti. Then they will carry on rewarding themselves with huge bonuses, in the manner to which they have now all become accoustomed.
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To clarify to a lot of people, this is NOT taxpayers money. This is a bond issue by the government.
In simple terms it's almost like a share issue, except govt bonds have 'guaranteed' return. And the banks are not buying these bonds with money, but are buying them with debts.
The 50bn pounds is effectively new money that government has just conjoured into existence. Our financial system now trades debt as money.
A bank's 'profit' can include it's debts. Ie, it lends you a 100k mortgage (it doesn't actually hold the 100k to lend you btw) and can then put that as future income and the future interest can be regarded as profit.
It's all about shifting debt around to look like a profit. But in reality, as I said before, there is not enough money to pay off these debts.
Our governments were made bankrupt a very, very long time ago through similar methods and are at the mercy of the bankers.
As Sir Josiah Stamp (former President of the BoE) said:
"The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. "
50bn created today. Not bad for a morning's work.
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Have a read of www.fdrs.org to find out how banks have bought the world through money that never existed.
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To be totally honest, i'm fed up with the whole lot of this credit rubbish!!
I work for a recently well publicised bank in the north, and all of my colleagues and myself are totally sick, everyones so worried about how this crunch is going to affect everyone - try not knowing if you're going to have a job in 3 months time through no fault of your own!!
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Goodness gracious Robert, this is not a 'bail-out'. What planet have you been visiting recently?
The taxpayer will only lose money if two rare events happens. Multiply one rare event with another rare event and you have an extremely remote event.
One, a bank using this new Liquidity Scheme needs to go bust (that is use up ALL its capital reserves),
AND (not or)
The haircuts applicable on eligible securities, together with the daily margining that will occur, proves to be insufficient.
Personally I don't think the Liquidity Scheme announced today goes far enough, both in terms of amount (which you hinted to in your article) and in terms of eligible securities. The BOE, but lets be frank here, we mean the UK Treasury, should say that this scheme is unlimited in amount and eligible securities should include all Single A rated securities (or better). Naturally the higher the risk the higher the haircutting should apply.
This 'credit crunch' may have been due to banks actions, however it is the duty of the regulators and governments to avoid extreme asset bubbles, the implosion of which has created this credit crunch. This they have failed so spectacularly to do. No MP or regulator wanted to intervene as they knew that by doing so they will have had to stop the price rise in their primary (as well as for many their tax funded secondary houses).
respectfully
Edward
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We can argue until the end of time about this banking bailout. Instead of worrying about the symptoms of this financial incompetence, people need to fully understand how and why money is created. You'll then discover that it's not incompetence but a very carefully contrived deception used by the elite to gain even more power and wealth from the people.
History does nothing but repeat itself. To find out more go to Google video and search for 'Money Masters' and 'Money as Debt'. There is plenty of other websites and videos to educate anyone willing to understand the truth.
Some of you maybe aware of the creation of money, please help to educate the others.
Knowledge is power!
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The bottom line is that the government should STOP interfering in the market.
This housing market is grossly distorted, so that houses cost many times annual income. Since real people, with real incomes, are the ones who buy the houses, and since 8-9 times income is not sustainable, houses prices HAVE to and most surely WILL fall. The sustainable level is 3-4x incomes, which is what it was when most of the boomer homeowners got their start on the housing ladder. Even with the governments "help", prices will return to this level, either by real decreases in price, or by real increases in wages. Since most wages are paid according the official government rates of inflation (which are a lie btw), then the only alternative is for prices to fall, get ready for as much as a 50% drop, only then will the market function.
I urge all non-homeowners who may be thinking of buying, to wait, now is a bloody AWFUL time to buy. Unless you can put down 50% you will end up in negative equity.
I say wait 1-2 years, then pick up a real affordable home that you can live in, when the prices are more reasonable.
I would go even further, until the governments of the world stop intefering in the housing marker, STAY OUT altogether. I say this for two reasons, 1) it is in your own interest, one day you may wake up and find you owe your mortgage payments to the government and 2) it will punish them for their stupidity, so maybe, just maybe someone will learn from this.
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"The 50bn pounds is effectively new money that government has just conjoured into existence. Our financial system now trades debt as money."
AHA, we have a GENIUS on the board! That is exactly what the government is doing. Say hello to inflation my friend. They are taking the money from everyone, by decreasing the value of the pound, just check it out against the Euro today. Not only does this punish people who didn;t buy a home, but also it punishes savers, by reducing the purchasing power of their savings. I am going to stop posting, as I simply feel to would up to say anything sensible now.
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It is important to acknowledge that the costs of a failure of the market to sustain liquidity always fall on the economy - that is the tax payers (and non-tax payers alike).
The question is therefore whether and when to use the central bank to support the financial system.
One can argue about the timing or the risks, but to make the assertion that there has been a risk transfer to the tax payer is to ignore the very real risks that this sustained bout of falling confidence may have on the economy, i.e the tax payer. Central banks are meant to be lenders of last resort at times of market failure.
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http://www.zeitgeistmovie.com/ - this addresses a number of issues including the truth about banks - be prepared to be re-educated.
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Some people around here seem determined to work themselves up in a lather - irrespective of the facts.
1. Only collateral owned by banks as at 31/12/2007 can be used in this scheme. So no-one's going to be trading the mortgage securities versus Bank of England funding and making money out of it.
2. Only 'prime' AAA (i.e. not sub-prime) securities are eligible securities with a significant 'haircut' applied.
3. The money is being 'lent' to banks whose collateral meets strict (some complain "too strict") criteria - not handed out on a plate.
4. The cost of access funding via the scheme is greater than the market cost of funds. The bank isn't pumping money at subsidised rates.
5. If the banking system were to crash and lending and consumer spending were to fall of a cliff (and lead to massive unemployment), the UK as a whole would be worse off.
The government can be accused of many things...like why on Earth we're running spending deficit via a burgeoning welfare state despite 60+ consecutive quarters of economic growth. That doesn't permit its critics jumping on any bandwagon to harrange them with any validity however.
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The only comment I have here is, THIS IS A BIG SCHEME TO FINANCIALLY RAPE THE CITIZENS OF ENGLAND AND THE CITIZENS OF THE USA TO BENIFIT ONLY THE FEW ELITE. I quote "The scheme is so substantial that the Bank of England has had to be INDEMNIFIED. SO THE TAXPAYERS WILL BE AT RISK." What a quite scheme.
This tells you who will be responsable to pay this huge debt if things go bad, YOU THE TAXPAYER. The Bank of England will own the property because they exchanged the mortage backed securities for Treasury bills ie; (cash), imdemnified itself so it can not be held responsible and passed the responsibility, ie; debt on to the taxpayer, YOU the citizens of England and the USA. You won't feel a thing for years to come until it all blows up, their just passing one big bubble for another. A BURSTING WILL COME AND YOU AND I WILL HAVE TP PAY OR THEY WILL TAKE EVERYTHING WE HAVE TO PAY THE DEBT.
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I hope all the people who find their blood-boiling at the moment have some blood pressure pills handy - the credit crunch has only just started to get going.
Our banks are currently trying to deal with the US sub-prime toxic waste they purchased in the last few years - and this is just the tip of an iceberg.
There is still thousands of billions of pounds of SIV's, CDO's and CDS's (used as vehicles to inflate everyone's house prices and consumer credit debt by the banks) - numbers so massive that any talk of them is met with stern denials - yet exist they do. And many of these exotic funds are worth pennies on the pound.
We haven't even started to see the effects on the UK banks from our own property crash (coming soon to a house near you) plus our credit card and personal debt is the highest in Europe.
30% of our GDP comes from The City, which ain't happening any more.
This bailout isn't even the end of the beginning; it's the start of the prelude!
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Part of Gordon Clown's speech to the CBI in 2005 (quoted directly from the CBI website)
?Every time in past decades when the CBI met in conference your constant theme had to be Britain?s stop-go economy, the failure to control inflation, economic cycle after economic cycle, Britain first in, last out, worst hit in world downturns.
In the fifties it was said Britain managed decline, in the sixties mismanaged decline, in the seventies declined to manage and even in the eighties and early nineties inflation often went into double digit figures . For decades Britain was the stop-go economy of the world, the most prone to inflation.
And in the last eight years we have not been without economic challenges that have tested our resolve - the Asian crisis, an IT crash, a wall street slump and recession from the USA to Japan and Germany, and now today our resolution has again been tested ? domestically, by the need to moderate the housing market and internationally, by the trebling over three years of oil prices and the doubling of major commodity prices - events which in the past always led Britain into inflation and recession.
But as we end 2005 which has seen the return of global inflation and this new threat to economic stability: while inflation is pushing up interest rates in the euro area and it is at 4.3 per cent in the USA, in Britain it is just half that.
This economic stability, what you need to plan ahead, is exactly what the post 1997 monetary and fiscal settlement - Bank independence, a symmetrical inflation target, new fiscal disciplines ? was designed to achieve. Our 1997 reform was not some one off change whose benefits lie only in the past, but an enduring and resilient framework that continues to give us the capacity now and in future to respond quickly and proactively to changing circumstances.
And so today, thanks to what you as businesses and we as a country have achieved, Britain is acknowledged as the economy with one of the lowest inflation rates, among the most stable and the least volatile. And my first and foremost commitment is to maintain economic stability: stability yesterday, today and tomorrow.?
From Liar loans to Liar Prime Ministers.....
Gordon Clown will go down as the biggest shyster ever to "serve" in Government.
He sold the family gold and now he's sold us all down the river with this deal. Thank you Prudence.
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Why does everybody keep saying this is related to helping the mortgage market. It is not - it is solely a question of bank solvency.
It is another example of the Government's financial incompetence (along with running up the highest national deficit in Europe, taking on the Northern Rock risk and Gordon Brown selling the UK's Gold at the bottom of the market) in buying into the banking industry's belief that it is too important to fail, and persuading politicians that the sky would fall in if this was allowed to happen.
Let's examine this. Norway had a major banking crisis in the 90s (as lots of asian countries did), for similar reasons that we are facing today. During this, no government guarantees were given for bank liabilities, 2 of the 3 largest banks had their share capital written down to zero and were then nationalised by the government, but they were not bailed out and had to suffer all the losses before any public money was committed.
No depositors lost any money - as the government refunded these deposits for the couple of small banks that closed, Norway avoided a systemic bank collapse, the problem was resolved in just over a year and Norway made a profit of 0.4% of GDP after it sold the shares it had taken over at zero on the open market when the banks were operational.
The worst thing is that the swaps are guaranteed with MBS which banks cannot sell at anywhere near face value on the market and whose value will continue to decline as the loans in the tranches start to rise to normal default levels. Labour and Gordon Brown is helping the banks survive at the expense of us as and we are assuming all the risk for these declining assets.
If the banks default on the loan where is the money going to come from to pay for this risk?
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to #95...
It was the AAA rating given to the sub prime morgage backed CDO's in the USA that got the banks (coupled with their greed) into their current perilous state!
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What does this 9 month money do to the savings ratio? How does this action by the Bank of England encourage people to save?
As far as I can see it the result will be to depress savings interest rates which will in turn depress savings which is OK in one way as it keeps the economy going but it also builds up a bigger problem for the very near future.
Take the hit, issues the rights and work towards reestablishing a sound financial market - I fail to understand this move, unless there are some terms that have not been made public.
Timescale - a decade, or if the 1930's model is used two decades, but in reality this market problem is far more serious than the slump of the 1930's as the asset value over valuations are so widespread and huge.
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The problem that we have here is three fold:-
1) This is very much a 'bail out', the BoE is having to incur risk and liability on the basis that banks do not have sufficient liquidity to operate in the market that they have created. If anybody tells you there is no risk, they are either lying or they do not understand. I hear the terminology 'haircut' being thrown about by all, which is indicative of a highly informed audience, but the liability relates to the fact that what if the 'haircut' does not cover the fall in value of the mortgage backed assets over the next 3 years? Therein lies the liability, and in the current housing market, there are no guarantees that the fall will not exceed the percentage delta of the lending terms, regardless of AAA rating.
The question must therefore be asked, and this is crucial to the anger being expressed on this blog, why haven't the banks been prudent enough to ensure during the frivolent last decade, that they have put aside insurance liquidity to survive during the impending dip? And why should the BoE take remove the liability on their behalf for them not doing so?
2) Notwithstanding the liability issue above, our money is now in a downward spiral of inflation, with its value falling against other currencies, excluding the dollar. Why is that? Because, among other things, the BoE has been making additional funds available during its auctions.
So what happens after £50+ billion is released from the log jam? The value of the pound falls further, so not only are the people who took risk upon themselves in trouble by stretching their finances, those people who have been prudent, and managed to maintain savings are having the value of those savings and investments devalued also, through no fault of their own.
Talk about collateral damage!!!
3) Gordon Brown is desperate to defer a recession until after the general election, and is willing to pay for it with billions of pounds of our money. He is exhibiting why he must not succeed, he is a terrible leader, willing to defer the rebalancing of the market to serve his own purpose, knowing full well that it will be 10 times harsher when it bites in two years time if his plan succeeds.
I for one hope that this fails, the correction in house prices continues and that Gordon Brown is removed from office as soon as possible.
The rules have been changed for the banking fatcats, the politicians, and the public is expected to put up and shut up!
It is that simple, and that is why there is so much anger.
The only thing that is actually beginning to scare me, is that something must have happened to have Merve the Swerve turn on his heel so sharply, and that is either a political issue and pressure, or more likely one of the big 5 is about to go pop. We just don't know what it is yet, or who it is yet... But it will come out in the next 2 weeks...
Have your contacts heard anything Robert?????
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50 Billion from the Bank of England.
Forever the cynic is this move by the Bank of England to change mortgages for Government bonds any of the following reasons.
The Northern Rock has to dump onto the market 50% of its 100%+ mortgages over the next 2 years into falling house prices.
These mortgages will be passed to the other banks for cash to return to the Government.
The banks then return these mortgages the Bank of England for bonds moving Northern Rocks dept off the books.
Northern Rock is then ready for sale.
The Tax Payer carries the risk.
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{{94. At 3:20 pm on 21 Apr 2008, Armaddeus wrote:
http://www.zeitgeistmovie.com/ - this addresses a number of issues including the truth about banks - be prepared to be re-educated.}}
I don't have 2 hours to sit through conspiracy theorys, good thing there's wikipedia:
http://en.wikipedia.org/wiki/Zeitgeist_movie
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Having read most of the blogs, it is clear there is a very strong feeling against banks in particular and the financial service industry in general. And quite rightly too.
However it is not in anyone's interest to let matters take their natural course, as we shall all lose.
The government should ensure that the bail out conditions include:
1. all bank bonuses and commissions cease immediately
2. the pay of directors and everyone else with "Manager" as part of their job title, be frozen
3. no dividends or capital repayments are made to shareholders until the debts to the BoE (ie you and me) are repaid IN FULL
4. that all loans granted by the BoE are backed by the securities already agreed, and unlimited personal warranties of every director (who are not allowed to resign while the debt to the BoE is unpaid)
5. that there must be NO mortgage foreclosures while the banks themselves are receiving BoE support.
All the regulatory bodies should be scrapped since they have allowed the situation to arise, and be replaced with individual customer committees to oversee their own banks.
The top people MUST feel some of the pain that their incompetence has unleashed throughout whole country.
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Why should I, as a pensioner without a mortgage who pays off his credit card bill in full every month, have to pay taxes to subsidize improvident bankers?
If banks are really in such a mess, and if letting on or two go bankrupt 'pour encourager les autres' is ruled out, surely the sensible thing is to nationalize them. Or would that be too much like a Labour party's policy?
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Such unprecedented action shows how bad the credit crunch really is.
The authorities took off their rosey spectacles, looked over the edge of the precipice and decided things looked distinctly grim.
Question: is this a panic or is it a sound precaution?
On balance I would say for now it is a sound precaution. However if this is not used by the regulators in years to come to clamp down on banking exuberance then we will know it as a panic measure.
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After years of making obscene profits, the banks, instead of facing the consequences of their greed, expect the taxpayers to support their lavish life-styles.
There would not be a credit crunch if they had not taken speculative risks. No doubt the bankers will still expect their lucrative bonuses, at taxpayer expense of course.
They should be allowed to drown in their own incompetence.
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Hang on!
- Why should BoE take on losses of banks and bail them out? Should it not be bailing out those house owners who were tricked into taking on those mortgages by collusion between builders, property dealers and banks.
As I understand, some builders and dealers/agents are under investigation for tricking buyers and selling them properties at highly inflated prices and doubling mortages.
This problem was created by banks who lent these mortgages without doing credit checks and just "trusting" these builders and agents.
I am not a expert on financial matters - but considering the problem is with customers having to pay interest rates they cannot afford; the solution is straight forward. Ideally, the Government should force these banks to lower the interest rates on these loans to rates they were initially given on. Consider the advantages of this action:
1) No real loss to banks as it was just the interest and profits for banks' investors. If interest rates come down, only shareholders will lose out on some profits; that's all.
2) Lower interest rates mean less people will be defaulting on their loans - people are going to have more money in their pockets - increased spending - economy picks up and everyone is happy
3) Yes, the banks would have borrowed money from each other - so they will all have to suffer this loss in profits.
I beg you, not to be fooled by banks' write-downs. They are not really losses. It is just attempt to create panic in my opinion. The bank valued their loan assets at "high rate of return" when they should not have given out these loans in first place. Now, all they will have to do value them at "lower rate of interest" meaning less profit for its shareholders that's all which is not all that bad since all Government's current scheme is doing is to allow these greedy shareholders to get away with high profits while borrowers will have no relief from high interest rates. Rich will become richer and poor will be left poorer.
Instead - forcing banks to lower interest rates for borrowers will benefit everybody. Rich lose out only on certain percentage of profit - but still get richer and poor will not hit the rock bottom. Fair in my opinion.
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To num 76 - fredhaus - it is actually 10 thousand £50bn bailouts!
More generally what we are witnessing could be the end of a 600 year old experiment: the Medici created debt as money and we have been working to that principle ever since. Simply by asking a bank for money and promising to pay it back, your action has created the money. Your promise can then be sold between banks and be used to allow other banks to 'lend' even more money. The system is based on two assumptions: 1 Bearers will fulfill their promises, 2. The number of people wanting to borrow money will always grow.
Of course we are now in a position where neither assumption holds - people are either unable to fulfill their promises or simply do not, and people have stopped borrowing money because they have reached their credit limits, or feel that they are already over-stretched, or (like me) see the beginning of the end.
The debt basin has long since lost any connection with the ability of people to pay back through work done. It has become an all-consuming black hole, and, like its astronomical counter-part, has now reached critical mass - perhaps we are about to witness the birth of a new system, or perhaps we are about to enter a new dark age of chaos.
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I think that too many people are looking at this in isolation, I think it is symptomatic of the fact that we no longer own our own economy.
Having recently read "The best democracy money can buy" I waver between extreme anger and despair.
We are all guilty of allowing this situation to develop. We all sat on our hands whilst successive governments gave away our national assests and allowed the economy to become so dependent on consumer spending.
When the government relaxed the rules which protected us from ourselves and made us vulnerable to these financial experts, we just felt good about the windfall profits we made from building society demutualisations (not to mention privatisations).
How was anyone allowed to take out a mortgage which was only affordable depended on a short term discount deal or record low interest rates.
When serious commentators have suggested we were overborrowed both individually or as a nation nothing was done, individuals just took out consolidation loans and the government believed the lending institutions what they said they were acting responsibly.
The government has a similar attitude to drinking, they allow us to be bombarded with temptation from the drinks companies but then tell us it is our responsibility to act sensibly - some people just cannot be trusted to do so and have to be protected against themselves.
I could go on .. Payment Protection Insurance .... endowment mortgages .... boiler room scams .... women empowering women .... pensions.
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CrumberNuncher:
Nice summary. I would only add that we will now quickly see how much trouble the banks are really in and if this is a bail-out or not. The 50B "bail-out" certainly does have a "haircut". If few of the banks take up the scheme, then probably they are not in as bad shape as some suspect.
On the other hand, if the whole 50B is taken up and the banks ask for more, then it means that banks are in very bad shape and, by the laws of supply and demand, the taxpayer has indeed bailed out the reckless banks. My guess is that it's a bail-out.
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To Post 100, as detailed by the Bank of England:
1. No CDO will be permitted as collateral by the BoE
2. As I stated AAA rated PRIME mortgage securities will be accepted - not sub-prime.
In other words, we're talking about very different structures of very different underlying asset quality. Don't make the easy mistake of assuming AAA rated prime mortgage securities resemble structurally over-engineered AAA rated sub-prime CDOs.
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Can Robert please explain why, if the banks have made so much profit over the last few years, they cannot afford to address their own self made problems?
Where is the cash made from their profits?
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This facility has one consequence which it seems has not been contemplated by the authorities. Banks using it will have large quantities of Treasury Bills, which they will use as collateral to borrow money. Hence a bank posting T-Bills as collateral will be implicitly signalling that it needed the BoE?s facility ? that it was too weak to borrow unsecured. This signal might stigmatise T-Bills, making them a less desirable investment for non-weak financial players, and probably cheapening their auction price.
For a fuller argument see www.jdawiseman.com/papers/finmkts/stigmatisation_t_bills.html
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The way the government and the Bank of England is bailing out the banks, points to a more serious situation in the world financial system. The banks and the financial sector has never being interested in the government bailing out those who get in trouble with their mortgage or their business, as far as the financial sector is concerned, those in trouble have themselves to blame and should bear the responsibility. The trouble with the world finaciale system stems from governments washing their hands of regulating the financial system, at the request of the finacial institutions, who believe only they know how to run the world ecconemy, and all restrainst should be removed. It?s time governments went did what they are elected for, and take care of their people. If the US government hasn?t the guts to take on Wall street and it?s banks, the future is going to be bleak.
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For the life of me I can not understand the issue here, the banks have all posted huge profits over the past few years, but the moment they have a hiccup joe public has to get them out of a hole of their own making. I understand that it is not just that they don't have the money, it is that they will not lend it to other financial institutions. If there is a crisis it is of their own making and they should be forced to create the 50Bn emergency pool, perhaps by cutting some of the bonuses.
I trust the BOE will charge them the same exhorbitant rates the banks do to their customers.
My final point where will the BOE get this money from, I know borrow it from the banks!
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Let's see if I've got this right :-
1 - After the shakey financial times times of the early and mid 70's, the Thatcher era ushered in the new, enlightened age of 'Me, Now, Grab what you can'.
2 - The banks, given the green light and eager to do their bit, set to with a will. Over the next few decades, they rationalised (closed) branches, embraced IT (reducing staff), raised banking charges, often refused to apologise for banking errors and employed a carrot and stick policy with small businesses.
4 - Keen to join in the ensuing feeding frenzy, the banks extended credit to customers with a marginal-at-best or doubtful ability to repay. Perhaps with even those with a proven poor credit record.
5 - The strategy is successful. Year after year after year the banks proclaim ever spiralling turnover (the envy of many a Third World country) and profits. Successful that is, if you ignore areas without a branch, employees without a job, small businesses on their knees and ordinary customers being fleeced.
6 - Then, calamity. The banks susequently discovered that customers with a poor ability to repay loans have, in fact, a poor ability to repay loans. The financial world went into panic mode.
6 - But, wait. In steps the Bank of England. That fine institution buoyed up with the success of their co-authored production 'The Saving of Northern Rock or The Propping of the Edifice Built on Sand'.
Fearful that the banks' Quarterly Profit graphs should display a negative gradient (giving the shareholders a sleepless night or two like the rest of us), they devise a strategy. Easy! The British taxpayer will buy more of the dodgey debts.
It's obviously a small niche market that's growing in an otherwise bleak landscape.
This is costing billions and billions and billions of pounds - not millions - billions. And a BBC reporter yesterday quoted a Treasury official as saying 'We just don't have the money to reinstate the 10p tax band'.
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. . . . and, just athought - I wonder if British banks will be able to buy dodgey debts very cheaply from foreign banks and pass them onto to the British Government (i.e. the British taxpayer) at a profit?
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This is disgraceful. The government and associated watchdogs (FSA) can't be trusted to effectively protect our exposure as tax payers.
I'd like evidence of change - banking directors being fired (it's started in the US - certainly more so than here), watchdog casualties (FSA etc) and then an overhaul of the regulation / oversight ---- and lo and behold any bankers who moan about "nanny state".
Gazzaden has got it just about right --- the only people I'd like to see protected to some degree being savers.
Sod the first time buyer and lets bring back the good old days of negative equity.
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Wake up people,
This is yet another example of the fat cats making there backroom deals at your expense. You didn't really think this labour government had any good intentions did you? They are in it for one thing...MONEY!!!
When people say "i hope the government are ashamed of themselves". Dont make me laugh, they could'nt give a S***. They have nice big fat pensions in their offshore accounts. Living in this country is a mugs game, i feel i'm being forced out!!! Anyone with the least bit intelligence must realise we are just being ripped off left, right and center. They have the attitude that we are here to serve them!!! I'm off, cant stay in this country any longer.
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I am aware that you mention that this bail out, if available last year, would not have applied to Northern Rock as its business model was too risky. However, could it NOW take advantage of these 9 month bills to get some of the £25 billion borrowing off the Governments books early???
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On a simplistic level, one wonders where does all the money come from for the BoE to lend out.
The answer, as a number of our correspondents have pointed out is ... from thin air, as is the Banks remit.
After the NR debacle, I tried to figure out by how much the injection of £100Bn 'out-of-thin-air' would water down the value of the pound, but the monetary indicators such as M3 are rather obscure.
Much easier, as one of our posters has stated, is to look at what the strength of the pound is relative to other major currencies.
Is is weakening, because dreaming up billions of pounds out-of-thin-air is very inflationary.
The ghost of Harold Wilson may be whispering in Browns ear ... the pound in your pocket ... you may know the rest.
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"Homeowners will have enough support to ensure that their homes are not repossessed, the government says." (BBC headline this afternoon).
So, the financially prudent are to underwrite the imprudent.
When I considered buying a house a year ago, would it not have been helpful for the govt to have told me then that I shouldn't worry about borrowing more than I could afford? Not to consider the possibility of a downside to the transaction? Not to reflect on the possibility of interest rate rises? That they will intervene in the free market to ensure homeowners are protected from their own recklessness?
Mortgage rates have only gone up about 1%! Anyone would think we were looking at interest rates doubling!
What about the millions - millions - of taxpayers who are hoping house prices fall so they can afford to enter or move up the market?
The govt is protecting the wealth of the affluent middle-classes - and charging the bill to the young, the less well-off and the sensible.
Social justice indeed.
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Why is no-one discussing the inflationary impact of this £50bn?
I understand that the Bank managed to not include this amount in Public spending due to a technicality which ignores the chance of this rolling over 1 year.
But if this cash is not new money then which £50bn of Public funded projects have been cancelled to reallocate this cash?
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Dear Mr. Peston
I had the misfortune to hear you talking to John Humphreys this morning on Radio 4
I suggest that you obtain a tape of the broadcast and listen to yourself
I think that you will be unpleasantly surprised
Or, to phrase it as you did today...
I err, you know, had the, um, ... misfortunetohearyou er, talking to, you know, erm, John Humphreys this ... morningon er, Radio um, 4
Er, I, um, suggest thatyouobtain an, er, um, tape of the ... broadcastand .... you know, em, listen to yourself
I think, er, think that you will be um, unpleasantly, you know, surprised
I know it's not always easy to speak extemporaeneously, especially early in the morning, but in comparison with Mr. Humphrey's easy and unflapping manner, you came across very badly - you always seem much more in control and much less hesitant on television
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