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Banks still not lending

Robert Peston | 00:04 UK time, Thursday, 16 October 2008

Something very strange and worrying is going on in money markets.

First the good news.

The two trillion pounds of taxpayers' money that governments all over the world have put behind the banking system, both in the form of capital injections and guarantees for lending between banks, has reduced the perceived risk of banks going bust.

This reduction in the probability of banking failure is measurable, in that the price for insuring bank debt in the credit-default-swaps market has roughly halved over the past few days.

Here's what you've been expecting: the less good news.

Banks are still not lending to each other at anything like a normal rate of interest relative to official rates.

The statistics (kindly updated for me by Barclays Capital) are extraordinary.

Back in the first half of 2007, before the onset of the credit crunch, the gap between what banks charge each for three-month loans, the three-month sterling LIBOR rate, and the average of expectations of the overnight interest rate for the following three months (the OIS rate), was 0.09 percentage points.

In other words, the three-month lending rate was closely aligned to expectations of what the Bank of England would charge for overnight money.

And that's where the gap stayed for months - until the onset of the credit crunch in August of that year, when the gap widened to 0.23 percentage point, or 23 basis points in bankers' lingo.

Which was wider than normal, but not devastatingly so.

Since then this interest-rate gap, known as the three-month sterling LIBOR-SONIA spread, has risen and fallen as the money-markets have become more or less stressed.

The more stress, the wider the gap or spread.

But the spread never got much above 1 percentage point, or 100 basis points.

Or at least not till September of this year.

Since when the gap has been widening and widening.

Last Friday, the spread reached what was probably an all-time record, of 219 basis points. That was a staggering 2.19 percentage points.

And it's only narrowed a very little since then, to 202 basis points, or 2.02 percentage points.

You may think "so what?"

Well the "what" is big.

It means that banks are only prepared to lend to each other for three months at an interest rate that is a full two percentage points above the rate at which they expect to be able to borrow funds from the Bank of England over those three months.

Which means they just don't want to lend to each other.

And, of course, if they're not prepared to lend to each other for less than 2 percentage points above the expected policy rate, what chance that they'll lend at a keener rate to consumers, households or businesses?

Slim to none, seems a fair bet.

A glance at the chart of the LIBOR-SONIA spread shows that last week's half percentage point cut in the Bank of England's policy rate has been more-or-less totally absorbed: almost none of that interest-rate cut has been passed on in the form of lower interest rates charged by banks when lending to each other.

Which is why only a relatively small number of mortgage rates and business lending rates have been reduced by the full half percentage point.

That's distressing, because it seems to indicate that monetary policy has become toothless, ineffective.

At a time when we're in a recession, it's particularly worrying if cuts in interest rates by the Bank of England aren't leading to reductions in the cost of credit for real people and real businesses.

And don't forget that in the last few weeks, central banks - including the Bank of England - have literally been spewing loans of short-term and medium-term maturity into the banking system. And these central banks have been providing these loans in return for more and more eccentric and eclectic collateral.

Yet although there's a ton of cash or liquidity sloshing through the system, banks want to hoard it rather than lend it.

What's going on?

Well the widening in the interest-rate spread may in part reflect the margin demanded for the new interbank lending guarantees demanded by the Treasury.

But that would seem to me to be a relatively minor factor.

It may simply be the case that banks are so badly shaken by the 14 months of crisis in their industry that they have lost almost any appetite to lend.

They've made a decision to lend less, to deleverage, and no amount of cajoling or even bullying by the authorities is going to persuade them to do otherwise.

Which is highly undesirable, to put it mildly, when the real economy is showing every symptom of having caught a very bad cold from the sickness in the financial economy.


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  • Comment number 1.

    Why should we expect anything diferent? From start to finish, self interest is central to all of this mess.

  • Comment number 2.

    Indeed, Peter, when the machine's bust, sticking plasters won't work. We've gone a long way towards nationalising the retail sector - I continue to argue the need for a free comprehensive basic National service, as a Public Utility, in passing - but at wholesale level, the hands-off system's bust, it's time to revert 20 years. Then, the Bank was the very visible central market controller, announcing the Treasury's funding operations first thing, funding the overall market position late-morning, based on position reports from the banks, and closing the residual position in the early afternoon. This no longer works in theory as we're part of Europe, but should still do so in practice because Sterling and Euro haven't integrated. The advantage of this method is that even if the banks don't want to deal with each other, they can still deal with the Old Lady, and she then has a good idea of their exposures, plus HMG can control money supply directly.
    And if that doesn't work, then you need to dismantle the machine, junk the broken bits (ie fire bankers, which will be electorally popular into the bargain) and find new spares. If the wholesale markets aren't working, on the ground, then it's time to talk to the Association of Corprate Treasurers, who they're supposed to service in theory, and see what they really need, as they're not getting the service - and then watch the Stock Exchange hop too.
    And finally, at a political level, this begins to look like a vote of no confidence in the markets towards HMG. How grateful - or perhaps they hope to garner yet more dosh for their golden parachutes.

  • Comment number 3.

    Maybe the banks have it right. This trouble upon us now seems to have been generated by too much lending. Maybe the banks realize people and industry are maxed out and really shouldn't take more debt. Would you lend to a person who is up to his eyeballs in debt and about to lose his job? Unfortunately governments don't seem to have got it yet and want to get back to the way it was. I am well aware that this is very simplistic, but I will invoke Aucamp"s razor.

  • Comment number 4.

    As a PhD economist of sorts in the 'twilight zone' of my career and having been exposed to a great many companies, banks and governments I have concluded that the only reliable indicator of future human behaviour is greed.

    It is no surprise to me that the banks are not yet lending to each other or you or me for that matter as they are all terrified of being the first to put money at risk in what for them is a new and uncertain world. This is clerarly self interest and motivated by personal gain.

    All the Kings Horses and all the Kings men (and all the tax payers money) won't mend the broken house cards unless a new ethic is injected into how they operate. They have to realise that they are not simply in this for themselves but their main objective is to provide a service to all.

    All I can say now is that they had better damn well start lending otherwise a great many of us will go to the wall and in the long run that won't feed the banking fat cats will it?

  • Comment number 5.

    "The truth of the matter is, they can't put a gun to their head and say you have to lend this money,'' said Charles Horn, a former official at the Office of the Comptroller of the Currency, part of the Treasury Department, and now a partner at the Mayer Brown law firm in Washington. Treasury officials acknowledge they can't force banks to get the taxpayer money into the hands of their customers. Instead, officials are betting that the government's investment will create conditions where banks have a greater incentive to earn profits from lending than to hoard money to shore up their balance sheets.

  • Comment number 6.

    "That's distressing, because it seems to indicate that monetary policy has become toothless, ineffective."

    No s**t Sherlock ! So what happened to all the trumpeting of our saviour Mugabe Brown over the last couple of days?

    Once a debt-based, fiat, Fractional Reserve Banking system starts to break down no amount of fiddling by any emperor is going to stop it.

    Here's the guide book for operating a Fractional Reserve Banking system written by none other than the Federal Reserve:

    [Unsuitable/Broken URL removed by Moderator]
    and to get around the moderators append the following to the line above:

    Once you understand the maths behind the FRB system it is not difficult to see why it is impossible to catch the cards as the house of cards falls.

    This debacle is no where near over yet. The total sum of derivative bets will have to be cancelled to stop the rot. However, even if that happens it will be a tragedy if it doesn't bring about the demise of the FRB system.

  • Comment number 7.

    Another angle developing the "cure not working" hypothesis: the concentration of banks is not helping the customer. My UK cash assets already amount to nearly 200000, before I start liquidation other positions. However, so many banks have dropped me in the dirt over the last couple of years there's only 2 left I trust, which leaves me little option as regards remaining in the UK - I'll be expatriating my dosh, as other nations are serious about guaranteeing their customers' assets.
    As we said before, and will doubtless say again, if the banks won't trust each other, even with government underwriting, then why should we?

  • Comment number 8.

    Dear Robert
    Following this scandal thus so far, and the failure of the stock market to respond, there is with out doubt a major recession now on going, it is this not the banks now fuelling the falls.
    The Stock market will continue to fall WELL BELOW THE 1000 POINT MARK, and that, is going totoo be more than a scandal.
    The failure of the Regulators to stop this crisis in the first place, will have major ramifications for the FSA,
    I doubt very much if Britain will as predicted susrvive this , it is going to be too costly in every sense.
    Better invest in Gold, ?

  • Comment number 9.

    Some think condidence of banks and investors, or lack of seems to be fuelling the this humungous credit downturn. I however think that these very instituions (bankers and investors) know the very extent of the BIG this credit HOLE (many more trillions of bad debt than were lead to think). In other words the banks unwillingness to lend to each other and the investors investing is indicative of much a far bigger problem than we and the world governments are lead to believe. The copitualtion of the financial system is nigh because the few trillion invested by governments is whofully inadaquate to fill the credit pit.

  • Comment number 10.

    Hi Robert,

    I think that the situation is a little more subtle than this. You ask:

    "what chance that they'll lend at a keener rate to consumers, households or businesses?"

    The answer to this question is that it depends upon the the type of finance you are talking about. I have been pleasantly surprised by the deals readily available for business asset finance - 5.28%.

    I can imagine that unsecured debt is deeply unfashionable at the moment, but it still looks as if you can borrow readily and at reasonable rates, provided that the borrowing is secured against something tangible.

    As someone who runs a medium sized business and has an old fashioned attitude to finance. This looks to be a rather healthier policy than has prevailed in the past.

    I can imagine that there are plenty of debt junkies out there who will have difficulty adjusting to the new reality, but in general, the switch to stricter and less adventurous banking is a welcome development in my book.

  • Comment number 11.

    @3, you miss the point. This is about wholesale market lending, which is 99% done to finance the Corporate sector. The Corporates are the lifeblood of the economy, and are finding it hard going, as they can't raise equity either, so can't expand. And if nobody can expand in a recession, then that's a terminal cancer.

  • Comment number 12.

    Mr Peston, what is valuable to me about your reporting is the insight and analysis, not that you break news. I wonder if all the hot news that you have been breaking recently has put too much pressure on you and has put you in a bad position at times. I know journalists love being the first to break a story, but it might serve you better to let the BBC break the story with a general article, and then follow up an hour later with your own analysis and comment on this blog. That way you won't be getting the heat directly, and we can enjoy the benefits of your (unbiased) insight and analysis. Certainly it isn't healthy that the markets wobble depending on what you say. Better to let someone else break the hot news and add your own value with commentary -- FWIW. So, more insight and analysis, please!!

  • Comment number 13.

    Robert, I am a mortgage broker who has had to make the painful decision to leave the industry. It is now not only the banks and building society's unwillingness to lend to customers and each other, it is also all the changes to their criteria that is having a dramatic effect. These changes are not highlighted in the media but are having a big impact. Nationwide cutting LTV to 85% and as of today changing their affordabillity calculator so they will lend less.Every lender has made changes like this. I am always acting responsibily when dealing with my clients and ensuring we look at affordabillity rather than what can be borrowed. I think we need to get back to a personal level with lenders instead of a one size fits all, like in the good old days when you had to meet the bank manager to get a loan or mortgage.

  • Comment number 14.

    l still can't believe that everyone is buying into this nonsense!
    The people at the top of the banking world have engineered this collapse deliberately to further enrich themselves in what is the biggest bank heist in history.
    Unfortunately it's the taxpayer who's been robbed blind by these people and it'll continue for as long as they keep scaremongering the populations around the world.
    This is nothing more than an artificial meltdown of the banks to facilitate grand theft of every single one of us. And guess what? They'll still do their damedest to repossess your house to aquire YOUR assets because the only assets they have in the banks is soon to be worthless paper.

    Does anyone seriously believe that there won't be hyperinflation when billions of pounds/dollars/euros are produced from thin air and injected into an economy?

    The money in your pocket holds it's value in relation to how much currency is circulating in the economy at any given time.
    The more currency circulating, the less value your money has.
    Couple that with inflation and you can see only one result.
    It's been asked before in these blogs if savings are safe. Well you may well have the same amount of savings in the bank but they won't be worth anywhere near what they were a year ago once all this bogus money floods the economy.

    I've said it before and I'll keep saying it, this has been deliberately engineered by the very people who are now being bailed out and it was all planned in 2006 in the annual meeting of the Bilderberg Group in Ottowa, Canada where they decided to crash the world economy within 3 years and blame it on the sub prime mortgage problem.

    Do the research folks, you are being manipulated by these people into believing that this is a mortgage problem, it's all the fault of poor people etc.... If you truely believe that then keep your heads buried in the sand, keep listening to the mainstream media and kiss your hopes and dreams goodbye.

    The alternative? Do some research, get informed and eventually people will get to a line in the sand where enough is enough. I think we're there already!

  • Comment number 15.


    The banks aren't lending because they can't; the money isn't there.

    Remember fractional reserve banking, virtual money built on trust? Remember credit default swaps, built on trust? Trust has gone, the promises are gone, the virtual money has gone.

    The only money which counts now is 'real' money backed by tangibles, the trillions (quadrillions even) have gone.

    Even the 'real' money we spend is an IOU written by the treasury.

    It will take weeks, months, years to rebuild the trust which all banking and now all business is built on. Until then we will be very lucky if our recession doesn't turn into a depression or worse - a war.

    All because of the ignorance of our leaders and the electorate who put them there.

  • Comment number 16.

    Surely as the government owns or has majority control in at least two major banks it CAN order them to lend?

  • Comment number 17.

    "it seems to indicate that monetary policy has become toothless, ineffective"

    Monetary policy is an ineffective expansionary tool in this situation - this phenomenon was well known to Keynes, who described it as pushing on a string. We need more fiscal stimulus - I fear all the additional borrowing undertaken by the Government recently is only filling a small part of the gap left by contraction in private lending. It is perhaps time for he Government to go further and borrow to finance - or guarantee the finance of - new homes, high speed railways, renewable energy, nuclear etc. if this leads to new UK industrial capability, amnd a decline in the Sterling exchange rate, all the better. The alternative may be a savage deflation.

  • Comment number 18.

    Bankers refusing to be bullied? Whatever next? They've certainly bullied small and large businesses to bankruptcy, let alone their recent defiance to the OFT over bank charges.
    Surely any leader 'worth their salt', the Prime Minister, should now take emergency powers and order the banks to co-operate or face nationalisation. After all isn't the role of a nations leader to ensure the safety, security and STABILITY of one's nation? Deliberate economic instability can be likened to the effect of a terrorist act, so the PM should in my opinion stop talking and just act, take the emergency powers he already has in Law and just get on with it. So what if the bankers get upset.

  • Comment number 19.

    If The Saviour Brown thought that by dishing out billions to the banks he would get them to lend to business and individuals he is more niaeve than we at first thought.

    SME s and individuals have only been able to borrow from banks against gilt edged guarantees usually linked to property, ie homes. In other words they are no more than money lending pawn brokers.

    Schemes such as the Small Firms Guaranteed Loan scheme sound good until you make an application and find that there are more and higher hurdles than a 100 Aintrees and only 4% of applicants eventually get accepted on the scheme.

    This means that entrepreneurs invariably have to hock their houses or pensions and sell their investment portfolio to get businesse going.

    The banks are useless at financing SMEs. They give you an umbrella when you open an account and as soon as it rains ask for it back!

    Brown would have been better putting his billions into clearing the customers loans and then re structuring a smaller, leaner banking system.

  • Comment number 20.

    It's impossible to know how much more bad debt will emerge on the books of British banks, but it seems likely to be considerably more than what has been recognized so far. Given that, it would be unrealistic to expect these banks to loosen their lending policies significantly at the moment, except to their best and most credit-worthy customers.

    In particular, with rising job losses and the world-wide economic and financial slowdown, we can expect that many British households with unreasonably large mortgages that are so far meeting their payments will become delinquent in the next 12 to 18 months, and as they do, the banks will have to recognize losses, but we can't yet know how much.

    In addition, increased unemployment will inevitably lead to withdrawal of deposits as people find they need money for day-to-day expenses.

    All these factors combine to make banks very conservative in their lending policies now, regardless of government guarantees and injections of capital. UK gov't action so far has been excellent, but what's no needed in addition is measures to stimulate private sector employment.

  • Comment number 21.


    What you and many neo-Keynsian Policymakers don't get is that by seeking to control the monetary supply you have destroyed the very apparatus which has been used to control it in the past the paradox of glutony has given way at last to the paradox of thrift. even if the banks were able to lend there is no doubt that they would be less likely to find any willing borrowers. consider your own gilt edged bbc credit cards are you likely to run them up to the max now the economy is imploding ? we are already deep in a liquidity trap and the answer is not more drugs. they just make the patient worse... going cold turkey will be painful but its the only medicine which will work.

  • Comment number 22.

    Gordon has borrowed from the money markets to buy shares in the banks. This is something that we are advised is a foolish and risky thing to do as an investment.
    More importantly you have to question whether it will restore any of the leverage that has gone up in smoke (and mirrors) in the last 12 months. Borrowing from the market to invest in the market consumes loans as well as generating (through fractional reserve process) new loans but doesn't give the banks confidence that the end consumer is any more likely to repay their debts.
    This looks like another failed attempt to restart a car that doesn't want to start. We've called the AA, we've called everyone who wants to have a go. The car is broken and has to o back to the garage for a rebuild or a replacement.
    The emperor's latest clothes have proved no more 'real' than all of the previous sure-fire fixes. Is it now time for the emperor to fall on his sword? (Perhaps he is part of the confidence problem rather than part of the solution?)

  • Comment number 23.

    yes its not a financial problem but a psychological one among the banking class. Short stiriling rate is dropping and it will take time. Confidence is not an overnight wonder but works over months?

    the top level of bank management should be removed. They are psychologically shattered. Some are not even bankers but the old school tie mob. Its these idiots who need to be replaced.

  • Comment number 24.

    I must say that newsreelsneil may have a point about the Bilderberg conspiracy.

    Many Arabs have believed in a Western and Zionist led conspiracy that manipulates markets and countries for power purposes.

    I find it surreal that billions of pounds/dollars/euros have appeared from thin air and have been borrowed. Borrowed from where?Who printed the stuff?

    To throw as much into the economies as has been "invested" in the last few weeks can only mean hyper inflation particularly when combined with a recession and inability to finance day to day work.

    I was told by a high level individual around 2,000 that there were moves to have only two economies in the world in the near future.

    Is this what is happening?

  • Comment number 25.

    Lehman CDS settlement on 21/10/08 surely has something to do with it?

  • Comment number 26.

    The behaviour of the markets is a bit like a drowning man coming up for air twice then finally going down 'for the third time'.

    First we had the euphoric rise following cuts in interest rates. Then we had the big bounce following the 'Brown Plan'. However, to anyone understanding the root causes of this crisis neither could possibly hope to work.

    Now the markets have finally realised that throwing money at the banks will not work, and we are headed for a severe global depression.

    Even bond markets are falling, which seems to indicate that people are losing faith in paper money itself.

    It's time the government started concentrating on emergency measures like feeding and housing the population, and preventing civil unrest, rather than continuing to fix a busted system.

  • Comment number 27.

    It is obvious the old LIBOR system is broken and was in any case inadeqaute for a globakised world, it is too hevily London or European bank based. The Bof E could in a very proactive way simply step in and establish a temporary replacement interbank rate. Literally to force the rates to narow by emergency refernce rate system, bypassing the normal reset rather than trying to flood the market with more liquidity.
    Banks can use force majeure provisions in agreements in syndicated loans and similar LIBOR referenced contracts at least in £.
    A modest proposal- might focus minds

  • Comment number 28.

    Our money ie. "the taxpayers" should never have been used to bail out the Banking system.It is like " papering over cracks" on a wall which is about to fall down and has no good foundations. It was obvious to me and I am in no way an expert, that the banks would want to hoard any money they receive after losing so much in the recent weeks. I think possible reasons for the banks doing this, is that they do not yet know how much "toxic debt" is still held by each other and now that the crisis has hit the real economy, they will not be willing to lend to any business which might be in danger of folding never mind lending to the ordinary man in the street.

  • Comment number 29.

    As a saver, in quieter times, I lobbied for 'Bank Rate' to be the minimum payable to depositors. Competition for deposits would drive up interest paid by banks above this minimum, and competition to lend would constrain interest charged to borrowers. Bank costs and profits would be squeezed by competition. However, offialdom declined to link Bank rate in any formal way to other rates. So in 'normal' times, reduction in bank rates are not passed on and margins are increased; and in abnormal times, rates are commendably kept high to dampen demand for credit which simply has to be reduced for long-run economic health. Why then should we be surprised that LIBOR should remain high?

    So long as Bank Rate remains not formally linked to any other, it cannot be a lever of economic regulation.

  • Comment number 30.

    So, the banks are still not up to doing their job ... okay, let's proceed to full nationalisation, shall we?

  • Comment number 31.

    The bank rescue seems threatened by greed; this time government greed. It was essential that the government should obtain a fair return on its investment in the banks. It was politically tempting to exact a punitive rate of interest. This temptation should have been resisted, but Brown and Darling could not resist temptation. They will near a heavy responsibility for a failed rescue, and for the ensuing recession.

  • Comment number 32.

    As a mortgage broker I'm only too aware of the diminishing appetite of lenders. Even since the latest base rate cut and the government's cash injection the products available have worsenend still further and pretty soon even a 90% mortgage could be impossible to get. I don't know if government's have the power to make banks lend but assuming they don't, we are all in for a tough year or so.

  • Comment number 33.

    At least some of the banks should be government controlled so that government can use these to lend at a sensible interest rate.

    Now as some were predicting unemployment is going to hit over 2 million by xmas and prices have started to fall, oil has fallen by almost 50%. Now there is no valid reason for BOE to keep rates so high, it has to cut.

    Main reasons for our problem is energy and food cost, it might be time to build more nuclear plans and move to GM food plus stop paying farmers for non production.

    It might be also time to ban short selling for good and speculation. Also there should be laws that gives minimum time that stocks (shares) should be kept before they can be sold off i.e. one or two weeks.

    Up to now I never believed in over taxing the super rich but it could be time to bring wealth tax on people who has over certain amount for e.g. 2% tax on wealth above £5m every year.

  • Comment number 34.

    I heard a bank spokesman on the Today Programme explain that it could be a year or more before the banks start 'lending to each other' (whatever that means). The reason he said was the banks have had (or will be getting) this capital injection but before using it want to top up their reserves. An analogy was given of a glass under a dripping tap, the glass isn't full yet and when it is overflowing then they will start lending. Or words to that effect.

    What on earth are they going to be doing with the money during that 'year or more'? It seems that while they are consolidating their positions in this careful and considered way the sectors of the economy that depend on the fluidity of inter-bank laending are going to have to stand-alone, ie: crash and burn.

    I do my best to understand these financing things and I learn a lot from these blogs but it seems a very confusing and secretive state of affairs at top level; ever changing amounts, declarations and objectives.


  • Comment number 35.

    @ Georgethorburn

    at last someone who seems to be on the same wavelength!

    re two economies, I think this is primarily about dumping the dollar so that the Amero can be introduced in the soon to be formed North American Union.
    For those of you who've never heard of that either, well it is the amalgamation of America, Canada & Mexico into ONE country. No more America, Canada or Mexico. ONE currency the Amero. This will be the start of an attempt to bring the whole of the Americas together into ONE union similar to the EU. So we would then have The North American Union, The European Union, eventually The African Union and The Asian Union each with there own currencies. So 4 currencies in the world then further amalgamation to an eventual single world currency. ONE bank, along the lines of the IMF, ONE government the UN.

    That is what this is all about!

    Do some research, watch some documentaries, (free on google) listen to some alternative media sources, get informed! The mainstream media is owned by the same people who have engineered this crash, you are only being told what they want you to know.

    Don't believe the hype, exageration etc...
    Look into things for yourself, give up watching mind numbing TV and start looking at what's happening in the real world. It's only then you'll perhaps start to think for yourself...

  • Comment number 36.


    I am a have said before that the bank rescue package will not work because we are faced with a world drowning in debt and thus we are now seeing debt deflation taking hold.

    I now expect that we will have to face early next year deflation across the world economy and in a year or two another massive banking crisis as deflation takes down both countries and banks.

    We do not face a recession but a DEPRESSION and the equity markets which act as a forward indicator are screaming this. That is why the banks are not lending and why Brown has NOT solved the banking crisis. The most dangerous part is still to come in about 1 or 2 years time.

    This will have to end in a banking moratorium as I have said several times before!

  • Comment number 37.

    Stupid Socialist Government.

    The banks don't need to change - they have already been rescued...

    Why take risks when you are secure?

    The Government are doing their best to undermined CAPITALISM and replace it with discredited SOCIALISM.

    CAPITALISM requires failure of the weak (or at least the threat of failure).

    The weak banks should have been left to go bust, and if they government wanted the public to get loans, they should have lent the money DIRECTLY to the public.

  • Comment number 38.

    Also in the US money is being sucked from regional banks, where the depositors are, where small businesses are, to the mammoth NYC centered banks...and then the govt jumps in and just adds masses more capital to those who already have greater access to capital.

  • Comment number 39.

    It seems reasonably apparent that financial institutions are somewhat nervous about whatever regulation may be imposed on them by governments busy bailing them out.The reticence to lend may be matched by a reticence to borrow .Basically they're counting their shekels and keeping them close to home.Governments may be able to save banks but it seems that they cannot mandate that banks be obliged to lend which is sad state of affairs for the taxpayer tasked with the bailout in the first place.Recovery of the economy is intrinsically linked to money beginning to flow.While the future of banks may be markedly safer at least in the short term,the global economy will remain precarious while they harbour their wealth in vaults. The implication of this that it appears that banks have been badly shocked by their own incompetence and fear doing anything to unpin while they rather timorously await the effects of regulation,whenever that comes,if ever,and with whatever it holds.

  • Comment number 40.

    Robert, we should expect this. Shares will continue to fall because of a recession and because why would you not sell in the morning and buy back in the afternoon at a lower price?
    Banks are in a state of shock- their whole business model has been rocked. They will hoard cash because they simply are not sure what to do- they know business as usual has gone for good and I suspect they are waiting for a lead- but who from? They will have to get out of their shock soon as they will not be making any money if they are not providing finance.
    The one thing that puzzles though is that we must have personal debt reducing and that is bound to make the recession worse and I cannot see a way of it being done without massive disruption- inevitable as we should not have let it happen in the first place.
    All in all though a two year recession with unemployment peaking at 3 million and an opportunity to do some serious recalibrating in the economy is not too big a price to pay for our excesses of the last few years- we must protect the vulnerable though by investing in skills and I am afraid taxing the better off.

  • Comment number 41.

    The existence of the banking system is conventionally said to require public confidence. The reality, perhaps, is that what is required is blind faith, which is not quite the same thing. The public has lost faith and so too have the bankers. Are they alone expected to have faith when the rest of us have none?

  • Comment number 42.

    The fact that the Banks are hoarding capital suggests 3 possibilities to me at least.

    1. They really don't trust each other at the moment (bad enough).

    2. They have even bigger skeletons hidden in their books that they don't want to fess up to (potentially worse).

    3. They are deliberately manipulating the markets (doesn't bear thinking about for individual savers).

    So which is it?

  • Comment number 43.

    Could the "mysterious" reluctance to lend have something to do with the fact that more debt is the last thing that the British need? People are up to their necks in debt and the banks know that they will have to write a lot of that mortgage stuff and and other personal debt off over the next few years, just like it is already happening in the US.

  • Comment number 44.

    The answer is simple.

    The banks do not know the level of their liabilities in any of the markets that they operate in.

    For example, what was rated as a toxic asset probably applies to assets which formerly thought 'good' are turning 'bad' as the global crisis spreads.

    So what do you do - you save for a rainy day as you know the day of reckoning is coming.

    I have been told by a senior banker that a whole series of derivative exposures and swaps are being unwound as we speak and that settlement time is between now and the 25th October.

    It does not matter that the level of 'risk' is equivalent on both sides of the ledger. Those are only figures - what really matters is when they are unwound or settled. Will all parties and counterparties pay up?

    I guess that is the $64 trillion dollar question.


    Another thing - lets stop pretending that this is a recession or even a depression - its a compression - a flattening, the like of which we have never seen.

    Its only a matter of time before we have our first sovereign default - Iceland is nearly there but there are a whole long list of others. After that happens, who knows where we are going.

  • Comment number 45.

    Lending isn't the driving force of a good economy.

  • Comment number 46.

    Looks like the banks are ultimately the ones pulling the strings.
    The banks OWN us!....its definitely not the other way round.

  • Comment number 47.

    Why do banks *need* to lend to each other?

    Why the need to borrow; Why can't they just us their own money??

  • Comment number 48.

    The banks do right not to lend anymore money. the problems that have occured over the passed few months with the banks was nothing to do with the uk economy. but with the housing market in the usa.will remined people wath happened the last time the bubble burst back in the early ninties. 1 million lost there homes. this bubble is ten times bigger which means the banks already know that many people here are going to struggle paying there mortgage. as the goverment have now spent up i think its very wise that the banks keep the money thats in the banks safe, as the money they would of been expected to get is going to fall considerable. sorry to sound negitive, just saying what i think.

    ps. ftse to bottom out at 3200

  • Comment number 49.


    No surprises that the Banks wont lend. We all know that UK banks are heavily exposed to CDS. I still believe the banks don't know by how much. Not one bank has actually admitted and quantified in plain words that they have even been involved. Why? Because to do so would cause a catastrophic collapse. (bigger than we have already seen), unless the banking sector collectively made the admission. In a way, the banks not lending to each other, is in itself an indicator of the scale of potential debt over and above what we already know about.

    Secondly, if the banks were to lend to each other, who in turn would they lend to? Business and home buyers? We are now into a recession. Why the hell would a bank lend to another bank, who in turn is going to lend to a borrower that is more likely now than ever to go bust.

    Eventually, at some point, somewhere, a bank will collapse and investors and savers will lose their money, its inevitable. If government continues to issue guarantees beyond its means, then government loses credibility and a run on the currency begins. Don't believe me? ICELAND its happening to us all.

  • Comment number 50.

    I'm probably about to display deep ignorance of the banking system but here goes anyway.

    My understanding is that banks make money through lending to people/businesses/other banks and charging an interest rate greater than the rate they give to savers.

    I appreciate that there are a lot of complex instruments about but essentially that's what they do.

    If the banks are unwilling to lend they will make no profit. If they are unwilling to lend whilst still taking deposits and paying interest they will make a loss.

    In which case, how long can the banks continue to refuse to lend before their shareholders (including the government) cry stop.

  • Comment number 51.

    As a property developer I've experienced this first hand. Last year we were doing 60 rennovations, this year 3 or 4.

    The banks will not lend, even if you have the money. They have NO CONFIDENCE in lending no matter what they say in public and will not give someone with a great deal of capital money, so what chance does a first time buyer have!

    The Government has to step in to force them to lend. Or take ownership of them.

    The problem is they only (in rare circumstances) give a 70/30 deal as they want no risk. Well, if the Nationwide keeps bidding the prices down and the banks are afraid of lending in case prices drop, what are they going to do - create a falling market where there is no supply of mortgages, excess property on the market and therefore prices will fall - simple economic supply and demand. Chicken and egg basically.

    The banks caused this problem through greed with 125% mortgages to people who can't afford it, inflating a lot of the market by say up to 10% last year.

    The banks need to lend to homebuyers. That's the only way out of this.

  • Comment number 52.

    The failure of rates to fall will be even more serious as expectations of inflation fall to - or probably below - zero. Probably this change in expectations is already in progress.

  • Comment number 53.

    Of course, there is another option to the man in the street owing an unsupportable average of 30000 - add another flavour of poison to the mix, start declaring yourselves bankrupt. That will then put the bad housing debt in the shade!

  • Comment number 54.

    So the Government can't force Banks to lend.

    Well we taxpayers now have 2 lenders ourselves don't we - Northern Rock and B & B. The Government CAN remove the lending and savings caps imposed, and fix the market in our favour, as it is fixed against us at present.

    How many mortgages and business loans could they make per £10 billion, almost all of which would be physical asset backed.

  • Comment number 55.

    What I should also add is that the media, in particular the BBC has had a massive impact on creating the current crisis.

    24 hour news was not around last time the market crashed and we are seeing the impact of irresponsible journalism and speculation have an impact on the market. Investors make rash decisions on what some journalist with hardly any real world experience says and with a sole interest of self promotion and increasing ratings or newspaper sales...

  • Comment number 56.

    @50, your market model's too simplistic. I was chief dealer in a top-100 corporate treasury a while back, so I've been there, done that. Sometimes a business is in hand, sometimes (like after a takeover) it needs funds. similarly, most businesses are cyclic, building stock for a product launch requires dosh, then it comes back in, and the more the company grows, the more assets it has to invest in, and so the more the liabilities increase, whether in the form of borrowing or equity.
    Multiply that by several thousand sizeable companies, and add in the consumer spendign on holidays and Christmas, and there's a sizeable shunt of funds around the place. No bank leaves cash sloshing around, either, so as one person went long, someone else went correspondingly short, and the banks square off the position behind the scenes - in theory.
    In practice, if the banks won't lend, the positions aren't squared, so business limits itself to cashflow in, which also slows and the entire economy dives into recession. The banks are the oil which keeps your lifestyle running, and if the oil congeals, Tesco dies from financial sclerosis.

  • Comment number 57.

    Just goes to prove I was correct all along, in capitalism companies that fail should go bust.

    The banks should have been allowed to go to the wall, save for depositor gaurantee (100% of).

    But hey, Gordon the great has managed to bankrupt all the banks AND cost the tax payer a couple of trillion (at least).

    Where do I get that figure from you may ask? its on the FT's website that you and me and underwriting RBS dewbt and they owe 1.8trillion pounds on their own!!!

    We are BANKRUPT!

  • Comment number 58.


    Well, conspiracy theories are always popular and there are often quite intelligent people who believe them. There are a few things that doesn't quite add up, though.

    Those at the top of banking are already very rich. What's more, they make themselves richer through growth in the economy. They'd be particularly stupid bankers if they 'stole' from us in the way you suggest since this means ruining the economy and giving themselves less opportunities to make themselves richer still.

    Also, the money that central banks are injecting into the economy are mostly in the form of loans and secondarily in the from of capital. The capital injection is relatively small - it's the guaranteeing of loans that opens governments to 'exposure'. Since the government is the guarantor, it is the government, not the banks, that would end up owning your property.

    What's more, if what you say is correct, then we will all soon be very poor and there will be some very rich bankers. In a democratic system such as we have, it would be a no-brainer for politicians to stand with policies that take money away from the bankers and put them in gaol for fraud. Failing that, the breakdown of society would probably lead to a 'terror' in which anyone who still has significant money would be in a very vulnerable position. Either way, it doesn't look very good for the bankers, who would be living in a very depressing kind of world where they would likely fear for their lives every day.

    So, before we start telling tales based on conspiracy theories, let's just realise that it is in no-one's interest for the world's economy to go into recession. Capitalism is certainly not meritocratic. It never was. It never will be. And I don't suppose anyone could devise an economic system that is. Depressing, maybe, but let's just get on with it and stop creating ranting fictions based on self-delusion.

  • Comment number 59.

    A view from the shop floor - I am a commercial finance broker with the unlikely job of persuading banks to lend money to businesses.

    the last couple of days has seen a flurry of activity from my bewildered contacts at the Royal Bank of Scotland, who are falling over themselves to offer deals and assure the world they are open for business.

    The rates are 2-3% over base for "normal" lending. A little higher perhaps than a year ago, but certainly manageable.

    It's the bank commissions paid to brokers that seem to be suffering!

  • Comment number 60.

    18 Sanity4all -

    Order the banks to lend?

    You mean just like Clinton did with those sub-prime things?

    Yeah - right.

  • Comment number 61.

    Since we nationalised Northern Rock and Bradford and Bingley, why not use these two as instruments directly under government control to push more money into the economy via mortgages and business loans? Instead of making hundreds of billions available to banks who do not intend to lend and save the economy (and themselves)? Maybe having a modern version of an active "National Bank" stimulating the economy is not so bad after all!

  • Comment number 62.

    This blog seems most contradictory to me !!

    Firstly, there were the complaints that the banks have over-lent !! Now, there are the complaints that they are not lending enough !!
    If the banks have over-lent and are now doing as they are told, i.e. reduce they lending, then surely the first thing they *SHOULD* do is *NOT* to lend some more !!

    Secondly, if the banks are "awashed with tons of cash", then sure they *DO NOT* have to borrow from each other !! And if they are not, then why make that statement !!

    Thirdly, what has feathers on a pigeon got to do with the fact that pigs do not fly ?? Similarly, what has inter-bank lending got to do with the facts that the banks are or are not lending to their customers (see point 2 above) ??

    Fourthly, many have called for nationalising all the banks and force them to lend !! For their information, this government has already nationalised at least two (2) banks (NR and B&B) and they are *ALSO* not lending to other banks, so nationalisation is *NOT* the answer to such simplistic demands !!

    Finally, we must be hitting a plateau for sensational news if apples are compared to oranges in order to create more sensational news !! In fact, this may be the breathing space and the first good news we've had in ages !!

  • Comment number 63.

    @ 58

    Keep burying your head in the sand or do some research.

    Maybe look into 911, not the Hollywood movie version of events or Fox News for that matter.

    Do you think a guy in a cave organised that?
    Do you think a plane hit the Penthouse?
    There is no evidence of either so please before hurling insults re "self delusion" do some research and take some time to think about things.

    Do you think these guys at the top don't have enough money to live the luxurious life they want already?

    This is about power over all of us, it's not about money.

    I sincerely hope you'll take a look at the issues with an open mind and perhaps look into alternative media sources instead of corporate owned mouth pieces who will tell you only what they think you need to know.

    Please, do yourself a favour and get informed, you may be surprised!

  • Comment number 64.

    #58 The Bible said that "the poor are with us always". I would like to add "and so will the conspiracy theorists and fanatics of all kinds" !!

  • Comment number 65.


    It would not comply with EU competition laws....Barclays and HSBC would cry foul!

  • Comment number 66.

    #59 It's nice to know that banks (or RBS, at least) are still lending to their customers !! Unfortunately, banks' commissions are not engraved in Words of Fire on Tablets of Stone.

    If I remember rightly, the last time that happened, Moses had to climb up a mountain to get them !! (Or at least, Charlton Heston did in the movie !!)

  • Comment number 67.


    I suspect the banks are currently hoarding the cash for a good reason - 21st Oct Lehman's is due to settle on their CDS, and due to the massive inconnectivity between these institutions, coupled with the other unknown quantity of AIG insurance payments (or not) on any defaults is leading to no one knowing who's actually going to be able to pay up. Hopefully the recent capital injections will be enough to cover any shortfalls coming out of this. But until this shake down has occurred and people know where they stand, then I wouldn't go lending any spare cash if I was a bank right now.

  • Comment number 68.

    What completely inaccurate "news". The LIBOR has to do with two issues:

    1) Wholesale depositers - who are not covered at all under any government scheme - are unwilling to lend longer than overnight. The banks can't lend what they don't have. That covers supply.

    2) Banks can borrow at a far lower risk free rate off the central bank and post any old crap as collateral so no desire for borrowing in the inter-bank market. That covers demand.

    The spread you are seeing is the sign of a completely illiquid market. No supply and no demand.

    As for retail lending, the banks are still lending but to people who can show an ability to repay. Is that such a disaster? ( We know where "prudent" Gordon stands with a return to bubble-era lending ).

    The only effect on the retail customers is if their loans are tied to LIBOR vs base. Also means more base rate cuts are a waste of time, which hopefully means the BoE can bank to it's job of targeting inflation. Again, is that such a disaster?

  • Comment number 69.


    BBC News 24 wasn't around during the last great banking crash of 1929-1934

    the only difference this time is that it has happened much more quickly!

    Compression of the news doesn't change the news!

  • Comment number 70.

    #59, Base or LIBOR? I hope you are paying attention to the difference....

  • Comment number 71.

    #49, how exactly do we "know" all the UK banks are exposed to CDS?

    Iceland didn't go bankrupt because of derivatives, it went bankrupt because it's banks went on a lending spree causing Icelandic companies to go on a buying spree and now they are paying the piper. Absolutely nothing to do with derivatives whatsoever.

  • Comment number 72.

    On the one hand, there is a macro economic case for the government re-funding the banks. If the banks apply the funding on their asset side - increasing personal and business lending - then the taxpayer's monies go to supporting the demand side and that should, at least, counter the effects of the forthcoming recession/depression.
    On the other hand, why should any responsible banker, at this time want to apply the taxpayer's equity funding to the asset side? why take on more personal lending when house prices are dropping and we have no idea where the bottom of the market is? Why lend to busineeses in the face of an economic downturn, the drpth of which we do not know? why load the banks with more risk when it was excess risk, coming to fruition that got the banks into the mess in the first place?
    Proper, sensible, conservative banking demands that banks should apply the taxpayer's equity to reducing the liabilities side of their balnce sheets - so no macro economic benefit there!

  • Comment number 73.


    My very recent experience of the banking sector is that even after the Govt "bail out", certain of the banks are still pulling in their horns, i.e. still chasing deposits and cutting back on new lending to corporates. Presumably the deposits are useful as this money is cheaper than the money the banks can borrow on the wholesale markets. I wonder if the cut back on new lending is an attampt by some of the banks to improve their ratios and therefore avoid taking the Govt investment which is obviously damaging their share price. I do wonder how the Treasury will react to this. One of the main points of the bail out was to get lending going again. If this does not happen, what are the choices - will the Govt. have to nationalise certain banks fully so that it has complete control over their lending policy?

  • Comment number 74.

    @ 58 & 64

    nice to see a reaction from you!

    one thing to look into

    The Bilderberg Group

    The list of attendees for a start then maybe start asking some of these people what the meeting was about.

    There are not only conspiracy theories, there are also conspiracy facts.
    It's now known, on the public record in America, that the events leading upto the Vietnam war were faked in what are known as "False Flag Operations" by the CIA.

    It's also now known that Pearl Harbour was allowed to happen and that the American government had prior knowledge of the attacks but wanted to use it as the excuse they needed to enter the war in Europe.

    Does allowing/manipulating these events, leading to the deaths of vast numbers of, not only military personel, but even greater numbers of innocent civilians not make you think that these people have no moral conscience whne it comes to the value of human life?

    I wonder how many people are aware that not only the twin towers collapsed on 911.

    Look into the events surrounding the collapse of Building 7

    I'll leave that with you.

  • Comment number 75.

    The top employees at these banking firms have us over the proverbial barrel.

    The made fat profits when the market was going up.

    They took billions out of taxpayers pockets when the going got tough.

    And now - you watch - they will have to be given further "incentives" (i.e. more money) to lend a hand in clearing the mess up.

    These creatures are really a disgrace to themselves and their families. I would vote for any politician who promised to cause them pain.

  • Comment number 76.

    The recapitalisation has given the bank a breathing space. However, lending is still predicated upon their risk models that were broken especially with regard to insurance.

    [Unsuitable/Broken URL removed by Moderator]

    Its still a question of confidence as each bank tweaks the underlying theorem. The problem for the insurers is the opaqueness of bonds because complexity itself is a factor in the risk assessment.

    All bonds need a visible pedigree just like a prize race horse. The risk assessment committee can then factor in the risks as a safe bet.

  • Comment number 77.

    Can Robert Peston please explain why banks HAVE to lend to each other? In a lend-borrow transaction one party borrows. Banks can borrow from the B of E at a better rate. So why the fuss? Why are banks "hoarding money"? (Robert's phrase).
    If, as seems probable, sterling crashes, won't they lose? Wouldn't it be better to get a return on their (borrowed from the B of E) money by lending it to businesses and mortgagees?

  • Comment number 78.

    The government should temporarily take control of the Bank Of England Interest rates AND the LIBOR rate (within the UK) immediately.

  • Comment number 79.

    Maybe we should ask for that money back, as it's clearly not working.

    How bad would it be if the bad banks fell and the money was used to set up some new banks under proper state regulation?

    Brand new banks with $2trillion behind them? That should raise confidence!

  • Comment number 80.

    I don't see anything strange in the rising LIBOR rate.

    The crunch has happened because depositors (institutional and private) perceive that the risk of placing money with banks had risen.

    If you perceive higher risk, you want higher return.

    Governments have reduced the perceived riskiness of banks but the interest rates being offered to depositors are too low to reflect the risk.

    I think that interbank lending will only be freed once interest rates rise enough to tempt people to place money with banks again.

    The co-ordinated reduction in central bank interest rates looks good for borrowers but as it does not encourage depositors to place money with banks, it won't help the credit crunch at all. Basic economics says that the reward needs to reflect the risk for the market in deposits to balance.

    I notice that the UK Government insisted on 12% interest on the preference shares that it is taking in RBS - a pretty safe bank now that it is being nationalised. The rest of us need to see interest rates nearer this level before we will lend to banks again.

    Interest rates need to rise.

  • Comment number 81.

    listen back in the last eighties when people in london did not want to do the less desirable jobs the conservertive party let a good number of people from other countries into the country to do these jobs, i think the number was around 150,00. this was the cause of the housing boom in the last eighties. it only effected the south and southeast. this relatively small number meant that the housing in this area was more in need pushing house prices up. people where moving out of london and down the m4 and m3 as far as basingstoke and reading. also into kent. the rest of the country was not really effected at all. when the labour party got into goverment they relaxed the boarders of the uk all together. and over the past ten years there as been far more coming into the uk than leaving. the demand for housing in the uk was so great that was the course of the hugh housing boom this time, now you might want to blame the banks or the people for getting mortgages they couldnt aford, but we are humans and if you can make lots of money you are going to try do so. and if you need somewhere to live yet there is not enough social housing about then your going to buy a home you cant aford. and then if you cant get a mortgage you will rent a but to let home. the western world as seen the biggest movment of people ever. not only in the uk but in the rest of europe and the usa. this was never planned for and thats why we are in this mess today. i am not saying its not a good thing for people from other countries to move to the western world, b.put it needed to be planned far better than what it was. so who really is to blame?

  • Comment number 82.

    Dear Robert

    Your analysis is completely wrong. The reason for the lack of trust is 2 fold.

    1/ A litigation hurrican is about to be unleashed against banks and financials. In every major city in the world teams of the very finest lawyers are preparing actions against the world's biggest financials and banks. Assets and accounts will be frozen, huge claims will need to be settled. Many will be unable to fend off bankruptcy.

    2/ The RULE OF LAW is yet to be applied. Many Banks are staffed and run by people who are one parlimentry question, one extradition application, one change of government policy away from investigation, prosecution and imprisonment.
    The scale of the self-cert fraud in the UK and the knowing sale of those mortgages and derivatives secured against those mortgages is mind boggleing. 100s of thousand of people and +£100 billion defrauded. This is corruption on a systemic scale.

    Government has failed to address the fraud. The corrupt remain in place. No one in the know is going to lend money to these business'. We don't even know if the policeman at our door, the reporter, the teacher, the housing officer or our MP is one of the fraudsters.
    The solution is bankruptcy, nationalisation of the banking machinery, criminal investigations and prosecutions.

    Without the rule of law all is anarchy and mistrust. There are no special categories. Crooks can never be trusted.

  • Comment number 83.

    Oh dear.....

    Capital controls and full nationalization of the banking system next Monday then!!!!!

  • Comment number 84.

    We are only on this planet for a short time and in that time it seems to be the goal of human kind to acquire as many possessions as possible. Look at what products-I use that in the broadest sense of the word-are spewed out by industry. Most of them go no way towards improving our quality of life. Our accumulation of goods only goes towards justifying our blood sweat and tears which goes towards the work we have to do to buy them. Take a look around any supermarket-how many obese people are filling their trolley with processed food? Take a look around any shopping centre and see the goods people are buying from shops like Primark. Why do we need these goods? How much has a mobile phone really improved your quality of life? Why do we need to borrow money to buy them? To keep the wheels of industry endlessly turning-we are the hamsters in the wheel. Even the captains of industry with their huge salaries just buy more and more luxury goods mostly to search for some sort of inner contentment. It might sound very niaive to say so, but money will not buy you happiness. We need a massive change in how we view life-and I am not talking about some sort of religious dogma, but a sense of belonging. We need to face up to the alienation that most people in the western world feel, and replacing it with a sense of common purpose and belonging. It is a sobering thought that whilst we are mithering away about the financial crisis in the developed world the other half of the world is slowly starving to death. As Ghandi stated-'there is enough for the needed but not for the greedy'.

  • Comment number 85.

    Post 8 Solomanbrown asks where our gold reserves are.

    Gordon Brown sold them off cheap from 1999 onwards. See the attached link

    Try not to cry when you see the price GB got for it.

    If you weren't depressed enough by that read this

  • Comment number 86.

    have I hit a nerve - my comments are not being shown on the board?

  • Comment number 87.


    Sorry but you couldn't be more wrong.

    At the moment the only thing being discredited is capitalism, socialism looks like saving the day - come the time when the banks get nationalised because they could or would not operate in their capitalist world!

  • Comment number 88.

    This comment has been referred for further consideration. Explain.

  • Comment number 89.

    There is no amount of money that will get this trough full enough to satisfy the greedy snouts of these senior bankers.

  • Comment number 90.

    We are all credit junkies undergoing cold turkey withdrawal symptoms - not least the banks who know exactly what is in the wood-shed.

    Painful, but Micawber had it right.

  • Comment number 91.

    The banks are not lending because the capital that has been lost to the system is far greater than anybody realises.

    I suggest you do a blog to enlighten your readers about the SYNTHETIC CDO market.
    Warren Buffett was correct in describing derivatives as weapons of mass destruction, if he was referring to the credit default swap.

    There are now two markets co-existing. The cash market where people lend money and can lose part or all of it and where it is relatively easy to quantify the losses e.g. in the case of Lehman Brothers it is no more than the amount of its liabilities

    The other market is the synthetic market where CDO's can be created with the reference to the same cash liabilities - the amoumt of such CDO's can be many multiples of the cash liabilities. The synthetic CDO uses a credit default swap to create the risk - it writes the swap, in effect taking on the credit risk even though it has not lent any money.

    The press has not paid much attention to this market because it is in effect a zero sum game - the buyer of the CDO paper is the loser and the buyer of the credit default swap is the winner.

    The problem is that by and large the losers are banks and insurance companies and the winners are hedge funds. The winners are not putting their money back in as bank capital.

    To give you some idea, S&P pointed out today that Icelandic banks paper was in 376 cash and a further 297 synthetic CDO's, with Lehamn and WAMU also popular synthetic paper.

    1. Capital has been permanently lost to the system.
    2. Bacause we can only quantify the cash losses, nobody knows how big the synthetic losses are or even where they are.
    3. Our wonderful regulator the FSA has been spending the last 5 years inspecting the wholesale markets for their anti-money laundering procedures instread of assessing their risks to these types of instruments and still have not woken up to the dimension of the problem.

  • Comment number 92.

    No. 55

    Wake up. Over 9O% of all transactions are OTC dominated by a handful of investment banks and other financial institutions. They don't make the decisions on the basis of reporting by newspapers and other media.

    The small, confused investor investing in the markets and making the markets by this is nothing else but illusion, although very real for him or her when he looses.

  • Comment number 93.


    re 911

    No, a man in a cave didn't plan it, he just funded it, the planning was don by one of the terrorist whilst studying architecture in Germany, that last point is FACT, as he gained a degree level qualification there.

    Try looking at known facts rather than extrapolating from articles on the internet - that often have their own political agenda...

    Anyway, this is way off topic now for this blog.

  • Comment number 94.

    Perhaps the government can set an example to other banks with Northern Rock. As a Mortgage/Financial Adviser it annoys me that Northern Rock reduce their variable rate to 7.34% (2.84% over base!). Nationwide's variable rate was 6.49% before the rate cut.
    This hits their most vunarable client's who are the 100% + mortgage client's. If they finish their fixed/discount rate, they have zero chance of remortgaging and Northern Rock don't give them any other mortgage scheme except the variable rate.
    I hope the government are made aware of this, as they will be in the repossessions business soon!
    At least they could get in line with other lenders and perhaps cut at least 0.25% off the rate for the high loan to value borrowers.

  • Comment number 95.

    No 8O
    There was no deposit crisis. The problem was on the banks' assets side that underminded provisions and very likely proper equity too.

  • Comment number 96.

    your comments are way off the topic and you should stick to the discussion at hand.

    BTW i think that you meant to ask if a plane hit the Pentagon (rather than the penthouse) didn't you?

  • Comment number 97.

    # 93

    You're right on terrorists studying architecture, pilot training etc...but it's also fact that this was funded by the CIA. It's also a fact that some of the supposed "highjackers" are still alive!

    Yes, off topic but was brought up as an example of moral corruption within the elites of the world.

    By the way, why didn't you comment on Vietnam or Pearl Harbour?
    Will you be convinced in 30 years time about 911 when official documents are released as is the case re the above?

  • Comment number 98.

    No I meant the Penthouse, it's called "sarcasm"

  • Comment number 99.

    No, I meant the penthouse!

    Sarcasm is alive and well in my neck of the woods.


  • Comment number 100.


    "Who's to blame"

    Not immigration, that is for sure, so please don't try and pull that card out of the pack.


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