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Why bank shares are falling

Robert Peston | 10:23 UK time, Wednesday, 8 October 2008

The government announces massive, unprecedented financial support for our banks, and their share prices fall - well all of them but that of HBOS.

Gordon BrownShome 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.


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  • Comment number 1.

    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.

  • Comment number 2.

    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.

  • Comment number 3.

    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!

  • Comment number 4.

    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.

  • Comment number 5.

    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?!

  • Comment number 6.

    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.

  • Comment number 7.

    "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 ....

    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.

  • Comment number 8.

    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.

  • Comment number 9.

    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.

  • Comment number 10.

    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.

  • Comment number 11.

    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.

  • Comment number 12.

    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?

  • Comment number 13.

    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!

  • Comment number 14.

    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!

  • Comment number 15.

    Just one thing government should make sure that this money stays with in UK.

  • Comment number 16.

    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!

  • Comment number 17.

    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 -

  • Comment number 18.

    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

  • Comment number 19.

    "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 -

  • Comment number 20.

    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.

  • Comment number 21.

    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.

  • Comment number 22.

    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.

  • Comment number 23.

    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?

  • Comment number 24.

    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.

  • Comment number 25.

    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 ?

  • Comment number 26.

    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?

  • Comment number 27.


    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.

  • Comment number 28.

    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

  • Comment number 29.

    #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?

  • Comment number 30.

    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.

  • Comment number 31.

    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.

  • Comment number 32.

    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.

  • Comment number 33.

    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.

  • Comment number 34.

    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"

  • Comment number 35.

    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

  • Comment number 36.

    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.

  • Comment number 37.

    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.

  • Comment number 38.

    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.

  • Comment number 39.

    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.

  • Comment number 40.

    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.

  • Comment number 41.

    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

  • Comment number 42.

    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.

  • Comment number 43.

    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.


  • Comment number 44.

    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?

  • Comment number 45.

    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?

  • Comment number 46.

    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.

  • Comment number 47.

    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.

  • Comment number 48.

    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.

  • Comment number 49.


    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 ?

  • Comment number 50.

    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 ?

  • Comment number 51.

    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.

  • Comment number 52.

    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.

  • Comment number 53.

    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.

  • Comment number 54.

    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?

  • Comment number 55.

    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.

  • Comment number 56.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 57.

    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.

  • Comment number 58.

    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

  • Comment number 59.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 60.

    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?

  • Comment number 61.

    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?

  • Comment number 62.

    Does anyone know what advantage, if anything, Nationwide will be taking of the offer?

  • Comment number 63.

    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.

  • Comment number 64.


    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.

  • Comment number 65.

    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.

  • Comment number 66.

    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?

  • Comment number 67.

    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.

  • Comment number 68.

    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:

    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:

    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"

  • Comment number 69.

    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.

  • Comment number 70.

    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..


  • Comment number 71.

    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'.

  • Comment number 72.

    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.

  • Comment number 73.

    Half a point of interest rates now as well... We live in interesting times...

  • Comment number 74.

    Ha ha! 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...

  • Comment number 75.

    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.

  • Comment number 76.


    Pie in the sky on earth would you expect your suggestions to be effectivley adminsitered?

  • Comment number 77.

    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?!

  • Comment number 78.

    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...

  • Comment number 79.

    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?

  • Comment number 80.


    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.

  • Comment number 81.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 82.

    "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 ;-)

  • Comment number 83.

    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.

  • Comment number 84.

    Breaking news.....the Central Banks have cut interest rates by 0.5 percent!

  • Comment number 85.

    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.

  • Comment number 86.

    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.

  • Comment number 87.

    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?

  • Comment number 88.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 89.

    Or is it, theft and, taxpayers money?

  • Comment number 90.

    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

  • Comment number 91.

    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!

  • Comment number 92.

    Or is the combination of words that you keep moderating away:

    Tony Blair, part time job, JP Morgan?.

  • Comment number 93.

    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!!!

  • Comment number 94.

    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.

  • Comment number 95.


    '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.

  • Comment number 96.

    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.

  • Comment number 97.

    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.

  • Comment number 98.


    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.

  • Comment number 99.

    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.

  • Comment number 100.

    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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