Why bank shares are falling
The government announces massive, unprecedented financial support for our banks, and their share prices fall - well all of them but that of HBOS.
Shome mishtake shurely.
Well no, that's completely predictable on the basis of a decision by the Treasury and the Financial Services Authority - as part of the rescue package - to pressurise eight banks into agreeing to raise at least £25bn in new capital.
This capital can come from commercial sources. But even if, for example, Barclays was able to raise new capital from regular private sector investors, that capital would be expensive - which is why its share price has fallen (by 15%, as I write).
And since the Treasury is actually making available at least £50bn of new capital to recapitalise the banks, it's pretty clear that the FSA - the City watchdog - thinks they'll need that much.
So it may be good news that the Treasury is prepared to shore up their balance sheets, but it's pretty bad news that there's such a big hole to fill.
Also the £50bn from government comes with expensive strings attached - such as reductions in dividends payable to other shareholders, and commitments to start lending again to small business and home buyers.
In other words, shareholders in the banks are being punished for the sins of executives who will need to go cap in hand to taxpayers.
Why has HBOS's share price risen?
Well, the big danger for HBOS was that it wouldn't be able to refinance its medium-term borrowings from the money markets as they fall due in the coming couple of years.
It faced possible insolvency due to the drying-up of these wholesale sources of finance.
HBOS has in effect been taken back from the brink by the Treasury's decision to provide a guarantee for new short-term and medium-term issues of debt securities by banks.
This may sound like gobbledegook. But what it means is that when banks raise money from other financial institutions, those loans will be guaranteed by the state.
Which means that when a bank or money manager lends to HBOS from now on, it is in effect lending to the Treasury or to all of us as taxpayers - and we're a pretty good credit.
So HBOS - and other banks that take advantage of the guarantee - should be able to start raising funds again from commercial sources.
Now here's the resonant conclusion.
If HBOS is no longer in imminent danger of going bust, there's no longer quite the same imperative for it to be rescued and taken over by Lloyds TSB.
That deal now looks like a fantastic one for Lloyds TSB, because it's a once-in-a-lifetime opportunity to create a retail super-bank.
But HBOS shareholders might wonder whether they're selling out too cheaply.
And the competition authorities may bristle too. They may nag the government about whether ministers were right to rule that the deal should go through, irrespective of whether consumers could be hurt by the birth of this monster bank.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~12~RS~)
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I have to say Robert, is this the tip of the iceberg? I think this is just the start of the government effectively reducing Joe and Jane Bloggs ability to buy things in the 'real economy' All this taxpayers money is going to deprive real consumers of real purchases in the real economy. We're all more heavily in debt because of it.
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Whilst this banking bailout is a top down sollution, may I suggest a bottom up sollution.
The "credit crunch" originated with people (not corporations or banks) selling mortgages to people who could not afford them. This is educated, relatively wealthy people (not institutions) trying to get hold of the money of relatively uneducated people.
Not very pleasant at all.
Since it all is about people (the institutions and banks are just a conceptual grouping of people) why don't you (the financial people) all stop trying to take money off people who are naive in comparison to yourself ?
Then we really may have a solution to the problem.
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There has been very little comment so far on the HBOS 'rescue' package by Lloyds TSB. The whole reason for this as I understand it was to strengthen HBOS balance sheet. The 'price' of this was a loss of autonomy for HBOS and the loss of the iconic Bank of Scotland name. IF I am an HBOS shareholder would I not now prefer the option of taking the governments money albeit with some strings attached so that the HBOS bank can retain its 'independence' Would I prefer Treasury 'control' which amounts to some 'strings' attached to lending to small business and some restrictions on executive pay to almost complete lack of control in the arms of Lloyds TSB?.
My guess is that we could well see this deal unwind as the 'Scottish lobby' gets going on this issue.
Not a word about this from correspondents at this mornings press conference nor from the two Scotsmen at the podium!
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Ah, so this is no longer just about saving banks, it's about saving house prices.. It's insane. Rather than banks committing to start lending to house buyers again, they should be committing to reducing their net lending and pay back the tax payer.
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where are the balance sheets?! We've just been committed to loans and acting as guarantors-does the government really think we're all stupid?!
Have the banks taking advantage of this guaranteed they will help small businesses and families? And which banks are helping themselves to it?
Assuming the plan isn't part of the Official Secrets Act, can we PLEASE have some openness here? Publish balance sheets, the rescue plan and the banks partaking thereof!
And has the EU given it's permission yet?!
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Could someone correct me?
1) The Government are going to use £50 billion to buy bank assets and give them liquidity.
2) They don't have the money - to say it's taxpayers' money is glib - so they have to borrow it (on top of a £1,000,000,000,000 debt)
3) The money will be raised by offering (presumably) gilt-edged stock to the markets.
4) This stock by definition is a very safe form of investment.
5) So the banks will rush in to bid and buy the stock.
6) Thus reducing liquidity by exactly the same amount as the money poured in.
So other than buying bank shares at (hopefully) the bottom of the market and thus potentially obtaining a good ROI what has this done? Of course using banks' own money to buy their shares is genious!
To make dozens of comments about 'remuneration packages' is just political posturing - in the scheme of things the remuneration packages is relatively small.
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"The government announces massive, unprecedented financial support for our banks, and their share prices fall - well all of them but that of HBOS.
Shome mishtake shurely."
No mistake, because things have not changed as the status quo banking System wriggles to remain the status quo banking System..... and with Labour Party help. What a disaster in the face of a disaster.
Resign, Gordon, do us all a Big favour.
"Support banks by raising additional capital by investing directly through preference shares or at their request, by assisting them, by raising ordinary shares.".... Gordon Brown .... http://news.bbc.co.uk/1/hi/business/7658277.stm
That is just so typical of wishy washy, ineffective and ineffectual leadership. All help to the banks should be through preference shares surely.
IT is as well to realise that this is a Quite Titanic and Pathetic Battle between Banks and Governments as to whole Runs and Rules the Planet. Previously it was the Banks and Bankers and they failed Miserably in their own Greed. They would do well to understand that Times have changed and they are no longer needed whenever Governments can conjure up hundreds and thousands of billions on their own with Simple Statements of Intent.
The Scam is Over, Gentlemen. Retiring gracefully to the Sidelines is a Shared preferred Option you may like to avail yourself of in order to keep whatever nest eggs you might have salted away.You will not be thanked for any attempt not to change in order to retain and maintain your artificial leadership position.
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Good reporting and analysis, Robert. Bank share prices are a good indicator, so your analysis is particularly helpful.
Meanwhile, though, I would caution against judging this restructuring/rescue process by the behaviour of the broader market (FTSE index, etc).
It is clear that we are going into recession, with adverse implications for company earnings, so continued deterioration in overall share prices is quite natural, and need not represent an adverse market judgment on the restructuring plan itself.
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If shareholders are being punished, it is for their collective failure to ensure that their companies were properly run. I'm a shareholder, and I know how little influence I have on our executives. But that's the deal. And if I must reap the whirlwind, so be it!
The point about HBOS is very well made. It is an almighty bungle by the Government, and gives the lie to the idea that these plans have been under consideration for some time.
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Robert - surely you must understand that lending more isn't the answer. Have a read up on Fractional Reserve Lending, look on YouTube for the "Money as Debt" video, work out how much imaginary "credit" money (aka debt) is out there compared to real money, read up on resource depletion at TheOilDrum and ResourceInsights and then see if you can explain how the heck all this debt will ever get paid back.
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My view is they should have started hoovering up bank shares in the market it sends the message that the government is committed to ensuring the survival of the banking sector while at the same time not to dilute shareholder value.
Once they had picked up a large number of shares at knockdown prices the sellers would keep shares and new buyers would have come in to the market. The knock on effect would have been significantly improved share value for the tax payer.
all they appear to have done is lend them more money but told them to improve your capital ratio meaning therefore this will not flow through the market. they have also given them the opportunity to dilute shareholder value by the government buying a stake in preference shares I am not sure where the incentive is to stop shareholders dumping their shares.
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Shortlist for the funniest and most incorrect things ever said in the City:
1: 'We have eliminated Boom and Bust' (Gordon Brown)
2: 'Our economy is well-placed to ride out the current economic conditions' (Gordon Brown / Alistair Darling)
3: Anything connected with the theory of 'de-coupling' (most US analysts)
Any other suggestions?
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Whatever happens with the banks and interbank lending, here's the paradox: what got us into this mess was irresponsible consumer borrowing and spending and what's about the only thing that can get us out? More of the same! Yes! That's it!
Now if the chancellor were to lend £50bn directly to us and we were to irresponsibly SPEND SPEND SPEND.... well, it's our money isn't it!?
Remember, one person's irresponsible purchase is another irresponsible person's wages! Capitalism.....shocking isn't it!
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So can we accept that whatever the banks said yesterday in their press releases, RP was right in his reporting and they did ask the chancellor for cash? If thats the case (and I never thought Id say this), but good show Robert.
These banks WERE clearly overvalued!
I agree with the comments on raising his own profile (he's got a mention on the front page of the Metro this morning), but I think that's inevitable!
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Just one thing government should make sure that this money stays with in UK.
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The toxic derivatives that are the cause of the collapse of the western financial system originated in America, as we all know. A recent article in the Gurdian by an economics professor from California made clear the "originate and distribute" strategy that the US financial institutes followed. Dodgy mortgages were concealed within incomprehensible financial instruments and sold for vastly more than their true value.
Somewhere in the USofA there are some VERY RICH bankers who sold us ALL down the river. But what are the chances of getting the most powerful state in the world to get them to compensate us for our losses? SFA!
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Again, I've seen no reference to HSBC? Does that mean theyre not going to the BoE for support, because theyre the only bank that doesnt need it? They would be eligible, under the terms of the chancellors statement.
Since NR cant fit anymore money in its vaults and Lloyds / Barclays / RBS are all looking desperate (and possibly liars yesterday, too), should we all be investing with HSBC?
And no, I don't work for or own shares in HSBC. I just wondered -
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It is imperative that commentary on this issue addresses long term solutions.
We need:
1 - a global registry of assets and liabilities
2 - a means by which to value such assets and liabilities, mark to market and not mark to model. If you mark credit derivatives on a maximum liability basis, they would be come far less useful.
3 - a global regulatory authority which is independent of any single country and its politics
4 - limits on the reliance of short term funding usage in banking
5 - a Glas Steagle styled global Act - the repeal of this act was where we began to unwind.
6 - a rethink on securitisation - lenders must take responsibility for lending and not be able to pass on the liabilities to some distant organisation that has no appreciation for the risk they are taking.
If these initiatives were passed we could get back to the business of business, build confidence and establish a back bone strong enough for the global economy and all the benefits it could bring.
Stephen Flood
www.goldassets.co.uk
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"Pestons Picks"?
Sorry, I've only been following this blog since NR last September and I've been wondering... Did it used to be a standard "I'd buy shares in so and so" type business blog?
My how RPs gone up in the world if it did -
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Nice point, itreallyis42. I was a little troubled by Robert's phrasing: 'shareholders in banks are being punished for the sins of executive' - this implies that the shareholders are innocent victims in all this. When you buy shares in an organisation you are signing up to risk - that's the whole point of speculation: you might win big precisely because you might lose big. Shareholders (should) know very well when they buy shares that they are handing over control of their wealth to executives. More fool them if they hand it over to unprincipled or incompetent ones that get them in a mess.
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The fact that the Government believes £50bn of new capital is needed does not mean that there is a hole of that size to fill in the sense that further write offs of assets of that amount are required. We don't yet know to what extent this is being used to raise the banks capital ratios.
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I have concerns about the plan to invest via preference shares and the proposed restrictions on dividends.
1. The use of prefs will mean that - unless they are listed - there will be no benefit to taxpayers if/when ordinary shares in the banks rise again. Prefs without conversion rights are close to fixed interest investments.
2. Restrictions on dividends and the dilutive effect of the prefs means that the ordiinary shares will be depressed. This will have calamitous effects on the many pension funds and insurers holding shares in the banks, and the restriction on dividends will impact the cash flow of these institutions.
3. As tracker funds rebalance their portfolios to reduce their holdings in bank shares (see how FTSE has moved in the opposite direction to bank shares in the last two days) the impact on bank shares will be even more marked.
Hardly surprising therefore that bank shares are in free fall today.
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Any thoughts on the Iceland situation?
It seems that our government is going to protector Icesave savers; that Iceland isn't even going to honour the GBP 16000 per person minimum guarantee; and that it is going to protect Icelandic but not foreign depositors.
If true, this is outrageous. Should we tell Iceland to honour the minimum guarantee, and tell them that, if they don't, we are going to seek redress via Icelandic-owned assets in the UK?
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Is the merger really such a bad deal for HBOS shareholders? The HBOS shareholders get paid in Lloyds TSB shares, which you say should do well out of the deal. Currently the two banks' shares are converging on the relative value agreed for the merger.
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With the full backing of us, the British people, will the bankers now be free to jet around the world borrowing as much as they like with no risk to themselves or to their lenders ?
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This is effectively the taxpayer eating himself..
- the single way a bank can turn a profit is by earning interest on loans it sells to people..
- this future debt (that will create the "profit") for the taxpayer.. will be issued to..
..the great british public (aka. the taxpayer)
- so the taxpayer can only ever "earn" (it's a joke if it wasn't so dreadful) the EXTRA they pay in intrest on their (eg mortgage)
..LESS the administration fees of banks (eg salaries)
= we're paying the bank £10 in order to be paid back £5.
Eating oneself keeps hunger at bay for a short while but is unadvisable..
I for one shan't be paying "taxes" from now on anyone with me?
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11:
Very good idea, and nothing says they can't still make market purchases of bank shares. Even relatively modest counter-trend buying in this market could have significant effects.
The only snag I can think of here is that government is an insider on the banking issue, knowing more than other investors, so market buying by government could breach the rules.
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Where is the leadership?
where is the vision?
the answer is not an injection of capital, of any amount, by the government which means debt for the nation, but forcing the UK banks to act collectively and start lending to each other e.g. a compulsory percentage of their capital must be lent out to other UK Banks......find a bank and market solution to a bank and market problem, rather than more debt for the nation
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#7 - amanfromMars
Is there some kind of significance in your random use of uppercase letters? Should it spell out some kind of secret word youre trying to get into our subconscious (or past the moderators)? Or are you just Stressing Everything?
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The credit crunch is the solution, not the problem. The problem was excessive lax lending.
By throwing more taxpayer money at the banks, our government is merely prolonging the pain.
Things will continue to be hairy.
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Phew, lucky we've told them not to be so naughty in future, or they might assume that we'll just continue to bail them out over and over again.
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HBOS shares dropped more than most on fears that the Lloyds TSB takeover might colapse. Surely the reason that HBOS is rising is that the market now thinks the takeover is still on. There is nothing in the Government rescue plan to stop this takeover from going ahead as planned.
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Does all of this represent a good investment for the UK taxpayer ?
Well, relative to invading Iraq, building the Dome and continuing to offer unfunded Civil Service final salary pensions I would say that trying to save the economy sounds like an excellent idea.
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Brown - "Not my fault"
Dec 2003 IMF gives Brown borrowing warning
Sep 2005 IMF report warning over £1 trillion mountain of debt
Sep 2005 Brown besieged over growth and borrowing plans
Dec 2005 IMF fires new warning over Britain's finances
Sep 2006 IMF warns over UK property crash
Oct 2007 IMF report UK house market is 'heading for crash'
Apr 2008 IMF: UK vulnerable to US-style housing slump
Oct 2008 : UK taxpayers bound to slavery for the next ??? years.
Oct 2008 : My pension shattered to bits. Brown says "Not my fault"
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the bail out in the US had to provide some protection from banks aggressively going after borrowers who were struggling.
Are we allowing the UK banks that cannot meet their commitments to borrow taxpayers' money so that they can continue to repossess homes from taxpayers who are struggling to meet their commitments
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Mr Peston you make a valid point of the worth that HBOS shareholders believe they have a right to. But it isn't exactly a balanced arguement is it?
We are taking a share in banks. The Bank's balance sheet has to be turned around in the face of what will be unprecedented right downs on the value of their assets. HBOS is compared to the rest of the high streets banks much less capitalised. We the country are shareholders and must have value for money. A struggling bank whose mortgage raison d'etre has no place in todays market is not an attractive proposition.
Shareholders, of which I am one, may think independence is will offer them a better deal. They'd be hugely wrong. Any attempt to negate the HBOS Lloyds merger could have disastrous risk to the tax payer and terrible consequences on the market. Whatever happens there is one thing certain the markets would crush HBOS's share price. We the tax payer would be left with a monumental bill covering HBOS' liabilities. Market's don't like indecision at critical moments. Lloyds TSB must take some of the risk now or the state will own the whole of HBOS at huge cost.
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The government should reconsider its situaton over HBOS being taken over.
The UK has already lost Northern Rock, Alliance and Lesciter and Bradford and Bingley.
They all offered savings accounts or current accounts that were better than larger rivals so consumers are already going to see less compeition in the market.
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No 2,
Surely the problem was the otherway around. The 'uneducated' as you call them were struck witha desire to own property, and possesions which they could not afford, and they wanted them now. Just because there is an opportunity to buy does not mean that one has to. They thus borrowed heavily to finance these purchases - Car Loans, Mortgages, Credit Cards, Overdrafts - without considering if they could pay them.
I fully agree that the banks should have better regulated to whom they leant money (after all Shareholders and Savers do not want Loans defaulted), but an equal burden must rest with those who borrowed more than they could afford to repay.
In a way they and the banks commited the same mistakes - borrowing long term and financing it short term, or borrowing more than they could finance.
Let us hope that the Government is not making the same mistake borrowing billions from the (mainly) Middle and Far Eastern banks. After all, if we (or America) cannot repay the debt - due to decreasing tax income as a result of the impending recession - then does that mean the chinese will reposess us? Or are these loans unsecured, in which case, I hope that we are lending to the banks at a higher interest rate than we are borrowing at.
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Let's hear it for Darling: the man who's basically written another blank check to these rogue bankers with no guarantee that we'll see a return on it. What a brave man, the man of the moment, well, no, a weak and negligent man, corrupted by his influential 'friends' in the city. This is not a 'rescue' this is a 'bailout'. Heads have to roll. One condition he could have insisted on was that those implicated in the mess are sacked, not 'retired' or asked to gracefully leave the scene, but sacked. My God it's the least we should get out of this mess. Get rid of the rogue bankers and let the rogue banks go to the wall. The banks don't need our money to restructure they need to go bust This is the only thing that'll sort out the mess.
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This must be the bitterest pill that Merv 'moral hazard' King has ever had to swallow.
Many posters keep banging on about the Fractional Reserve Banking system but it seems to me that modern economies need this, but crucially not at the levels of leverage that we've seen recently.
I do not think it is feasible to return to an Islamic style Full Reserve system.
We are sort of witnessing a massive deleveraging now, despite the best efforts of HMG and others to deflate the 'bubble money' more slowly.
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Prior to this melt down bank shares were priced on earnings that were greatly enhanced or even dominated by profits from high risk 'investment banking' type business eg buying and selling mortgage assets etc. One of the great tricks of investment banks was to get investors to treat commercial banks and investment banks as the same risk. This meant high profit, very risky investment bank earnings were given the same weighting as the more boring but significantly safer earnings of commercial banks where deposits were taken and loaned out to businesses. No wonder commercial banks went down the risky path.
Hopefully investors will now price shares correctly by taking account of risk. This should mean investment banking share prices being lower because the better returns are offset by the riskier nature of the business while commercial banks with their lower returns are better weighted because of the lower risk. Given that the whole banking business in the recent past hoodwinked investors into weighting high risk activities as low risk share prices in the future will be lower. Of course that is once everything is back to normal
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This is a very wise and important package. If we get interest rate cut on top of this we should be back in action. By the end of this week the key banks will start getting wet (more liquid) and this will settle short term matters.
Those banks concerned are implicitly being reined back, as rightly they need doing so. There are anniversaries approaching pertaining bonds/loans pay back and renewals, but this package should help considerably and a cut in interest rates will for short and medium terms save the British Markets. Regulation is important as, when it comes to money; abuse, greed and corruption raise its ugly head, especially if irresponsible control is let loose. FSA and as well as additional public/government personnel, (many accountants, compliance, etc) must be put in place to oversee business practices to get the banks out of the bad times.
A very important issue regarding the quality of business products, (derivatives) traded needs to be looked at. Foreign banks, especially American banks, are self rating and so far they are to blame for the mess we are in. Institutions have been doing business blindly for the last 5 years, the management taking pay/bonus packages while they were heading towards a dead end.
The future is real and there for us. It is not the end of the world and we have a lot of living and loving to do. As far as life is concerned its business as usual. Let?s turn around, fuel up, find the right path and carefully continue with the journey.
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Dear Robert,
The banks are not lending to eachother because they think that one or more of the other banks are insolvent. How does putting in 50 billion pounds of our money convince the banks that the other banks are solvent. Does anybody have any idea how insolvent a bank like RBS might be?
Frightening, truly frightening having someone else using your money to prop up stupidity.
CaptainKAM
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As ING has bought the UK depositors of Kaupthang and Heritage this AM at least that should reduce the amount the FSCS has to pay to some savers with Landsbanki.
All we need now is someone to buy up the UK savings of Icesave.
Anyone want to guess how long it is before ING reduce Kapupthang's market leading savings rates to inline with the ING Direct rates?
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Great reporting Robert.
Personally I think the Chancellor was a bit wishy washy in his promise to curb fat cat bonuses. I don't feel that he is in control of things at all. I don't like the idea of him gambling with public money at all.
George Osbourne seems much more in command (but sadly only in opposition). I'm convinced that the Conservatives really are the party for the people now. Labour are the party for losers.
How much is it going cost us to repay all the funds UK citizens have lost in Icesave?
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I think the Government have finally addressed the issues and provided a broad approach to the pressing needs of some of our key banks. As you, Robert, has said on many blogs, it's not just toxic debts but the need for capital and liquidity. Let's hope it works and banks can resume their important role in our economy but with more oversight and control.
However, how did we get into this mess. I suggest the Gramm-Leach-Bliley Act in 1999, which repealed the Glass Steagal Act that restricted Banks structures in the USA, might be a candidate to blame.
This Act resulted in the formation of the "Financial Services" industry in the States and the rest is history.
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The government has done well. Not only is this package smart but it also looks like good news for bank shareholders. A lot of the help is "opt in", the best type, because it helps the banks even if they don't opt in.
The best bit is the line "..and is also willing to assist in the raising of ordinary equity if requested to do so." That looks like a promise to underwrite a massively discounted rights issue to me.
As I write the bank sector has fallen less than the FTSE100, and I predict that we will see the markets reverse the declines fairly quickly, especially in RBS but also Barclays and Lloyds.
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This is disgusting. The Government is giving the banks 50 billion pounds of our money so the banks can then lend it back to us at a profit.
The government should be using this money to protect the poorer private investors first instead of bailing out the incompetent banks who have created this mess in the first place.
I also suggest that the board of directors for these banks should be help personally responsible for the collapse. They over leant to people based on a housing market that relied on perceived instead of actual wealth.
The last couple of weeks is not capitalism gone wrong, this is capitalism working, and as such the government should let the marketplace sort itself out.
Anyone who thinks that capitalism is all about growth is an idiot because everything has a ceiling and what goes up comes down.
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Robert
Please could you tell us ALL on your next blog, what were the profits of our big four banks over the last two tax years.
We never see ant breakdowns, are we likely to see this from now on ?
As I recall we have a annual profit competion, who can make the most.
Where has all this profit gone !!!!!!!!!!!!
This would be a great help to all of us who over the last three weeks have been following your blog.
PS. have you been home yet or do you have a room at the BBC ?
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It's worth checking the market prices of the banks' Preference shares, too, since that's what the Government intends to invest our money in.
RBS prefs, for example, were trading yesterday at a yield of 31.4% ! What % is the Government proposing to demand on our behalf ?
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Have KAUPTHING stopped allowing withdrawals?
A CHAPS transfer initiated on 06/10 from a Kaupthing Edge account has still not arrived at the destination bank (08/10 11.30) - have Kaupthing stopped withdrawals - I note that news about a buy-out of their UK savings business has emerged today.
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I would like to put on record my absolute disgust in which you treat us the general public. We are not stupid. You have made your name as the person talking constantly about the credit crunch. How much do you earn? Is your mortgage safe or do you own your own house? You should try living on the minimum wage for a year to see how you handle. It will take the arrogance out of you.
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Some people refuse to see the upside of this.
According to reports Northern ROck have already repaid half of what they were loaned which will come with interest to the treasury.
It could be that the govt makes a tidy profit out of all of this.
As they can effetively keep the banks afloat they are not at risk of failure. If you realise that the banks will be monitored so that they do not take excessive risks intheir investments you can assume that their business will be profitable and they will remain going concerns. As such it's a pretty safe investment for the govt who will see a return from the operations of private businesses.
As banks shares can't go much lower the govt wil also make money when they sell the shares a few years down the line when they should be worth considerably more than they are now considering how oversold they are.
It may be bad for shareholders ( I am one) but for the general taxpayer this could be quite a boost to the treasury coffers in time.
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Does this mean the "Big Bang" experiment is over and we will revert to heavily regulated Banks. Looking at the effects of unregulated Banks they seem to have little to recommend them as we speak. But maybe when bank shares are resold by the government we will all be patting ourselves on the back for such decisive action - short memories are very useful.
Perhaps some will remember the mid-1980's when to get a mortgage you had to have saved with an institution for at least a year (or more) before you would be considered for a mortgage - will we end up back there? Buyers will need a decent deposit to be put into housing, in Germany you need 25%, seems like a good idea at the moment.
Where have all the credit card adverts gone?
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In a supposed market economy, we did not intervene when share prices were being inflated simply by up-valuing one share on another. The FTSE was over 6000 purely because the 'markets' were buying at higher and higher prices. Where did that money come from? and got to? Nobody suggested Governnment intervention when the market had a daily rise of 10% .... so why not let the market fall until it finds its own level. This was chapter one of my basic Economics textbook as an undergraduate.
If the Government wants to insure that money finds its way into the 'real' economy, I don't understand why they are channelling money to the failing banks? Why not lend directly to the borrower - say via Local Government in association with planning application approval for business or house building? Why not simply create jobs in the public sector that have been 'downsized' or privatised in recent years - say cleaning in hospitals - and pump billions into the market
and to the banks via employment? In the most successful recovery of a collapsed market in economic history, Hitler and the National Socialists used public projects to regenerate a failed economy although their subsequent crazy, disastrous political and social policies buried this important economic achievement.
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This is effectively the taxpayer eating himself.
- The SOLE way a bank can turn a "profit" is by selling loans and charging interest.
- These loans (creating future "profits" for the taxpayer) will be sold to.. the great british public (aka. the taxpayer).. as mortgages/credit cards..
- The only amount the taxpayer will "earn" (it would be funny if it wasn't so serious) is the EXTRA we pay in interest (on mortgages etc) ..MINUS! the administration fees (salaries etc) of the bank.
So we're PAYING the bank £10 to earn a "profit" of £5.
I'm no good at maths but that sounds like a loss of £5 to me.
Eating oneself staves off hunger for a short while but it is inadvisable..
This is widely reported as a "nationalisation" of the banks..
- instead this is a reverse takeover of the state, by the banks.
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The banks are not lending to eachother because they believe that one or more of the other banks are insolvent. How does pumping 50 billion of taxpayers money convince the banks that the other banks are not insolvent. Does anyone know the scale of the insolvancy of the banks - RBS in particular comes to mind.
This 50 billion is being used without knowing the scale of the problem. This is propping up stupidity. Say all the British banks went bust - so what there are other banks in this globalised world
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Here's a naive question. Share prices are falling because there are lots of people who want to sell shares. Presumably they are not putting their cash under the mattress. What are they buying instead?
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Am I the only person who is worried about the analogy with what happened in 1992? Then, the pound was looking like it would crash out of the ERM. The government spent billions on trying to shore up its value. Despite that, the pound crashed out of the ERM, and the government looked really silly.
So what happened then is that the government spent billions betting against the market, and the market won. Here, the government are spending billions betting against the market. Am I missing something, or does the lesson of history tell us that this is likely to end in tears?
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Does anyone know what advantage, if anything, Nationwide will be taking of the offer?
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This package by the government is the fiscal equivalent of rearranging the deck chairs on the titanic. What is needed is a period of 1-2% intrest rates,and a change in accounting rules to let banks write down non performing loans over the period of the loans. At present we are all taking the short term view and present accounting rules encourage this.
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51:
I don't know what's happening here but, as I've posted here already, we need to sort out this Icelandic thing. It looks like a microcosm of the whole sorry mess.
The way it looks is, "we'll take deposits from UK savers - we'll use this to buy companies overseas, particularly in Britain - when it all goes wrong, we won't even provide minimum guarantee compensation to the British depositors, HMG can do that - but we still expect to keep the assets that we bought with your money - right?"
If I'm reading this correctly - and please tell me if I'm not - we need to sort this out, telling Iceland to either honour guarantees or lose assets.
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Why is the govenment so desperate for the banks to start lending again. This is what got us in this mess to begin with. Greedy banks and shareholders looking for more and more ways of increasing profits because the 'traditional' market for mortgages was becoming saturated. Now these banks will take the government funds, add them to their balance sheet and hey presto, they continue to make profits. Why can the banks not just lend what they can afford to from their customer deposits and be happy with making a profit, any profit.
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We need to be careful not to take our eye off the global ball, so to speak. Today's actions might help the UK situation, but what's happening in Europe, Russia, the US, the Middle-East etc today? I remain to be convinced that this action will not shortly go the way of the US's TARP, ie a drop in the ocean. The degree of global banking inter-connectedness is now so high, it's difficult to judge how actions in one country can stave off the contingent effects of linkages to other countries' banking systems.
Let's assume/hope that Darling's Dodge works. Meantime, look at the global economic leading indicators ... there's an awful lot of downward-looking trends out there. If I hear another 'expert' or politician warning me that we could be looking at a mild downturn/recession or whatever, I'll chuck the TV/radio out of the window.
Surely, common sense says that what we're now facing is something rather more painful than a mild recession? Can somebody tell me (honestly) if a depression is now on the cards? If so I think I'm as much concerned about the social consequences as the economic ones. Unlike the 1930s, perhaps citizens these days are far less self-reliant?
Or put another way, since we seem to have created such a fragile, gossamer-thin way of life these days, will not economic failure on the scale of a depression have much more profound social implications?
But hey, this could work; let's hope so. Glass half-full?
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Looking through the package it seems the Government will give capital, loans etc while 'contractually' insisting the banks lend to people and businesses and do not use their capital for sexy investment style business. In other words banks will return to their old fashioned core business of taking deposits and lending to businesses. This is what people expect of banks. I have surplus cash and want to lend it but want to spread my risk so I go to a bank where lots of people are depositing money and the bank is lending to lots of borrowers. A nice spread of risk for which I am happy for the bank to make a reasonable return. I don't even mind the banks lending my short term deposits out on a long term basis like mortgages so long as I know my interest rate remains competitive. It was because baks started underpaying for deposits that building societies came into existence.
Banks need to go back and rebuild their business model as a facilitator between depositers and borrowers with no cross subsidies and fair returns for all including the bank itself given its value added - as a facilitator. Such a low risk, unexciting business would receive an excellent share rating and true long term investors like pension funds could settle back knowing it has a sound long term investment to offset against its long term liabilities.
Everyone is a winner except those looking for an enhanced short term super gain, be they employees or more speculative investors.
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Well Robert, according to the Daily Mail - not that I often frequent the real or virtual pages of the rag (can you describe a virtual page as a rag?) but this caught my eye:
http://www.dailymail.co.uk/news/article-1072549/BBC-reporter-Robert-Peston-blamed-helping-trigger-shares-fall.html
So you are responsible for giving the Bank of England its independence; responsible for handing exchange rate policy to appointees of the Big Four banks; responsible for eleven years of unrealistic credit-debt madness; for allowing the same process to occur in the USA, however cleverly disguised with under another name 'sub-prime mortgages; responsible for the creation of new forms of 'The South Sea Bubble with such inviting names as Hedge Funds, CDOs and Derivatives; responsible for the collapse of any number of financial institutions all over the world, but with particular interest in the UK, commencing with Northern Rock.
In my attempts to explain to friends and fellow workers what is wrong with Financial Markets - and here read Capitalism, I refer people to your blog and particularly your posting 'Liars? loans' of 20 Aug 07:
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/08/liars_loans.html
The question that the Daily Mail needs to answer is: what don't you like, the message or the messenger?
The big question for everyone else in the UK is:
If the person who gave the Bank of England its independence (with the first act of policy New Labour engaged in - what a tombstone that is!), handing over management of financial markets, the setting of interest rates and consequently monetary policy, is now working closely with the appointees from the big four banks who inherited those roles and are the people responsible for the current financial crisis, why when things are so bad, is it the case that the only person that Gordon Brown can call upon to save the 'Masters of the Universe' is the 'Prince of Darkness' or 'Lord Voldermort' to some - Peter Mandelson who has to be exhumed from his EU Commission grave, biblically arising for a third time.
To quote a famous saying: "Be afraid, be very afraid"
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The government say they are trying to restore the fluidity of the movement of funds around the banking system
But what if that's the problem - the rapid movement of funds around the banking system, like a pass-the-parcel game of gigantic proportions? It gives the appearance of banks acting like credit card tarts, covering up short positions one day and with their borrowed cash helping another bank cover up their short positions the next day.
Isn't then the constant feeding of the system with further cash like feeding a fire? And especially if the cash doesn't really exist, it's virtual money the government has created.
Someone, somewhere, has to take the hit for the bad debt risks taken over the last 10 years. The sooner that's recognised and the hit taken the sooner it can all be allowed to settle down.
Maybe the USA did get it right in their rescue plan, by tackling the bad debt in the system, rather than by pursuing other distractions like taking shareholdings in banks, etc.
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This is going to end very badly and frankly the sooner the better.
Any businessman will agree - you can't borrow your way out of debt - even if you're a bank..
GC
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I find it ironic that a Government that has refused to properly invest in social housing is in effect now paying for similar housing in the US. If only they'd bothered to pay for new housing in the UK and encouraged banks and other investment institutions to do the same. If they had, then even with a downturn in the economy and problems on Wall Street they'd/we'd still have something to show for it. Can't go wrong with 'bricks and mortar'.
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This package by the government is the fiscal equivalent of rearranging the deck chairs on the titanic. What is needed is a period of 1-2% intrest rates,and a change in accounting rules to let banks write down non performing loans over the period of the loans. At present we are all taking the short term view and present accounting rules encourage this. If this government bailout does not work ,very likely in my opinion, it leves the uk and the pound in a very very dnngerous position. Who will lend us money?. Not the euro zone it has its own problems, IMF maybe but in dollars and with a falling pound not good for us.
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Half a point of interest rates now as well... We live in interesting times...
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Ha ha!
..my previous comment was moderated out for saying that i wouldn't pay "taxes" to banks
Of course BBC, what you say goes..
- or rather what you don't let us say goes unchecked...
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Isn't it a bit disingenuous using the nationalisation of Northern Rock as an example of the government's good policy results?
I thought Northern Rock stopped lending, or at least drastically reduced its mortgage books, and had to stop taking deposits as their market-beating interest rates were knocking the takings of independent banks, and possibly contributing to the later crisis.
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#55
Pie in the sky ..how on earth would you expect your suggestions to be effectivley adminsitered?
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regarding the Missing chaps payment-I noticed rbs did something similar in march this year-for a period of a week all chaps in and out of our account overnighted for at least 24 hours in a suspense account-to date we have never received an explanation. Academic now,as we were so disgusted we changed banks! Does rbs' serious liquidity problem stretch back that far?!
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The time draws nigh for a cull of senior banking executives closely followed by the senior partners of the accounting firms that rubber-stamped their sins...
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Simple Question: answers from anyone please.
Where has all this money the government has to loan come from? I thought the government ran with massive borrowings?
Is it being printed off today? In which case, should we all buy bigger wheelbarrows to prepare for paying our groceries with?
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Robert,
I believe an important point has been missed in most of the commentary regarding this financial crisis, and it relates to risk management.
I still can't believe that Lehman's owned an amount of sub-prime paper many times the value of its own equity (which obviously means the positions were leveraged).
This is madness!
The same goes for the other big investment banks, whose vacillations dragged down their commercial cousins.
Either top management knew the extent of these
positions and decided to run with them, or the risk management systems were giving incorrect results.
I think this question could be the basis for a very interesting article.
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"This capital can come from commercial sources. But even if, for example, Barclays was able to raise new capital from regular private sector investors, that capital would be expensive - which is why its share price has fallen" Preston
Surely this is one solution though. I would suggest one cause to the problem is the central banks' ability to set interest rates. By setting interest rates unreasonably low, credit can be pumped into the economy causing a short-term boom, but in the long term, debt builds up too much so that there is concern as to whether this debt can actually be repaid. Thus a crisis like we have now.
If interest rates were set by market forces, then a shortage of depositors would force higher interest rates that would put the brakes on rampant borrowing sooner before a huge debt mountain was built up, and we would not be in the current situation.
Many people want lower interest rates now, but this will just allow more debt to build up and create a worse long-term problem with repayment.
To actually get out of the current problems will be very tough, especially on the reckless borrowers and lenders. At least Barclays seem to be going for a realistic funding model rather than a short-term fudge.
(Plus "Free Banking" will give the Fractional Reserve Banking commenters something else to think about ;-)
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The government say they want to support the average person in the street and small businesses.
Wouldn't it have been more efficient to put these funds into a new lending organisation, charged with doing solely that? By the time the banks apply the funds to their own pet projects and mountains of overheads will there be much left to address the government's aims?
Then, free of having to service small depositors and lenders, the banksters can come out of the closets and do what they've always wanted - open betting shops in all their branches. That way they never have to worry about giving the money back that's brought into their branches.
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Breaking news.....the Central Banks have cut interest rates by 0.5 percent!
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It's all very well to be critical of every thing the government does in todays uncertain economic climate.Forgetting for the moment how or why we arrived at the current situation, is it anyones case that all the major banks should be allowed to go bankrupt, with all the money people have saved?
Sure the bankers came up with crazy instruments, and sold them to crazy people, who bought without understanding what they were buying. That does not alter the fact that the entire banking system needs help on a scale that only governments can provide.
However one has no sympathy for the heavily indebited individuals, who not only have no savings, above or below the £50,000 guranteed amount, but have lived way beyond their means.Unfortunately, they will deserve what comes to them.
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So we are borrowing money to help sort out bad debts, sounds crazy to me. Does this money that is being raised/borrowed for all thes ebail out plans actaully exist or are we perpetuating a situation build up out of non existent funds.
Also how much worse has the media made this, verey day the reporting gets more hysterical. Every main stream bulletin now is pretty much "we're doomed Capt Mainwaring, we're all doomed. How can any real confidence be built in such a frenzied atmosphere. The culture the givernment has build up for instant media access, public briefings before parliamentary statements ahs not just eroded our democracy it now means that starved of the constant feed of information the media present a due thought process as dithering and make the situation worse.
I have little time for Gordon Brown, his plicies have been heading this way for years, but if ever there was a time to foster calm and allow time for considered artional decsion making and planning this is it.
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Roberts, you wrote: "In other words, shareholders in the banks are being punished for the sins of executives who will need to go cap in hand to taxpayers."
Actually shareholders are the owners of the businesses and they elect / appoint a team to run the business on their behalf. If they fail to control the behaviour of their appointees, then that is their fault and responsibility. They have to pay the price. If they do not like it, then they should be more active and responsible as a shareholder.
Perhaps there is something wrong with the structures between those who "own" a business and those who run it.
And what about the army of consultants who have encouraged Boards to pursue strategies that they do not fully understand?
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Or is it, theft and, taxpayers money?
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As the government is taking some control of the Banks and they are looking into Executive pay I hope they will not compare with US Banks and Lehmans CEO in particular.
As the Banks have had a hand in this crisis will the Goverment insist that they bring back any call centres and outsourced jobs from India and other places to counter the job losses that are coming in the rest of the economy
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The share prices of banks are falling as they have no intrinsic value and the existing shreholders will not get anything - at least that is one reading of the bail-out!
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Or is the combination of words that you keep moderating away:
Tony Blair, part time job, JP Morgan?.
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I wonder if either Gordon Brown or Alistair Darling know what a CDS is ?.....or whether they have even heard of them?
I don't suppose the bank CEO's have ever mentioned them (even in passing) to the dastardly duo.
If they don't know what they are.......I bet they'll find out on Friday!!!
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The writing on the wall at Belshazar's feast read mene, mene, tekel, upharsim, thou art weighed in the balance and found wanting. Literally, It has been counted and counted, weighed and divided - but we haven't even counted the damage yet, let alone reconciled it against its peers, consolidated it and apportioned the blame.
At the end of the day, the Chancellor's not gone far enough. If one of my staff refused to do his job, after a disciplinary procedure, he'd lose his job: if the banks simply won't deal with each other under any circumstances, then the same must apply, this is the equivalent of the necessary disciplinary review, and the Chancellor should have read the Riot Act. There's no indication that these latest measures will change anything.
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#38
'I fully agree that the banks should have better regulated to whom they leant money '
.....they were - after the last recession, following the grand ideas of endowment mortgages and 6 times wages lending.
15 years is a long time - and most of the public had forgotten, or weren't old enough to remember.
The relaxation of the regulation was all in the name of growth.
I'll see you in 2023 when we'll be doing this all again. It won't be self-cert or endownments next time, but a new financial instrument that the banks will cook up to improve their profit margins.
That's all CDO's ever were - the magical money for nothing and your cheques for free.
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Ah. Thank you moderator. You are now clearly censoring posts that are deemed to be anti bank.
What a great and free society we live in.
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Confidence can ONLY be restored when everything is out in the open.
Banks must produce independently audited accounts on the basis of "mark-to market", but assuming a "going concern basis". This will produce a worst case situation and then there will only be one way up - not the present situation where lenders still fear that there is something in the accounts which will destroy all and any bank.
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79:
Let me try to explain how I look at this question of paying for this intervention.
Companies and individuals have borrowed money to buy assets (principally property) which is no longer worth as much as the debt secured against it. This is the "value gap" that we're trying to manage.
Government is putting money into the banks in order to prevent this "value gap" dragging the banking system - and with it the economy - into a collapse vortex. There really isn't any alternative to this, in my opinion.
Where government gets that money will depend on how much it turns out to be. In a best-case scenario, the government gets back its loans, with interest, and makes a profit on its equity investment. In a worst-case scenario, it loses the lot. Best assumption is probably somewhere in between - a significant though far from total loss of the government's cash injection.
This gets paid for in several ways, none of which we're going to enjoy, but they are less bad than systemic collapse.
Depositor money has been flowing into National Savings and Northern Rock. That helps. Government can issue gilts, another source of funds. Government can raise taxes, but not in the present situation. And government can print money, meaning inflation, which over time will shrink the "value gap".
The first problem is the near-term nature of the situation - we need to put in money now, without knowing what the ultimate cost will be, or how, longer term, we're going to pay for it.
My guess is that we end up with higher inflation, probably countered by wage controls (to prevent secondary inflation), which means we all get a bit poorer over time. Government debt will rise, with implications for public spending. Taxes will have to rise too.
So we all get poorer, through inflation, lower private borrowing capability, lower house prices, higher taxes, less public spending, higher interest on government debt, and a pound that will buy you less globally.
As one economist said recently, this is the end of "the Goldilocks years", by which he meant a debt-fuelled boom and a "want it now, pay for it later" culture.
So it's pay-back time. The party is over. We can survive this, but we're going to be poorer.
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The root of the problem is how we as a species protect ourselves from delusion.
The belief system adopted by the Western branch of mankind in the last few years was one of the most illogical and unbacked by evidence in history.
Religious beliefs might be lacking in evidence yet, in some ways, be quite logical.
Some shamanistic beliefs might appear to be backed by evidence and confirmed by experience yet appear to us as illogical.
But the belief that market and house price bubbles will not burst is both illogical and irrational. Evidence from history shows that so far they have ALWAYS burst and the notion that we can all become millionaires by watching Eastenders as our house prices increase is entirely illogical. Yet most people believed this.
Until we can find some way of not being so utterly thick (and greedy) then we deserve all we get.
And stop moaning about the fat cats. If you don't like it then stop voting in politicians who pander to them time and time and time again.
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Money From Nothing
Like a sorcerer with a long white beard,
the bankers waved their wands and money appeared,
Credit created from nothing but air,
Passed on to consumers to buy their fare,
But what the bankers did not say,
is that they did not create quite enough to pay,
so now the whole world is bound in debt,
but the fat cats still show no regret,
eventually we will all awake,
to the greedy bankers' take, take, take,
Some come on folks, it's time to see,
the evil financial sophistry.
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Throwing good money after bad has never been a good strategy in a financial crisis mainly because the banks will simply pull the rug from under you when they are ready.
Brown would have been better off paying off or reducing the exorbitant loans and mortgages the banks customers have been lumbered with and then nationalising the whole lot until such tiome as they become a marketable business again, if ever.
Keeping banks alive with public money whilst they sting the public 15 to 30 plus %, charge £30 for a mix up , pay huge salaries, bonuses, pensions and benefits is not a good way to spend hard earned public money.
Where does all this money come from?? A month ago there wasn't enough for anti cancer drugs, now we have found £250 billion to support banks!
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Well said #70 guy_croft.. Perfectly put.
(and thanks BBC for not moderating my last comment - faith revived)
- how do you feel about letting RP off the leash a bit more..
- there's a bit of the "toe the party line" about this plundering of the public purse..
- he's pretty much the only person on the tel preparred to publicly decry the bank system. so was sad to see him say "we might make a profit out of it" which is technically impossible - he must be exhausted!
- go the real RP!
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#45
Johnny, another short memory....
The Conservatives invented this problem with Thatcherite monetarism - and despite their desperation to distance themselves from this mess, they would have been as bad, if not worse.
Don't think jumping from the lion's mouth into a crocodiles jaws is a good move!
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#84 !!!!
So the government is going to give taxpayers money to the banks.
The BOE reduces interest rates so savers (who no longer have a safe haven) will take the money out and invest it in ... the stock market? Na too dodgy.
Under the bed actually looks like the best bet anywhere at the moment.
The more we look at this problem the more it looks like the economic growth since regulation was an accounting error - what were really liabilities were stated as profits.
The economy hasnt grown - it was fractional reserve banking inflated.
Its not looking nasty anymore - its looking ridiculous.
We're trying to rebuild a house of cards in a hurricane and with really bad shakes from the DT's.
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My comment got edited out yesterday when I said I would be shifting my money around if there was no improvement in the Depositor compensation level.
Well Darling ignored raising the Depositor Protection level.
Spain, Belgium and Holland now have higher levels (100,000 euros).
So edit all you want BBC moderators, but like Canute you can't stop me or others from shifting our money into a better protected haven.
Darling and Brown overlook the primary purpose of Banking which is to
Firstly protect your depositors
Everything else builds from a solid Depositor base
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I don't understand...
Implied rates should now be falling on the back of these co-ordinated central bank rate cuts...
Instead they are actually rising!!!! What the hell is going on here? Can someone not intervene to force the interest rate traders to revert to reality here!!!
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Forward into the abyss we go.
This is another foolish commitment driven by an egotist in Number 10 who is incapable of recognizing what brought us here and so is therefore unable to get us out of this mess.
Again and again he peddles the mantra that this is an American crisis due to irresponsible lending over there, conveniently ignoring the fact that we followed the self-same policies and therefore face the self-same difficulties. By contrast, and with bare-faced cheek, he maintains that the UK has had a decade of prosperity.
It is because of Brown's hubris and failure to acknowledge that the last 10 years led us to this point that his solution has no chance of resolving this crisis.
What is more worrying though is that both the Tories and the Lib Dems have acquiesced to this absolutely moronic proposal, which shows that as and when this fails no one will have a clue what to do next.
They are all gambling on Brown's flawed assessment that our economy is fundamentally sound. How, in Heaven's name, can it be so when house prices are more than 10 times average salaries? And if they are prepared to bailout irresponsible borrowing then they are giving everyone the green light to dispense with their savings, i.e. spend, spend, spend, and just rely on Government.
Oh, and where does this £250b+ come from? Saying it is a problem stored up for future generations is rubbish. If it was so straightforward then all debt could just always be left for future generations creating a utopia.
Anyone for tea?
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Happy days are here again for those of us with BBR tracker mortgages.
I can feel those 'animal spirits' returning already.
PS. These moves might even save Labour ... now that would be a miracle!
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#12
"any others"
Yes, the one that went along the lines of;
"The financial service industry will protect the countries future prosperity" (Maggie Thatcher as she closed-down whole swaths of UK manufacturing back in the 1980s).
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The interesting question is why is Robert Peston writing about Lloyds TSB/HBOS right now? Or to be more precise, whose agenda does this story serve?
Here's a hypothesis:
The Lloyds TSB/HBOS deal never made any sense for the shareholders of either bank or the customer. HBOS is a fine bank with a liquidity problem (which can be resolved by providing BoE funding and capital) and no significant credit problem (more difficult to solve without a takeover).
The takeover solution was backed by a weak Prime Minister whose priority of the moment (2 weeks ago) was to keep a big bank rescue off the government's books.
But events have moved on and the government is forced to bail all the banks out anyway.
This must change the political imperative of Brown and Darling to killing the deal - and saving 8,000 jobs in Edinburgh (Mr Darling's constituency) - and Glenrothes for Labour.
But, of course, such a switch can't be too open or too quick - having given such strong and recent backing to the merger.
Much better to have Robert Peston prepare the ground, and even invite a Scots rebellion on the matter.
Either way, for the sake of Lloyds and HBOS shareholders, bank customers, jobs in Scotland and jobs in England the deal should now be unwound. A bigger bank is not necessarily a better bank.
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Some people chose to put large amounts of money into Icesave, a bank based in a country with a population about the size of Hull. The reason that they did so was to get a better interest rate than they could get from a UK based bank. At the time they did so, they would have been aware that the maximum protection to depositors under the Financial Services compensation scheme was £35,000. Now the UK government is saying that all of their money will be recompensed.
Can someone please explain why part of my taxes should be used to compensate those people?
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Re #23
The Icelandic comments are a fit of pique from an inexperienced government and from a country in dire trouble (not that we in the UK have anything to brag about).
I presume they came because of the UK's and other countries refusal to help them out of the current crisis.
However, the sensible response would have been to say that Iceland would do its very best to honour all its commitments - whether it intended to or not.
In saying it will not honour its commitments Iceland has effectively signed its own economic death warrant (or printed off another 50 copies of it just to make sure, as it was probably already signed anyway).
I would hope our government takes a more measured response by effectively judging the positive and negative impacts it would have on our economy before it takes any significant action. In the short term it may be worthwhile freezing some assets before a more appropriate course of action is determined.
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Getting rid of the gamblers and chancers at the top of RBS has given it a slim prospect of survival, but its days as an independent institution are numbered.
The question for the share price is about whether HSBC is really prepared to move seriously for the NatWest component. It might be worth the inevitable strain on its own asset/liability ratios.
In policy terms such a move would be in agreement with current thinking at the Treasury and FSA regarding mergers and the creation of larger and (maybe) sounder banks.
Watch out for this one soon.
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From somebody who lambasted the UK authorities on this blog after the Northern Rock bank run......
This is actually a very good plan.
The key provisio is that banks should be able to give shareholders first option to buy new shares.
This minimises the risk to the taxpayer, ensuring that shareholders have every incentive to protect their holdings.
The government can buy whatever shares are not called on by shareholders.
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#96
It's often not what you say but how you say it. I suspect (have no way of knowing what you did write in those blocked messages) that you were using certain words or strings of words, the first and second tier of moderation seems to be done by a computer bot.
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#79:
Simple: the government have borrowed the money.
However, what I don't understand is who lent it to them. Presumably they haven't borrowed it from a UK bank. Can anyone explain to me and bogbrush who we are now in hock to?
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Interesting development - at least one bank, and possibly others, have said that, whilst they welcome the recapitalisation plan, they don't themselves need to draw on it.
This could go one of two ways. One, we could find out that several of our banks are very strong - good news.
Second, though, the pressure could now be on the others to make similar statements. If the can't or won't, the market will make very negative assumptions about them. That could be very bad news indeed.
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From what I've read (although I might be wrong), no government anywhere has yet addressed the issue of toxic debt.
All the money is being used to effectively subsidise toxic debt, ie to keep it on the books, rather than a combination of eliminating the toxic debt and injecting liquidity.
You can have as much liquidity as you like, but if the root cause of the problem is still there then you're just throwing good money after bad.
I'm all for providing liquidity in a time of crisis, but unless the cause of the crisis is sorted out then the whole thing's pointless and you end up in a worse position than when you started because you've just thrown trillions of pounds/dollars/euros of tax payers' money down the toilet without addressing the core problem.
Maybe I'm wrong, and maybe hidden away somewhere there is a plan to get rid of the toxic debt that I haven't spotted, if there is then I hope the media highlights it so that we all know we're not throwing good money after bad, and if there isn't a plan to get rid of toxic debt then I hope the media highlights it even more because it's critical and needs to be done right now.
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#103:
Thatcherite monetarism certainly did not get us here. The money supply has been rising at a phenominal rate for years under Brown's watch - obviously fuelling the asset bubble. A monetarist would have raised interest rates and choked off the growth in money supply, and hence the bubble.
What's more, the government has been running huge public sector deficits for years under Brown's watch. Thatcher's trademark was balancing the books - she drew old-fashioned parallels between the government and a housewife balancing the household budget, remember? Thatcher's first couple of years as PM were characterised by a vicious battle between her and the profligats who didn't want her "Cuts". Remember?
If we'd had Thatcherite monetarism here and in the US over the last decade, maybe we wouldn't be in the mess we're now in. The Lady would NEVER have presided over Gordon Brown's spendthrift lack of prudence.
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I haven't seen the question asked whether the banks are going to pick up the capital on offer, with strings, from the state. Up till this morning, we thought that the state would take a stake in the banks but this is now not apparently the plan. In the US, the bailout of Fannie and Freddie has been ineffective for the reason that the management has not wanted to access the state funds (see George Soros' article on this).
Assuming that they are distressed enough to take up the funding (i.e. they can't raise it on the open market), I suspect there will be a huge temptation on the part of the government in future to inflate away these debts. By the way, the Icesave rescue alone will cost GBP 4 bn from what I read. That's cash on the nail, not an equity stake which might pay back or a guarantee that can be charged for.
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112:
Many thanks, a good reply and much appreciated.
Not long ago, many commentators waxed lyrical over Iceland's 'economic miracle'. It now turns out that they borrowed the lot. My concern is that they shouldn't be allowed to walk away, disowning liabilities but keeping the assets.
As you say, they are floundering in a deep mess without a clue about how to get out of it.
Their statement is indeed, as you rightly say, an economic death-warrant. As any ally and trading partner, we need to be sympathetic; but we also need to be tough. Latest news seems to be that we are indeed looking at Icelandic assets. Good.
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118:
Good point.
I think the plan is to get the banks to write-down the toxic debt, fairly soon. Then the government's capital injection makes up for the write-down, in other words the toxic debt goes and the taxpayer pays for it.
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@114, Who gives a damn about shareholders, they placed a bet and were prepared to win but now they lost, one word, tough.
What really matters are the depositors who were not making a bet but believed their money was safe, it is these people who are keeping the system afloat. If I and millions like me decide to take money out of the bank the system will fall.
Two reasons for this happening in the first place.
1. Fractional reserve banking, it's a fraud, a pyramid system.
2. Removal of essential legislation to keep the banks in check. [Thanks' Gordon].
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CRIPES!.....and there's not even any footy on the box tonight to take our minds off the subject!
It's small wonder that this country has a national drug and alcohol problem (i.e. there won't nearly be enough of the stuff!
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@116
..I think we've borrowed it from our future selves..:?
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#80
I can answer your question - having worked in several risk departments in banks over the last 20 years.
Risk management is an approximate philosophy for an in-exact science.
The banker refuses to believe it, but all markets are based on human sentiment - which is often irrational.
These latest moves in the market show this very clearly.
They will bang on about formula's and market trends etc. but it's all rubbish. That's why a 5 year old child picking stocks can do just as well as a 35 year old fund manager.
There is something to be said for the Anthony Boulton method of fund management - where he (used to) goes into companies and meets the management to asses their investment potential.
...but all the rest is complete gambling. You have better odds on putting money on the 4:15 at Haydock.
Bankers convince you they know what they're doing because generally the markets rise and everyone wins.
It's at times like this you realise you have all been hoodwinked into paying (via your fees) huge bonuses to someone who is simply sticking pins in the board, hoping to get lucky.
Best of all, when the risk team does highlight an area that needs unwinding - they will often get overridden by senior management, because taking the safer option will reduce the potential profit, and consequently the bonus of both fund manager and senior exec.
No-one should be surprised at this - this is the design of the capitalist economy and the structure the banks work with which is accepted by the FSA.
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#116 China and the Middle East I'd imagine. They're the countries who actually have money and assets rather than just debt. Not that they will want to continue to fund the debt junkie West for much longer because the stuff we're selling them is increasingly worthless.
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Money is essentially created out of nothing to create debt and enslave people. Priniting more money will not stop the liquidation of assets that we are seeing at start of a huge de-leveraging process. It merely increases the amount of debt in the system. The real shame is that after 300 years we have created a system that increases inequalities in wealth as well as causing massive damage to our environment.
We need to base our economy on something of greater fundamental value than greed and specualtion.
When is this debated or discussed in education or in politics ?
Why are there no other credible solutions ?
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Crispblog (#4) has an interesting point. I'm not quite sure if it was taken up, but it is a matter of interest that here in S Africa where there is a very great number of unsophisticated consumers the government has passed a bill to prevent their exploitation. The crux of this bill is that if a lender gives without due diligence it is his loss. Credit cards became harder to get etc and the upshot is that S African banks are not facing the crisis that is happening elsewhere.
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#116 DisgustedOfMitcham2,
You're righ to ask "where does the money come from".
The answer is Mr Darling is going to trot down to the mint, press the big green button and pull very hard on the lever of the printing press. Hard to believe I know but you have to educate yourself on where money comes from.
In the debt-based, Fractional Reserve Banking system it is spirited out of thin air, literally. When you go to the bank and ask for a loan, upon receipt of your signature on the contract documents the loan amount is credited to your account at the press of the return key on the bankers keyboard. The second before he pressed that key the money credited to your account did not exist anywhere on this planet. It is institutionalised fraud.
That takes a lot of effort to get your head around that concept. You are permitted to believe by the complicit media that a Bank is a building with a vault at the rear of the shop stuffed full of pound notes. When you borrow some of those pound notes someone goes into the back shop with a plastic bag, fills it and hands it to you.
That could not be further from the truth. You are being 'lent' money that does not exist and being charged interest for the privelege.
If you're seriously interested in the answer to your question please watch the following short videos in the following order:
http://www.youtube.com/watch?v=ThXpjmfyiMQ
http://www.youtube.com/watch?v=sanOXoWl0kc
http://www.youtube.com/watch?v=kTv1fo6sKmo
http://www.youtube.com/watch?v=3qicabStQkc
http://www.youtube.com/watch?v=7kpSbkaD4tM
Once you have watched them (and it may take a couple of goes since the content is so contrary to your current beliefs) you will get very, very angry.
Once you have understood how this fraud works search for the next installment called Money Masters which gives you a much more detailed review of how it works complete with a comprehensive history.
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#111
The gift that we are making to these foolish gamblers is the prce that a grateful people are willing making to ensure the continuance in Government of the Great Leader who has served us so well through abolishing Thatcherite policies of boom and bust.
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Of course a market economy is a financial merry-go-round, and if it doesn't keep spinning we all get thrown off. Really, the whole crisis comes from a growing realisation of how fast we have been going, and how much damage could be caused if we stop spinning.
So, without worrying too much about the details, we have to confront this question: How fast is fast enough? If we are going too fast now, we must eventually be going to slow down and right now seems to be the time that this is going to happen.
As individuals, we have borrowed to buy now and pay later. The banks allowed us to. But there was always a limit to how much we could borrow. We may have described our movement towards that limit as "growth", just as we now refer to the balance of payments deficit as "inward investment". But this doesn't alter the fact that you cannot keep on spending more than you earn, not indefinitely. And banks, therefore, cannot keep making a profit from lending to the increasingly overborrowed.
We cannot alter the past. We have alressy mortgaged our future to pay for it. This "taxpayer's money" is more of the same nonsense, I'm afraid. The Government is going to borrow someone else's money in our name. All Government borrowing will become more expensive as a result, and our future taxes will ultimately be higher. But that is as it should be, to some extent: we have benefited from the "growth" and now must pay the price.
How we, as individuals and as a nation, actually earn the money to pay for our past profligacy is a question for another day. In the mean time, all we can do is hope that the period of readjustment will be no more unpleasant, and no more unfair, than it needs to be. Standing full square behind the financial system is an important first step, but addressing the fundamentals will be an altogether more challenging task. A bold and decisive action that I do not expect to see is a commitment to increase taxes. Now is hardly the right time to increase them but, except politically, it is certainly the right time to recognise that ultimately there is no alternative. Perhaps "preference shares all round" could be an ingenious new stealth tax...
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Share prices are falling because the bankers are preparing to steal all the money Browns putting in
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robert...
you don't think that hbos and rbs have gone up because everone thought it was going the way of northern rock and bradford and bingley last night hence the mad selling when the 5pm meeting was announced.
and as they haven't been nationalised the prices have risen.
i know its not as fancy as your explaination but it it is alot more plausible.
i bought hbos last night and sold them mid morning today because i thought the govt wouldn't nationalise.
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China announces that the government is increasing the pool of money available for lending by reducing the amount banks must hold in reserve.
They have learned nothing from our crisis then.
The reserve policy i.e. leverage is exactly what brought about the current problems
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Just out of interest - why doesn't the "Websites Linking to Here" section, which is full of glowing testimonials about Mr. Peston's foresight and keen intellect - also make mention of the numerous sites (including order-order.com and ft.com) which point the finger for yesterday's precipitous banking shares collapse at the illustrious Mr. Peston and his ill-judged comments on the bail-out?
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#127: If you're right about that, and I can well believe that you are, it really puts any worries about what the Chinese military are up to into perspective. If we are ever unlucky enough to fall out with the Chinese, I can't see why they would bother to nuke us if they already own our entire financial system.
Very scary.
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#123.
Its simple...the more that shareholders stump up the less the government has to.
And given we dont know how bad this recession will be, the less call on public money at this stage the better.
"who gives a damn about shareholders?" doesnt come into it.
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According to RP's prog on the Beeb last night - this problem was all started by low interest rates. So here's a good idea - lets lower the rate again! woohoo - lets all go bonkers on the credit cards.
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#130
Watched the Money as Debt Video in horror.
No wonder usury was banned for so many years.
The truely frightening part is that exponential growth, or rather exponential borrowing is required to keep up with the growing Interest payments. Its a viscious cycle.
Which explains the decision today to lower interest rates. If we can get everyone borrowing again like there is no tomorrow then the credit crunch will go away!
So many commentators call the current housing market a crisis in mortgage lending and the government need to stimulate this again. But its not, the real crisis is inflated assett (house) values.
Its madness.
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Make a note in your diaries for Sept 2009.
Quote form Gordon:
"I now call for a General Election having made bold and significant moves to protect the British economy." Only I could have steered the ship through the turbulent "global" problems over the past year. Give me a mandate to continue my journey to save the Scottish(sorry British) economy.
I command this statement to the house."
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#119
Please don't try and change history, this fiscal system was put in place during the 1980s, that was on Thatchers watch, so she is ultimately responsible, are you seriously suggesting who ever followed Callaghan as leader of the Labour party (had they won in 1979 or 1983) would have adopted 'Thatcherism' - of course not, they would have been more likely to have adopted the teachings of Marx than Friedman!
I know that Thatcher is many a bankers Goddess but please, the first thing any alcoholic needs to do is accept that they drink to much, without that first step there is no cure and all that will happen is an on-going trip from one drinking bing to next...
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Hmm...Do I detect a degree of backtracking as to the inevtitability of the Lloyds/HBOS merger.
It seems like only last week that you carried out your instructions to inform the literate classes that this merger would go ahead under all circumstances.
Every word you write reveals with crystal clarity that there is no long term planning and that the great and the good are making things up as they go along.
The only constant is the unswerving intent to continue with the transfer of wealth from poor to rich. All main political parties and all main media outlets are supportive of this strategy.
Hello democracy, my old friend...
Funny how everyone is seemingly in full agreement that short term market movements provide no guidance in this case. I bet they´d soon become highly relevant if only were going up instead of down.
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#128 - Well put. Fractional reserve banking is a big part of all of this.
Look back to the great dpression and the shrinking of the capital markets then. Sound pretty familiar.
And the outcome? A massive land-grab by the bankers at the top.
When, oh when will the media pluck up the courage to address this?
Mind you, every US president that tried to get rid of the Fed and print government bills was shot!
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SO much for the Bank of Englands 'independence'. I'm glad that old canard is out of the way.
A big hand too to Robert Peston for faithfully reporting his master's voice these past few months Another Railtrack. Private and institutional shareholders stuffed by months of inaction, the share price driven down by despair due to lack of action and all so that Gordon can grandstand at PMQ's with an interest rate cut. Time was when Labour would jeer such a politically timed cut.
Now we're all suffering from Stockholm Syndrome. So, trashed economy, share price and pensions aside we're actually relieved they've done anything. Thank you for stopping the beatings Mr Brown.
Commentators have been calling for action like this for months. But no. Trash the banks shares so much that they're desperate and then, just before they call in the receivers, offer to buy preference shares at bargain basement prices. Huh. I suppose we should be used to the idea of being stiffed by the government and we do have Railtrack as a precedent but I still had it in my head that the government was there to support British industry rather than beggar it and then buy it for peanuts.
And this is how he shows his gratitude to the industry whose lending drove the last 10 years of his 'miracle' economy.
Gordon has, by repetition, managed to convince a large part of the UK that the reason they can't borrow any more money and keep his GDP growing quarter after quarter is not because, well, it had to end some time. Nope, it's all the fault of the 'irresponsible' banks. If they hadn't been lending all this money then they'd not have got into funding problems. If they didn't have funding problems they'd still be able to lend even more money. If they hadn't been lending so much.
Yep. The credit crunch is all due to 'irresponsible' lending by other people. Not me. So I shall be borrowing 250bn quid to lend to the banks so that they can lend more money to you. SO you can spend money you don't have. Like you've been doing for the last decade. Did I mention that GDP has grown for 63 consecutive quarters?
Now GDP has stalled. And it's because you're all not borrowing and spending enough. You're letting Gordon down. Do you know whose fault that is? It's the banks fault. They've been irresponsibly lending for 63 quarters and now they've stopped.
Let's punish the banks!
Don't look at me. It's all the banks' fault.
I shall teach them a lesson they'll never forget. Vote for me!
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#130:
Can we please have no more of this nonsense about "fractional reserve banking" and how the whole banking system is a fraud?
Yes, money and debt are the same thing. Even a dollar bill backed by the gold standard would still represent a loan note from the Treasury. That's how money works. Get over it.
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Robert, the reason the stock prices fell this morning is complex. It is a reflection of the lack of money in the stock market which is in effect just sloshing about. What little money there is as now mostly speculative and this morning it just transfered from commodities to the banks for the uplift they got from the UK and central bank(s) intervention. Now it is moving out again. This is very dangerous as it shows that there is a danger of not having enough buyers in the market and raises the posibility of getting a 'no bids' situation where there won't be a bid price for some stocks.
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looks like the US bailout plan is not working, looks like the UK bailout plan is not working, looks like the co-ordinated interest rate cut is not working........! Is there a plan B?
As usual too little to late from our courageous leaders. Why did they wait until today to unveil the super plan, why not last week or the week before?
it is simple the banks need liquidity, i have lots of money but i will not lend it to a bank for two reasons one is it safe, and two i want an above inflation rate of return....
The first is up to Mr Brown, stop messing about talking in conundrums just say it "All UK deposits are guaranteed 100%".
and the second by the BOE , put up interest rates, and make the banks pass the rise on to savers, cutting has not worked so it cant get any worse.
For everyone who says upping the interest rate will cause recession, well instead of giving all this money to banks put it in the national savings bank and use it to finance business at a lower interest rate than the banks!
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Without TRANSPARENCY and ACCOUNTABILITY being required in any bank rescue package / recapitalisation the markets will remain unconvinced re the stability of banks. Accordingly, SENTIMENT in the inter-bank market will NOT recover and the crisis will continue. Governments will continue to pour rapidly reducing resources into the black hole as they chase their tales as opposed to ascertively address the problem and make difficult decisions. All carrot and no stick is not the may to address the problem and most importantly restore sentiment.
I set out in the blogg on Monday an effective solution - I am saddened that our governement with all the resources at its disposal can not understand the heart of the problem and so wastes so much.
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Doesn't the govt raise cash by issuing bonds which are bought up by financial institutions? Perhaps the safest investment there is.
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In the City ...
- turning simple things into tediously complex things is INNOVATION
- taking big risks with other people's money is BALLSY
- earning around 5 times the average wage is FOR MONKEYS
- testosterone fuelled management by fear and intimidation is DYNAMIC
- doing everything in a bit of a panic without thinking much is SHARP
- getting a massive bonus is also good for the economy because of TRICKLE DOWN
Well sorry, you're rumbled I'm afraid. Took way too long but better late than never.
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The banks also operate overseas. Will our taxpayer money be used there as well as in the UK?
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It seems a lot of banks owe a lot of money. One thing I don't understand is who they owe this money to?
There must be some banks or other institutions that aren't cashstrapped if they're in a position to lend money to ailing banks. Who/what are these institutions?
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130: Sorry to be a pendant, but the Royal Mint produces only coins, it is the Bank of England (plus HBOS, RBOS and The Northern Bank) that prints notes...
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Excellent news. So the solution to the problem caused by cheap credit is.... yes, you guessed it, more cheap credit.
This is like helping an alcoholic stave off the shakes by giving him another drink.
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Well I can't envisage the Rich List people having multiple Bank Deposit Accounts with 50,000 pounds in each.
Lets see, how many individual Bank Accounts of 50,000 each,would it take for the cash deposits for the following people to be guaranteed by the Government.
Net worth figures
Lakshmi Mittal - 27 billion
Abramovich - 11 billion
Hinduja Brothers - 6 billion
Sir Phil Green - 4 billion
Sir Richard Branson - 2.7 billion
I assume that they all have some money on deposit or in a current account with a Bank and it will be worth a bit more than 50,000 thou.
Obviously the great minds in Government and Banking haven't given a lot of thought to protecting the Depositor base.
They act like Novices from the New Starter intake of the 'Banking for Novices' course -the course for Newbies without any understanding of what Banking is built on.
(see Newby Lecture no.255 - Deposits get taken in and then they get leveraged and then the leveraged but gets lent out, but first make sure you have some fairly static depositors)
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#130 NorrieC, don't you get tired of the same line all the time? You have clearly misunderstood how FRB works. Banks do not create money when they lend you money, if *at the same time* other people pay back their loans (and they do all the time). It is the total amount of deposits and lending that determines the amount of money in circulation. The interest rate on loans goes back to depositors (and some to shareholders) who take them *out* of the system and buy stuff. It is only net changes to deposits and lending that affect the amount of money, and this is what is attempted controlled by the BoE interest rate. You are barking up the wrong tree, if you want to understand how all this extra credit was created without (much) inflation, look at loan syndication.
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We are not out of the woods yet. The Whole is awash with $55.5 Trillion of Credit Default Swaps caused by irresponsible financiers according to Nicholas Varchaver (senior editor) and Reporter Katie Bennie.
The injection of funds by the Fed and the Bank of England will not be able to resolve this financial Tsunami. By either the 1st or 2nd Quarter of 2009, we will be faced with a more dire situation. What then, further injections of tax-payers funds. My advice to investors is to get out of the Stock Market NOW. I have friends who have lost huge sums on equities and are regretting their decision to participate in this frenzy.
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I don't want to comment on the overall plan because I have a vested interest (wanting to be able to afford a decent home -- not unreasonable seeing that I earn a decent salary).
One red herring keeps re-appearing: the problem is not that UK banks are not willing to lend to each other. The problem that UK banks have massive liabilities due to the housing bubble, and other banks and institutions in the world are not willing to lend to them -- because the housing market is collapsing.
So the best the government could do was to put the wealth of the nation on the line in order to save the wealth of the nation. Maybe with these guarantees the international markets will trust UK banks again. Maybe not.
I fear my hard earned money will be eaten away by inflation while the government props up the housing market.
But there is still hope: the £50 billion might not be enough, and in the end the UK will go the way Iceland has gone.
It is a mystery to me how anyone could believe that the UK economy was sound?
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#10 better-get-planning
". . . see if you can explain how the heck all this debt will ever get paid back."
Does anyone believe that all this debt will ever be repaid?
I think the ideal some of us were raised with, "to pay off our debts", is toast. The modern ideal is "just keep making those interest payments."
And why not? If the amount of interest paid over the term of a loan far exceeds the original principal (and inflation doesn't devalue money to the point where the interest income is worthless), who cares if the principal is never repaid.
Of course, if the debtor defaults, not only is the principal not going to be re-paid, but the interest income stream comes screeching to a halt.
But now for the fun part: instead of letting those who made the loans lose their stake in what was after all a supposedly well-calculated gamble, the gamblers (read "banks") are being partially re-paid by people who work for a living, create real wealth, and pay taxes. The fact this "repayment" is only partial hardly matters if the gamblers have already collected lots of interest income, and can "leverage" the re-paid amount into new money to lend, i.e., gamble, thanks to virtually unfettered use of the fractional reserve banking system.
I think I'll just go stand outside the nearest casino and hand money to anyone coming out who looks as if he or she has lost at the gaming tables. What do I expect will happen? The gamblers I've befriended will turn right around, go back to the tables, and start betting again.
The bankers would be laughing all the way to the bank, were it not that they gambled so recklessly they risked disappointing their shareholders mightily. But now our governments are stepping in to "rescue" both bankers and shareholders. All will be well (they hope).
And all of us who supplement our earned income with crumbs that fall from the gaming tables, must hope our homes and pensions will be there in old age. Sadly, we're all in this together.
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If this is such a good 'once-in-a-lifetime' deal for Lloyds, why are their shares in the toilet ?
Maybe the market knows something you don't ?
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#146
I haven't seen anyone here ask for the return to the gold standard.
Fractional Reserve Banking is simply imoral. In any other walk of life this kind of behaviour would be considered as fraud.
Why can a government, through bond issue, raise funds from a central bank at interest yet not raise the funds directly?
The two are equivalent other than the interest paid to the bank.
Woops, I just answered my own question :-(
The fact that interest is owed on every note in existence is a travisty of our civilisation.
Future generations will look back on this period of history and shake their heads!
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Interest rate reductions to stimulate the housing market.... sounds good to me, what could possibly go wrong?...amazed it's never been thought of before really.
Thank goodness we have a sound and robust solution in sight.
Re HBOS and LLoyds..just up to us really..the shareholders and execs are bombed out of the argument---as who takes over who would be totally academic with the public money.
Personally I say call it off... just because of the competition aspect.... and the fact that it was a rushed , botched solution to a situation that has utterly changed...
.....And also, not least because my copy of the new Government decision making software (don't ask how I came by this) also told me it ought to be called off ...
iit's versitile, simple and incredibly effective.... see, dor instance.... ....Rate cut?... 0.5% or1%??? Heads it is! Lets have a 0.5% rate cut
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@ #6
"in the scheme of things the remuneration packages is relatively small."
No. Everyone assumes this, but actually in the last decade things have become so extreme, that the remuneration packages of the top brass are now a very big deal.
Lehmann's bonus bill for 2006 alone was $8.7Bn. Over the period we are talking about, they have taken nearly $40Bn out of the company. Lehmann owed less than this when it went bankrupt.
To be clear, Lehmann's therefore DID NOT TRADE AT A LOSS. It traded at a profit, but instead of those profits being invested, they were handed out as bonuses to the top brass. If the bonuses had remained part of the company's working capital, Lehman's would currently be a solvent company.
The only argument would be that "if they had not paid those bonuses, they would not have retained the talent, and they would be in an even worse position". Really - how?
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The ultimate bailout of this crisis will come from the Chinese.
Why ? Because they are the ones holding back on the liquidity.
The Chinese know that if we no longer buy their stuff, the result will be social carnage in China - mass unemployment, etc.
The Chinese also know that the approx. 0.5 trillion USD in american securities that they hold will become worthless if the US economy collapses.
So, if they're smart, they'll hold off on the liquidity until we hurt like hell, then pile into the market, snap up a load cheap assests and then restore the liquidity to the benefit(?) of everyone (especially China)...at least until the next crisis hits.
The question is whether they will time it right or not. If the world plunges into a deep recession the social strife induced in China as a result may not be surviveable by the current regime.
To summarise, we're all in this together, and the Chinese are the only ones yet who haven't shown their cards.
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#146 Adam_C_UK wrote..
"Can we please have no more of this nonsense about "fractional reserve banking"..
...That's how money works. Get over it."
*****
...or doesn't work as is plain to see.
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HM Treasury Press release. 6 May 1998
ALISTAIR DARLING: The financial markets play a pivotal role in ensuring the efficient allocation of resources within the economy. This is at the heart of growth and continued
prosperity - resources going where they are best employed. It is vital that these markets are a fair and clean place to do business. The Financial Services Authority's (FSA) objectives will include sustaining confidence in the UK financial sector and markets and assisting in the detection and prevention of
financial crime.
I intend that the new bill will equip the FSA with all necessary powers to enable them to fulfil these objectives. As was stated in answer to a question by my honourable Friend the member for Hove (Mr Caplin) on 7 April (OR, WA, Col. 152), the new legislation will enable the FSA to make rules binding on
authorised firms for the protection of investors, depositors and policyholders. The FSA will also be able to make rules requiring firms to have appropriate anti-money laundering systems and controls in place. Breach of these rules will potentially trigger an array of intervention and disciplinary
actions among which will be a power to levy fines on regulated institutions.
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When I was young, my sister and I used to play Monopoly. We loved the game and didn't want it to end, so we would bail out players who would otherwise go bankrupt and thus be forced out of the game.
It made the game last longer, all all players eventually became rich - but eventually the bank went under.
I have a horrible sence of deja vu.....
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#165
Chinese ........ + Sovereign Wealth Funds in the Gulf, Singapore, Norway.
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We're not talking about the same banks who were taken to court by their customers for overcharging them? The ones that sent out a BBA spokeswoman time-after-time telling us that unathorised overdrafts were all wrong and should be punished. Now they're borrowing cash from everyone, what's our 'charge'?
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Re #169
Agreed. Although it's hard to imagine most of the Norweigians I know in a rioting mob.
Off to Norway next week. Maybe if I turn up in rags and with a begging bowl they'll stuff my pockets with some wonga to help us out of this mess.
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#169
Hmm, Norway, the country who (apparently) refused to help out it's cousin Icland.... Or were they just keeping their power dry?
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Surely the only answer to this crisis is for those that have real money, rather than credit, to start spending it as opposed to hoarding it in case of hard times. Even if they bought goods and services that are totally unnecessary so long as it is backed with real cash and not that raised against collateral, it will oil the whole economic system. In fact, all those that have bled the system with inflated wages and bonuses should do the patriotic thing and now spend, spend , spend. But only in this country, to improve our economic position initially in the hope that our fiscal health can permeate.
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#171
If they do that tt- could you let me know so that I can get my share before they run out?
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Re #172
I wouldn't exactly call snapping up a countries prime assets for next to nothing "helping them out".
Maybe the Nweigians were smart enough to realise there was no value in an ecomony based almost entirely on bubble finance. Maybe they thought owning all those retail outlets in the UK which are soon to be "Hammered" in a recession wasn't a wise choice.
Despite the UK's decimated manufacting sector, we still have a significant proportion of our economy generating more "tangible" wealth (there's got to be a technical term for this but I don't know it). This makes us a somewhat more attractive target for the swfs.
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So, the government is part-nationalizing banks to ?save? us from the credit crunch. The same Government has installed a few tens of thousands of CCTV cameras to ?save? us from terrorists. They use now those cameras to fine us for parking offences! They have also installed tens of thousands of GATSO speeding cameras to ?save? us from speeding motorists, not for milking the motorists, of course not. Their beloved Red Ken installed the congestion charge to ?save? us from pollution. They have put the highest duty on petrol in Europe. They are putting in jail old ladies that do not pay their Council Tax, but they are ?losing? foreign criminals in their thousands from ?open door? prisons. They offer asylum to Afghani highjackers and the Home Office hires illegal immigrants. And I can go on and on. Do you people see a trend? I have lived in a communist country for 28 years and I have to tell you that you are in for a very nasty surprise and when you?ll finally start realizing what?s going on it is going to be too late.
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So, what's the betting on Lloyds TSB and HBOS. Are they on or off?
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The cap on Bank bonuses will not be very tough (nor transparant). Remember, he who pays the piper .. In 18 months Balls, Darling, Cooper and Brown will be looking for a new job - with a big bank???
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Two comments and a question.
First, the bottom up solution proposed by itreallyis42 is too late. The mortgages have been taken out at the inflated house prices caused by the bubble - and the mortgagees will have to go on paying them. Now, in addition, they will have to pay the taxes which will be needed to pay for the bail-outs and rescue packages etc.
Second, we are now told the problem is that the banks won't lend to each other and the "wholesale money market" has dried up. But if the banks don't lend to each other, presumably they still have the money they would otherwise have lent - and could lend it to businesses or people who need it.
Why should we worry that banks won't led to each other? Or is it that by doing so they create a gyroscopis illusion of additional money which vanishes when it stops turning?
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I had significant money in Icesae and took it down to £35,000 because of the risk. I put the big number in Northern Rock. The interest rate I got in the latter was about 1% less than in Icesave.
I am now a little aggrieved to see that those that left their money in Icesave, earning this higher rate of interest, are to get their money back. Surely there should be some penalty applied by the Government so that the return of these depositors is less than those that used their nounce? It would also mean that people would not, without any thought, just put their funds where the interest rate is highest. Investors must take some responsibility and to have their interest penalised while conserving thei capital would do this
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- Too much irresponsible lending caused the situation.
- Realisation of overpriced housing (mainly in America) triggered the situation.
- Frantic efforts to protect themselves (the Banks) is perpetuating the situation.
- Will government intervention save the situation, or?have we just underwritten high house prices in the long term?
It seems to me that part of the solution has been provided but without the controls and regulation to govern how this money will be used, how do we know it wont just line the pockets of the rich and trigger the next crisis in 18 months?
Personally, I hate the thought that I have worked hard and saved hard but still cannot afford a house and now the Government (and tax payer) has a significant interest in keep house prices high.
Some might say that house prices have fallen but I disagree. Apartment and flat prices have plummeted but house prices have hardly shifted. And why do we have so many apartments and flats because of the governments planning mandates.
Affordable homes for families, controlled inflation (across everything relating to family life), and moderate growth. Sounds sensible to me but when will the government start to underwrite these sorts of solutions?
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#117:
A number of banks have made statements today on whether they plan to use the recapitalisation scheme:
- Barclays has said it will participate (no surprise, although amusing given comments yesterday that they didn't need the money)
- HSBC said it has no plans to use the scheme as it is already well capitalised (core Tier 1 ratio 7.7% compared to RBS 5.7%)
- Standard Chartered also does not plan to use recapitalisation scheme
- No statements yet from RBS, HBOS, Lloyds and others although seems likely they will follow Barclays' lead
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I was driving along on Saturday and heard the BBC Moneybox programme.
Very interesting ... gullible sounding Paul whatnot was asking some bod from an Icelandic Bank about their finances.
I was so concerned that I pulled over and phoned a relative immediately and said that I hoped that he had not opened an account and if so to withdraw the money straightaway.
In fact, he'd parked it elsewhere (ING) which would'nt make me sleep easier at night but at least its still there at the moment.
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#176
Good rant..hope you feel better!!
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Just as well the government got this sorted before December - after all: the Banks have got to start thinking about how to fund their annual executive bonuses. £50bn .. yeah: that should just about cover it.
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if you went into a room with 10 people and knew that 3 had an incurable disease and it was only transmitted by touch -how many would you shake hands with?
..
....
.....
......
None?
Welcome to the world of banking!
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Why did the Government choose ING Direct for the transfer of Heritable and KSF accounts?
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This looks like the best of a bad job - and well known heads should certainly roll.............
BUT what I would like to know is ' where has all the cash gone to. '
It was in the system a year ago and as money supply is still increasing there should be more of it about I don't know of anyone sleeping 30 ft in the air with millions under the mattress so where has it gone. ? On deposit with the Government ?. Returned to some other financial system in the middle or far east ?.
Or perhaps in the other parallel universe that I am beginning to think really exists.
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#180
Agree entirely - how about they forego ALL of the interest that they have earned on the Icesave account?
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Labour and the FTSE....2nd May 1997 it was 4455.60 ------Today 4344.92
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#140 Swatts1000,
Scary isn't it. Now that you've got your head around that, search on 'Capital Adequacy'. It does away with the pesky need to have any deposits at all if you pay a ratings agency to say your 'investment' is AAA. Then you can operate with an infinite lending ratio. Great isn't it?
#146
"Can we please have no more of this nonsense "
Really? Which part of the geometric expansion of debt was the part you didn't understand? #140 watched the video and clicked on to the
exponential growth paradigm immediately. I suggest you watch the vidoe and come back and make some informed comments rather than your ad hominem attacks.
"That's how money works. Get over it." No. Sticking your head in the sand won't help. You are correct. That is how it works for the moment. It has not always worked that way. Other forms of money have worked on the surface of this earth far longer than the current FRB system. Banksters don't like the other systems because they can't make money out of them. Hence the adverse reaction when you suggest that they are stopped.
#154, yes you are strictly correct. It didn't seem important to make that distinction for the point I was making.
#157
"don't you get tired of the same line all the time?". This is a serious subject. If you want something like this changed you can't just mention it once and hope the world moves with you.
"You have clearly misunderstood how FRB works." We'll come back to that statement at the end.
"Banks do not create money when they lend you money, if *at the same time* other people pay back their loans (and they do all the time).". The arithmetic doesn't even work in this statement. Taking a mortgage as an example you pay back approx 3x what you borrow. Where does the 2x balance come from? It can only come from new debts. In your example you are contending that the borrowing/repayment ratio is 1:1. It is not.
"It is the total amount of deposits and lending that determines the amount of money in circulation." This is a correct statement.
"It is only net changes to deposits and lending that affect the amount of money". That contradicts your previous but one statement.
"if you want to understand how all this extra credit was created without (much) inflation" OK. Perfect. This brings me to my other main point. Lets, for a moment, give you the benefit of the doubt that in the inflation of the money supply matches exactly the increasing demand for goods and services and the production of those goods and services. By your contention, the prices would not rise and neither would wages so the CPI (erroneously reported as inflation) would remain static. So far so good. Now the infaltion of the money supply is geometric. If you don't understand that statement you need to go back and watch the video again to get your head around it like #140 did. The question becomes, therefore, do you seriously believe that the exponential expansion of population, debt, industrial activity, consumption of energy, consumption of raw materials, production of waste, production of pollutants, destruction of the biosphere etc etc can continue indefinitely? There is a near 1:1 relationship between the expansion of debt and all other items on that list or the other way around, whatever you prefer.
To believe that any exponential expansion can take place (on eath) indefinitely is not logical.
I return to your statement - "You have clearly misunderstood how FRB works.". I disagree. I respectfully suggest you watch the following videos and concentrate when it gets to the part where it describes the exponential expansion of debt and why it cannot ever be repaid. You need to understand the maths behind the narrative.
I could level the same charge at yourself but falling out about this serves no useful purpose and detracts from the discussion in hand.
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#178
re Brown and Darling looking for new jobs in 18 months
Err, not likely, but if they are they won't be looking for a job in banking as there will be none going as there will be no private sector banking! On the other hand a defeated Cameron and Osborne might be calling it a day with politics - in Cameron's case, not of his choosing though, just like Major he will be heading back to the private sector in Witney!
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#179 see my comment #159 above
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#179 Very good. If the banks aren't lending to each other they must be sitting on wads of cash they otherwise would have been lending.
So why would banks rather lend to each other than use the cash themselves? Maybe, just maybe, every time they pass it to others a commission is created. And hence give strength to the legendary bonuses.
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#190
Don't you mean "Bankers and the FTSE"?
Labour didn't cause this, bankers and their fantasy money did, you know, the money that never existed, never will and never could have..
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If the Government had ensured that the money markets had the necessary term liquidity in the first place, i.e. at the time of Northern Rock, then none of this would have been necessary.
The Banks concerned have all been meeting the capital requirements of the Bank of England so in fact they are not under-capitalised by regulatory definition. In fact the Banks may not need the level of capital being advertised in the media.
This is a major failure by the Labour Government, in their regulatory responsibilities, in their fiscal responsibilities, in their monetary responsibilities and in their economic responsibilities. Brown and his Labour Government should go now, without any further delay. Their dilatory attitude has brought the UK economy to this parlous state. Furthermore they should lose any right to any Government pension other than the minimum state pension.
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#194 see my comment #159 above
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#184 Yeah, I feel much better now, thanks.
Why bank shares are falling? It is somehow connected to my previous ?ranting? in the sense that people have lost trust in the system. As long as this is not addressed, nothing else will work. All we see is the same old principle being propped by the Government. We had the banks gambling with our money, they lost it, either because they gambled badly or because the ?casino? went bust and now we give them more money to gamble with them. And we are not even changing the gamblers or putting our representatives in the game. This seems silly to me! Why not use Northern Rock, the nationalized bank, as ?bait? for the other banks? Why not use Northern Rock to start offering aggressive mortgages and loans to small businesses? How long do you think the other banks would sit on the fence? I think it?s worth trying.
And another thing:
Why doesn?t the Government order (or cover for the difference) the banks to maintain the mortgages at the same rate they were negotiated with the home owners a few years ago for the next 5 years (for example)? People are not defaulting because they cannot pay the old (initial) monthly payments, but because they cannot pay the new, re-negotiated, inflated one. I think most people would support that.
#196 I totally agree.
How much money did this Government save during the good times? Not only didn?t they save, they borrowed. That is plain criminal.
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#191 NorrieC
I'm all but convinced by your posts and look forward to the next. Keep them coming!
Just one question: you say "Other forms of money have worked on the surface of this earth far longer than the current FRB system."
Which form of money/financial system would work to support an industrial (or post-industrial?) economy, assuming that everyone acknowledges that it must not be based on exponential growth, but should be sustainable?
If the answer is too long to describe here, could you point us to some source of more information?
Thanks.
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As an economic illiterate (but anxious to learn), I have a question.
I have read reports that the Bank Of England is going to inject vast amounts of money into the UK economy. I have seen estimates between 50 and 400 billion.
My question is simple: whre does the Bank get this money from
As I understand it the government already has massive debts. When we asked for a pay increase where I work, we were offered 2%, on the grounds that the government has no money.
So where is this 50-400 billion coming from?
Does the Bank just print it or borrow it (from China?). If it borrows it, why would the Chinese (or whoever) want to lend it?
I ask this question merely in attempt to make sense of events.
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Preston, maybe you could ask the Bilderberg Group what they planned when they met 2008 (June 5-8) at the Westfields Marriott in Chantilly, Virginia, United States? If you check the guest list it is surprising how many Financial Executives attended this year. hmmm is the Global crisis actually pre planned so that a Globalised Financial banking system is put in place? If the demise of the dollar is presented to the American people expect the Amero currency to be annouced to save the economy.
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Can anyone please explain how the Auditors of the UK Banks signed off the latest Accounts, that I believe showed a cumulative profit of aproximately £37 Billion?
Surely to sign off the accounts, they must, as part of their 'due diligence', have understood and agreed with the valuations the Banks placed on all the 'exotics' such as CDO's and any and all mortgages carried and/or guaranteed etc?
(note the Bankers are appartently saying they did not understand what these exotic investments and presumably associated derivitve positions actually were, so who 'educated' the Auditors in these key valuations or were the Bank's self serving valuations taken at face value?)?
Could it be that 'commercial self interest of the Auditors and the Bank Directors ensured that little or no professional 'risk assessment' was undertaken to the detriment of shareholders and now probably taxpayers.
However the fat Auditor fees and the real bonuses of the Directors do appear to be directly related to the fantasy accounting indulged in for mutual satisfaction and enrichment
Is there not a real case for both the Directors (including non-execs) and the Auditors be classified as 'not fit and proper persons' and thus be disqualified from being paid any further sums and be barred from working in the finance industry?
(Note I have no shares in any financial institution but I fear for my childrens pensions that could well be affected by the Casino that masqueraded as the foremost Financial and Investment Centre in the world)
The Bankers and Auditors surely can not now argue that, using the broken record excuse 'of lessons will be learnt' that they alone are best 'qualified' to sort out their mess so they should continue in place?
They patently did not, either, bother to execute due care and trust as they totally failed to understand how all these so called 'profits' arose from these exotics or feel it necessary to educate themselves in the businesses they were being paid handsomely to direct or audit.
Next:
Is the government actually about to invest money in any UK qualified Bank requesting direct investment without knowing what are the total liabilities of that Bank?
Currently, apparently, no-one knows or probably dares to give a full listing of the liabities so how can anyone say what the correct price for these Banks really is or if they are they actually insolvent and taxpayers money is at great risk?
Where, when and by whom is the vital due diligence going to be carried out?
Let us hope prior to a further penny being committed.
Will the Banks total liabilities and potential liabilities for all associated companies and related pary transactions become public when a Government investment is made with our money?
If not why not?
Finally this morning, 8/10/08, a spokesperson for Pearl Insurance said on the Today programme that they believed the next crisis could be a run on a currency: as this needs 'short selling' is this a further 'benefit' of globalisation and the finance industry?
Currently short selling is banned in UK exchanges, but presumably not elsewhere (the US banned shorting)only until early October I believe) but selling 'short' surely is a prerequisite for a run to succeed.
So how and where can a run on a nation's currency be gambled on and executed?
These are a few few simple questions from the man on the Clapham omnibus.
I hope the people with power and OUR future real money have all the answers prior to them throwing good money away that we have not even got yet.
As Getty famously said that your first loss is your best loss , do not chase a lost cause, the UK Government can not just print money 'ad infinitum' to cure terminal problems if they are terminal without causing even wider problems for more of us and for longer.
The Government has only said that the Bank's, like everyone need more money.
They have not said that they know that the taxpayers money will actually be enough to cure the Banks problems.
If anyone else conducted their own financial affairs in such a cavalier and reckless manner they would surely be surly be very quickly parted with their money... and we all know the old adage.
Or is it all just to save their own skins?
(Note the Government aims to loan vast sums for up to three years neatly delaying repayment until after the next General Election and possibly those of their future employers (see Lamont, Lawson, Tebbitt, Blair etc etc))
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# 18 Good points ü with the condition that it is in "peace time", but in "war times" all of the actors like thirsty deer will run to the river of central bank money and renounce all other forms they so dearly believed during the "peace time". And it's been like this since 1857... Just in different forms and at different scales.
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#170 - What a great idea.
UNAUTHORISED OVERDRAFT CHARGE TO EVERY BANK WHO IS BORROWING FROM US.
I think about 70 bn each will suffice.
If hey cannot afford to pay, we'll take their cars, houses and clothes.
WHY ARE THE RULES DIFFERENT FOR DIFFERENT PLAYERS?????
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#93,nice one,i think a few people are waiting to see the lehmans unwind!!
btw ,the collateral for the dastardly duos latest bailout,try the nhs for a start.
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Yet again, we see the total failure of non-executive directors to do the absolute basics for which they pick up their substantial stipends.
Non-execs should be appointed from a panel which has been independently trained and approved. Especially in the case of the City, non-execs have been appointed as retained advisers, drawing on their experience and knowledge of completely separate enterprise. They are supposed to be representatives of the shareholders (and thus, indirectly, of the public), keeping a weather-eye out for the potential of a debacle such as we are now enduring. As such, they should have an intimate understanding of the business of which they are supposed to be watchdogs.
Their stipends should come from a fund created by compulsory donation from those companies deemed to require non-executive supervision, rather than directly from the company itself.
During the 1980's, I was employed by the Equitable Life. Every year, I looked at the list of the non-execs in the prospectus, and wondered what (for example) a builder would know about the machinations of a life office. As became very obvious, nothing at all.
We have a long history of creating regulatory bodies which crush the little man with burdensome red tape (thereby creating more "Civil Service" empires), while letting the big fish get away with murder. I remember Colette Bowe being rewarded for falling on her sword (during the Westland affair), with the top job in financial regulation - a management consultant who had been seconded to the MOD was hardly likely to cause great worry amid the boardrooms of the City giants.
We have had the pensions mis-selling scandal, the collapse of the Equitable Life (following on from the rescues/cannibalism of a string of other life offices), the "dot.com bubble" fiasco, the serial failure of the SFO to nail anybody and now a lemming-rush to gain short-term bonuses by investing in unemployed Americans "buying" overpriced housing. And every time, Everyman suffers.
The staff of Lehman Bros., whose combined activities drove their firm to bankruptcy, are to receive 2.5 billion in return for the excellence of their efforts.
Enough - no more trough for the snouts.
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I have enjoyed reading your blog Robert..
Also found something else out about you today!
http://www.thedailymash.co.uk/news/celebrity/robert-peston-transformed-i
nto-pure-energy-200810081310/
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#199 papanca,
Thanks for your kind comments.
For the most part I have deliberately stayed away from proposing alternative systems at the moment because all it would serve to do is distract attention from the discussion in hand. The whole subject of where our money supply comes from and who really controls it is a subject which is never touched (ordinarily) by the main stream media. I has been difficult enough even raising the topic for discussion despite the conditions recently being ideal for fuelling the discussion. You can see even on this blog there are some who not only won't discuss the topic but they's rather I didn't either.
When the discussion is mature enough and the basic principles to be understood the suggestions for replacement systems will flow naturally from all corners.
An example of a non-FRB system in the UK's history is the Tally stick system implemented first by Henry I. It lasted 728 years and was very successful as a currency. It saw the UK through the bulk of the expansion of the British Empire ! It was only disbanded when the money changers duped Henry VIII into replacing it with a debt-based Fractional Reserve Banking system because the money changers could not make any profit out of the Tally stick system.
To learn about the entire history of the various forms of money look out for a video called the "Money Masters"(google, Youtube or to purchase on the Money Masters video http://www.themoneymasters.com/). It is very informative. Although predominantly American-based it covers the birth of the system in Europe and the involvement of the Bank of England.
http://mises.org is another excellent source of information.
Thanks for asking.
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#202 neologic,
Your questions are spot on and the view of any competent and professional person.
"the UK Government can not just print money 'ad infinitum' to cure terminal problems"
That may be the view of your humble, reasonably minded person but do you think the same appplies to Mugabe Brown? I think the answer to that must be emphatically NO.
Does anyone know where your average Joe Bloggs can go on the web to find out how much money AD and GB have printed this week or any other week for that matter? Is it called M3? M4? Where can you get those figures?
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~ 202. Great point. I wonder if we can get someone from the auditing profession to answer the question. What do they look for when the carry out an audit? If they don't understand do they just ignore it?
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Dear Robert Peston,
Please could you ask A. Darling or someone in Government with supposed knowledge of what they are proposing to do regarding the funding of UK Banks why they have chosen 'Preferred Stock' as received wisdom is that it does not have the advantages of either:
Common stock nor
Bonds
Also unless there are separate, and as yet to be announced, 'call options' or 'warrants' how are the taxpayers going to participate in any shareprice recovery of the Bank.
furthermore could you request will all Banks be expected to pay the same interest/coupon and will this be greater than the 10%Warren Buffet is requiring for his paltry $5 Billion investment in Goldman Sachs.
You could also actually find out if the person you are asking knowa the difference between 'non-cummulative preferred' and 'cummulative preferred' and which type the Government is expecting to receive from the Banks (the answer should be the former but I suspect that after listening to A. Darling today and his spokespeople they do not know as someone was saying the taxpayer would benefit by receiving dividends but that is not the case until the Government has common stock (voting or non-voting).
Further what is going to be the Government's exit strategy with timescales.
The prime purpose of these questions is to see if they actually know what they are doing with our mere £4-500 Billion or are they just hoping that it might be enough and it might be good regardless of the fact that it will no doubt be great for the incumbent Bank Directors and exec's whatever the eventual outcome or losses to the taxpayer actually results.
The Government appeared completely out of it's comfort zone and I fear the implementation will be equally botched to our cost.
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Can someone explain:
400,000,000,000.00 GBP = 691,213,941,191.54 USD
United Kingdom Pounds United States Dollars
1 GBP = 1.72803 USD 1 USD = 0.578692 GBP
Wow ?.so the smaller economy of the UK requires to bailout UK Banks to the sum in Dollars equal to the USA? Are we in a bigger mess than the USA? :-o
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When you think of the tens of billions of pounds / dollars that are spent fighting wars one can't help wonder if it is actually more effective to spend the "war-chest2 on deliberately wrecking world economies - is that just cynical thought?
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WHAT EVER IT TAKES TO RESTORE CONFIDENCE WILL COST 1,500 BILLION.
BAIL OUT TEMPORARY ANAESTHESIA UNTIL POLITICIANS RE-ELECTED.
MASSIVE TAX AND MORTGAGE INTEREST RATE INCREASES - IN THE PIPE LINE TO PAY FOR THE BAIL OUT.
AFTER THE ELLECTIONS WHEN THE TEMPORARY ANAESTHESIA HAS WORN OFF - YOU! THE TAXPAYER AND HOMEOWNER WILL FEEL THE REAL PAIN.
THE BANKS DON?T TRUST EACH OTHER SO DO YOU HONESTLY BELIEVE TAXPAYERS WILL GET THEIR MONEY BACK?
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"Shareholders punished for the sins of executives" - that would be the same institutional shareholders who watched while the banks fed the orgy of consumption and pushed for ever higher profits and dividends that most rational people realised could not be sustained
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This comment was removed because the moderators found it broke the House Rules.
It's so much useless bluster for the PM and the chancellor to go on about making sure that the exceptional bonuses for the financial sector directors will not be repeated from this point foward. We know full well that there will not be much bonus that can be justified for this year and probably a few more besides until things stabilise. What about the clearly unjustly paid out bonuses etc for the last few years while this situation was being created. The government sees fit to retrospectively tax owners of cars bought years ago so why not apply a special case retrospective tax to unjustly paid out bonuses in the financial sector? It should reflect the damage that was done to everyone else! The recent change in the share price of those institutions reflects only some of the damage caused.
http://petitions.pm.gov.uk/Retrofinsectax/
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Are there any Policemen / women, Nurses, Teachers, Local Authority, Forces staff and other public sector workers reading this?
YOU WERE REFUSED A PAY RISE THIS YEAR SO THE BANKERS COULD RUN OFF WITH YOUR MONEY!
The police weren't even allowed to strike to protest. Is that a fair an just society?
Do not enforce the law of the Bourgoisie.
WORKERS OF THE WORLD UNITE!
The time has come Comrades......pick up a copy of the Communist manifesto and all will be explained.
The only country who isn't panicking is China. They have been protected by their socialist principles, free trade and free markets represent the freedom of the Bourgoisie - not the worker.
They may have started on the road to capitalism - but they will be turning around as we speak.
1917 was too early, and required too much force. This time it will be an spontaneous uprising prompted by the lack of food and the loss of everyone's material posessions.
1917 was isolated - but this time it's global. There will be no intefering from external Bourgoisie nations.
Even if it doesn't happen this time - there will be a next time. It is inevitable, the Bourgoisie will create the revolutionairy proletariate.
The fall of capitalism has begun. Even the most ardent capitalist supporters have admitted that "The credit markets will never be the same again".
The system does not work - it was proven in 1929 and it took 10 years of hardship to get out of it.
Are you all prepared to live with poverty and unemployment until 2018?
Don't think public sector jobs are safe either. Where do you think the Local government will find the cash they have lost in iceland?
.....from service and job cuts.
The government just blew all the national savings which could have helped us through the recession.
It's all over folks - bar the shouting.
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#191 NorrieC I didn't watch the video, I don't believe I need to, going by your comments you have either misunderstood it or it is wrong.
The difference in what you borrow and what you pay back is called interest. It goes into the bank and out the other side, to the banks depositors and savers. These use the interest earned to buy stuff, which pays your wages, which you use to pay interest, and round and round it goes. It doesn't stay in the bank as deposits *unless* depositors on average decide to increase their deposits (see further down).
The relevant borrowing and repayment ratio is not necessarily 1:1, it can be bigger or smaller, but it is matched by an equal change to bank deposit liabilities, call it a deposit and withdrawal ratio if you like. The amount people want to borrow is negatively related to the interest rate. The amount of wealth people want to keep in liquid cash is also negatively related to the interest rate. By putting the interest rate up or down, you therefore affect the net change to deposits *and* the banks re-lending of deposits, creating or destroying liquid money (but not wealth). Hence if all depositors and savers decide to keep all their interest earned in further deposits (not likely), this is an increase that you may wish to stop by putting up the interest rate, encouraging depositors to place this cash in less liquid alternatives - see below.
If you manage to control this process well (a totally different question) you will adjust the amount of liquid money to match the needs of the economy. By some theories, excessive growth of liquid money causes inflation. If inflation gets too high, put up interest rates. Arguably this is a blunt instrument, which is why aiming for an inflation rate of 0 is not desireable - getting it slightly wrong puts you into deflation, and that is far more damaging. More important than zero inflation is stable low inflation.
Looked at in another way, Mervyn is trying to fine tune what is supposed to be a self regulating process. It assumes the economy borrows for profitable investment. If people save less and spend more (or borrow to spend), it increases profits, increases investment, increases borrowing, increases interest rates and increases savings again (or reduces borrowing to spend).
Now.. Borrowing through issuing bonds or CDOs, or through accepting long term savings - this does not create liquid money, as the lender cannot take these instruments down to Tesco and pay for their groceries. Arguably (simplisticly) it therefore doesn't create normal inflation. That doesn't stop it creating asset price inflation, but Mervyn doesn't look at that, not his job, according to Gordon. He believes in the self regulation above, with some "minor" swings due to timing differences.
Now for end borrowers, read diluded house buyers and dogdy governments in the West. For originating savers/lenders, read Chinese and oil countries recycling massive trade surpluses into bonds and other less-than-liquid instruments. For the fog in between, preventing the Chinese from realising that the returns they are making are too good to be true, read the syndication and derivatives sausage machine, incompetent governments, regulators and auditors, *marvelling* at the economic miracle that is ever rising house prices and record borrowing without inflation. For the weak link in the whole picture - there's your FRB.
Please excuse the lengthy metaphor, but FRB is inherently unstable in the same way as a car travelling at 60 mph. Without regular MOTs (FSA) and a competent driver (Mervyn under the instruction of Gordon), headlights (auditors and credit ratings) it *will* crash very badly. And it plunged into the fog years ago when all the above were watching location, location, location in the back seat.
It does not in itself lead to geometric growth of liquid money the way you describe it. It is at the moment very much threatening to massively reduce liquid money, which is what happens if it crashes.
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May I just mention to you Earthlings that a more pressing problem is awaiting around the corner:
21 December 2012
The Sun will cross the Galactic plane (strong gravitational effects from the SuperBlack hole at the centre of the Milkyway)
Plus, planet-X (Suns twin Dwaf Star) is getting closer sending comets from the Oort cloud earth bound.
So....can you hurry up and sort the money problem out so we can afford a party while watching the firework display :-))
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Hello Robert, I am concerned by the recent events within the banking industry, however I do feel that the media are somewhat responsible for the extent of the problems and that includes the BBC. It is incomprehensible that the BBC does not understand that over-exagerated reports on the economy promotes fear and fear is the biggest danger to the money markets. I work for a company that is doing extremely well despite the problems in the economy, I deal with companies evreyday and they say that the media is partly responsible; I am not blaming you personally, but a toning down of language would go a long way to helping us get out of this mess.
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Robert,
If as a business, I default, I go under and loose everything! The banks that have raped the common people of their cash through their thieving practices, and now we have to prop them up because they come crying home to mamma!
I say, let them fall, let the people withdraw their cash from these thieves and place it in a responsible bank which should be overseen by the public and governments.
Go after the thieving CEO's and sequent their assets, put them in prison or better still 'Guantanamo Bay'!
When there is trouble, the tax payer has to foot the bill, the poor person who relies on trust and honesty from financial or government decisions has to put up with their filthy greed!
I personally have no credit or overdraft facility! If I want a mortgage, then the new way should be that, I borrow say £200,000 from 4 banks, i.e: £50,000 from each bank, spreading the risk! It makes sense!
Go back to the old days when your bank manager grilled you regarding your financing, then your mortgage should be finally approved by the government or FSA before acceptance!
Let the people form their own banking system and get rid of the greedy thieves who are dictating our lives!
Radical change is needed!!!
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Anyone know what happens to UK savers who have deposits with Landesbanki in Guernsey????
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I'm a proud RBS employee and shareholder. I'm fed up of hearing Pestons name, the only highlight for me this week was that daft mare Sarah Kennedy on R2 repeating your name as Preston over and over again.
Turn it in Rob, Ive started to listen to Moyles on R1, at least it cheers me up, I for one am getting bored of you.
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Here are a couple of ways of solving the financial crisis:
1. Central Bank interest rates should be significantly further reduced. This will enable many more people to pay their mortgages and would provide support for house prices. This would greatly reduce the number of people going into a negative equity, foreclosing on their housing loans and greatly reducing the attendant massive potential losses to banks. It would also release more cash into the economy thus encouraging spending and reducing recessionary effects.
2. Fuelling inflation has always been the concern of reducing interest rates. However, one of the great flaws in the way inflation is calculated is that house price rises are not included in the inflation figures. If they had been, then interest rates would have been higher in the past, house prices would have been lower and we wouldn?t be in the mess we are in now. However, with the current situation, taking account of the falling house prices, current inflation figures calculated in this manner would be in serious negative territory, and Central Bank interest rates could justifiably be reduced significantly. When house prices stabilize or start going up again, then Central Bank interest rates would rise again.
3. Since banks are not lending to each other due to the perceived and actual risks, banks are holding onto the money they have. This money could be providing much needed liquidity to the credit markets. The solution is to reduce the risks. One way the risks could be eliminated is if the government sets up an intermediary organization, whereby banks could lend their excess cash to the intermediary organization without risk, and the intermediary organization could lend onto other banks that needed the money. Simple.
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It has been reported that Iceland?s assets have been frozen in this country due to the failure of their banks and the subsequent row over compensation.
The USA, by perpetrating a massive swindle, has been the prime cause of the financial turmoil we are seeing around the world. Countries affected should seize USA assets in their countries; identify the ?financial instruments? (junk bonds) that originated from America, and extract compensation by liquidating as many of the seized assets as is necessary. The issue of these so-called financial instruments was nothing less than a financial fraud/ confidence trick and America should be made to pay to clean up the mess it instigated.
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Post 4 has got it.
Will they never learn ?
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Northern Rock has not yet passed on the 0.5% rate cut. Should the government's own bank not lead the way and set an example? How can they "demand" other high street banks pass on the rate cuts when their own bank doesn't follow suit?
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This comment was removed because the moderators found it broke the House Rules.
I am a lucky guy. I still have $10 left in cash.
It seems to me that HBOS or one of the others should be offering me 35% p.a. for it and they would be if the man who gave away the gold reserves wasn't standing there with his hand on the printing press. I have a very little of the only thing that is now in great demand, but its price is being forced down, down, down. Until that changes we shall not start on the long, long road to recovery.
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I am a lucky guy. I still have $10 left in cash and there aren't any naughts on the end of it.
It seems to me that HBOS or one of the others should be offering me 35% p.a. for it and they would be if the man who gave away the gold reserves wasn't standing there with his hand on the printing press. I have a very little of the only thing that is now in great demand, but its price is being forced down, down, down. Until that changes we shall not start on the long, long road to recovery.
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#219 crispblog, "I didn't watch the video, I don't believe I need to," With all due respect that's an illogical statement. If we are having a discussion, within which we have opposing views, and if one party presents evidence to support his claim and the other party refuses to read it then the discussion can go nowhere. In a court of law if you, as the defence, refused to read the charges brought about by the prosecution and the evidence contained therein you would not be able to form a sustainable defence and would lose your case. I contend that the basis of your argument still rests on a 1:1 relationship between deposits and loans. You rejected that by saying that "The relevant borrowing and repayment ratio is not necessarily 1:1, it can be bigger or smaller". However, you do not define bigger or smaller. If it is bigger then your argument falls. (My contention is that it is much larger, 10-20:1 on average with Northern Rock at 40:1.) You completely miss the point that if you agree it is larger then you have just agreed with my position since if it is larger then that money has to be created. I did consider attaching a long list of links to prove my point but it's just as easy to google for "Fractional Reserve Banking". However, I will leave you with a link that contradicts your contention entirely. The Federal Reserve publishes an instruction manual on Fractional Reserve Banking. A copy can be downloaded here: [Unsuitable/Broken URL removed by Moderator]The fiscal model used by the Federal Reserve System is based on the same model used by the Bank of England and all other world banks producing fiat money. In this manual it sets out exactly the framework necessary to operate a Fractional Reserve Banking system. To save you reading it, which, given your previous statement is unlikely, I will quote from the 3rd paragraph down on page 6: "How the Multiple Expansion Process Works If the process ended here, there would be no "multiple" expansion, i.e., deposits and bank reserves would have changed by the same amount However, banks are required to maintain reserves equal to only a fraction of their deposits. " So, no matter how many times you repeat that "going by your comments you have either misunderstood it or it is wrong. " it does not change the fact that Fractional Reserve Banking is mathematically expansionary on an exponential scale. My contention is that the earth cannot sustain a mathematically exponential expansion of debt, population, consumption of energy, consumption of raw materials, production of waste, production of pollution etc etc. I must question your motives for attempting to present such a vociferous yet unfounded defence on this matter.
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Robert, according to Wikipedia there were many "Financial Experts" who attended the
Bilderberg Group meeting 2008 (June 5-8) at the Westfields Marriott in Chantilly, Virginia, United States:
Including
? Keith B. Alexander (2008), current Director, National Security Agency
? Roger Altman (2008), former United States Deputy Secretary of the Treasury
? Harold Ford, Jr. (2008), current Chairman, Democratic Leadership Council, former US Congressman, Vice Chairman, Merrill Lynch & Co., Inc.
? Robert Gates (2008), current United States Secretary of Defense
? Richard Holbrooke (1995 - 1999, 2004 - 2006, 2008), former U.S. Ambassador to the United Nations
? Vernon Jordan (1979-1985, 1987, 1989, 1990, 1991, 2005, 2006, 2008)
? Henry Kissinger (1957, 1964, 1966, 1971, 1973, 1974, 1977-2003, 2004,[6] 2005-2008), Secretary of State, 1973 ? 1977
? Henry M. Paulson, Jr. (2008), current United States Secretary of the Treasury
The list goes on so is better if you check yourself...
Anyway because the Bilderberg Group holds "Private Meetings" many theorists conclude they have a hidden agenda.
It can be seen from this list that there were alot more "Financial Experts" at this meeting than previous years. May we all ask what did they already know about the problems with the banks then. Is it a coincidence that after this meeting a global financial crisis has occurred or has this crisis been cleverly planned? Let's ask the Bilderberg Group attendees to comment and produce the minutes of their meetings! They owe us this "Right" in the name of "freedom of information" act during these difficult times. Lets clear the air so we can be sure there is no financial "New World Order" agenda!!
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its a sham... I don't believe for one moment that any UK bank is suffering.
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interesting tale from the battle of waterloo, regarding nathaniel rothschild circa 1815. Has rather a lot of relevance in today's climate.
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I find your latest report insulting.
You cite the arrogance of the Banks and yet the tone of your report today smacks entirely of this.
Your references to bankers is a disappointment to the hundreds of thousands who work in the industry and do not make the sums you refer to. Many have lost thousands of pounds that they put aside to back the business they believe in.
Please get some balance in this - your brand of journalism furthers only your own purpose.
PS Not sure why your editotial team didnt post my comment last night!
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Can you please investigate the composition of the remuneration committee membership of companies and how these members are elected?
It appears to me that they are members of a select set in that they very probably consist of individuals who themselves hold high executive offices in other like organisations with a common target to ensure that high remuneration is the norm as they themselves will also benefit. In short 'You scratch my back and I scratch yours'
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Why is it that top executives need to have bonuses anyway? Why not let them work for a wage like all the other members of the organisation.
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It seems we're a service economy with nothing left to service, so what will replace it? Certainly not high-tech industry as we've outsourced most of these jobs to India.
It will take a generation to rebuild the necessary skills base. There just aren't enough senior people with the necessary experience.
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Seems to me that , as usual, the Media creates the message yet takes no responsibility for the repercussions it causes.
Without the media hype people would still have savings and banks would still be afloat.
Notwithstanding, banks have made serious mistakes and Goodwin fell on his sword today,
The media, unlike politicians and even bankers, seem unanswerable to anyone.
Peston has had a field day. Who is Peston answerable to??
When is the media, including the bbc, going tom be answerable to the turmoil it causes?
"Don't shoot the messenger" has moved somewhat.
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Peston stop talking down the economy.. i think a step in the right direction would be getting you off the 10 oclock news!! your a waste of space and your actually costing people money.
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I cant help but look back a year ago and think how things could have been so different today. For instance lets not forget that ABN Amro. RBS may have joined forces with Fortis and Santander, but it was Barclays who made the first bid. This was seen as an attractive buy than more than one consortium at the time so lets not point the finger now and say this was a bad idea from the start. Had that been the case then why so much interest in the first place. Secondly credit is harder to come by now, but surely allowing lending based on last years criteria is only going to harm the economy further. Banks have tightened the way credit is dished out to customers so surely the way ahead is not going back a year but revising the way we underwrite credit in future. The banks do require funds in order to keep going through this turmoil. Will lending it straight back out to customers with less attention to affordablilty really help anyone.
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Oct 13, 2008 was a momentous day for UK banks but on another Oct 13, 1307, Europe's biggest bank at that time the Knights Templars was nationalised by the French King Philip IV, who was deeply in debt.
There seems to be some parallels here.
History does repeat itself.
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It is absolutely amazing that Lloyds TSB was allowed to acquire HBOS. It goes against all the rules of anti-monopoly and it will be interesting to hear what The UK Competition Commission was doing when this deal was allowed to go ahead? How could they have forgotten about their people, ignored the fact that this merger will inevitably bring with it job losses and will leave many borrowers stranded as number of financial products will disappear. I was shocked to learn that the number of available buy to let remortgage deals was reduced by 94%.I wonder if few years down the line government will admit that they allowed for it to happen as they were trying to get big problem off their hands.
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