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We've lent £185bn to banks

Robert Peston | 12:58 UK time, Tuesday, 3 February 2009

Here's a jaw-dropping measure of the failure of the banking system over the past nine months.

Through just one funding initiative, the Bank of England's Special Liquidity Scheme, taxpayers have pumped a staggering £185bn into 32 British banks and building societies - according to figures released a few minutes ago.

The Bank of England has provided this £185bn in the form of Treasury Bills - which are short-dated government bonds that can easily be turned into cash. And in return it has received £287bn of collateral from the banks, in the form of loans made by those banks.

All of those loans received from the banks have been securitised or turned into tradable securities. And most of them are residential mortgages converted into mortgage-backed securities.

So the best way of seeing all this is as a three-year loan of £185bn to the banks, made by all of us as taxpayers, for which we've received £287bn of assets.

And, what's more, we've received a fee of 1.15% for our trouble.

For British taxpayers, that doesn't look such a terrible deal. The risk of loss to us, given that we've lent £102bn less than the face value of the collateral we've been given, looks pretty small.

But it shows you quite how serious it was that the commercial market for mortgage-backed securities had collapsed and quite how desperate the banks were to raise cash.

The banks were prepared to pay through the nose for our money, because without taxpayers' financial support they would have collapsed.

Here's another number that gives me the willies.

The Bank of England says that as at 30 January 2009 it values the £287bn of collateral at £242bn.

That implies that the value of these mortgage-backed securities has fallen by £45bn or nearly 16%.

Or to put it another way, the Bank of England calculates that our banks and building societies have lost £45bn on just these mortgages and loans.

Which is a scarily big number - and may explain why the Governor of the Bank of England has consistently refused to rule out the possibility that some of our biggest banks may yet have to be fully nationalised (though the Treasury's new scheme to insure the banks against some of these losses may prevent nationalisation).


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  • Comment number 1.

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

  • Comment number 2.

    Given that many of us expect the housing market to fall by 50% over the next few years, surely the massive premium could more accurately be seen as a true measure of the risk that the BoE took on when accepting this security?

  • Comment number 3.

    Well as long as the banks are Ok.

    I notice in the US nobody wants to borrow, so has Flash gone to all this trouble of saving the banks/world (whatever he saved) for nothing?

  • Comment number 4.

    There has been a lot of comment and a good deal of consensus that the cause of this world wide financial crisis has been profligate lending by banks on a massive scale. The reasons why the UK, in particular, is almost uniquely badly placed to cope with and survive this crisis are rather more diverse and complex. Certainly the sheer level of indebtedness, both corporate and personal, is a major factor and certainly the fact that the UK has an unhealthy reliance on a bloated financial sector is another factor but another reason is that for the past eighteen years successive governments have subjected the UK to a creeping cancer of bloody-minded bureaucracy and petty regulation which, in general terms, has had disproportionately large effects on small business, which is regarded by many as the backbone of the UK economy.

    The effects are threefold:

    1. There has been a tendency for business to flow towards the largest, often national or international, sized companies because they are the only ones with the economies of scale to cope with the ever increasing costs of compliance. The smallest businesses have found it harder and harder to survive let alone earn any realistic profit.

    2. Flexibility and innovation are stifled because businesses are compelled to operate within a straight jacket of rigidly enforced procedures (often - but not always - resulting from one-size-fits-all EU directives).

    3. The economy has been required to finance an ever-growing army of bureaucrats and administrators to police this mountain of regulation.

    It is not a party political issue. John Major’s Conservative government was equally as guilty of this as the Labour governments of Tony Blair and Gordon Brown.

    The UK, as an organisation, has top heavy management and, like anything that is top heavy, once it has been disturbed beyond a certain degree, it starts to topple and once that process is started it is nigh on impossible to stop it falling. This financial crisis has started that process in the UK.

    There is nothing that Gordon Brown’s Labour government can do to stop the collapse. Neither will a change of government have any effect. The tinkering with the system that is currently taking place is futile – the magnitude of the problem is too incomprehensibly enormous.

    Certainly policies pursued by the current and some previous governments have had a bearing but much of the problem stems from the nature, personalities, capabilities and levels of experience of those we elect into power. With a few notable exceptions, the UK tends NOT to elect competent people into power and that, largely, stems from the manner in which the party political machines select candidates in the first place. MPs have become transformed from being the Peoples’ representatives in Parliament into Parliament’s representatives in the People.

    There needs to be a seismic change in the way this country is governed. The democratic way to achieve this at the next general election would be for everybody to vote only for the independent of their choice and not for any member of the three main political parties (that, of course, will not happen). The alternative, ultimately and regrettably, will be civil unrest (which undoubtedly will happen) to force change. There will be bloodshed and there will be no justice.

    The forthcoming catastrophe is unavoidable. Picking up the pieces and rebuilding afterwards will be an enormous task. The resourcefulness and drive of the British people will successfully accomplish it – but it will be achieved despite government, not because of it.

  • Comment number 5.

    That implies that the value of these mortgage-backed securities has fallen by £45bn or nearly 16%.

    Which implies the annulised rate of decline in house prices is over 21 percent and still going down.

    A similar drop in 2009 will mean these so called assets then become toxic again.

    But we knew that didnt we?

  • Comment number 6.

    I'm assuming that the value of the mortgages held will continue to fall for at least another year, so it's very possible the banks will end up winning and the tax payer will lose.

  • Comment number 7.

    Oops, in half an hour, one posting. Bob, you've been moderated to death. Your decent posters have deserted you.
    As regards a sense of scale, this is less than a month's GDP, or a quarter's tax take, on current turnover, and could be paid for by cancelling Trident. It's only jaw-dropping that it's not worse, but you've still missed the point, it's not what's happened that's bad, it's what's in the mucky mushroom cloud overhead that's going to matter. That turnover's dropping like a rock, and the 185bn's pretty much gone to inflate the cloud further.

  • Comment number 8.

    Why are we bankrupting the nation trying to balance the books of already involvent banks?

    It no longer makes any sense.

    We'd surely be better giving money to each homeowner to pay off part or all their mortgages.

    At least then some of the banks debts would be reduced and ordinary people wouldn't be looking at destitution in the face (at least not quite yet).

  • Comment number 9.

    off to the bank to discuss extending my business banking facilities....any chance of a few tips gordy...!!
    i wonder if the goverment credit scored them to see if they were actually suitable for a loan!.........probably not!!!!

  • Comment number 10.

    As a trained journalist you should know better to equate dropping valuations with losses. British banks have not lost £45bn for the simple reason those mortgages still exist and have not been sold. You are confusing (as accountants do) mark to market valuations with profit and loss. I have no doubt the banks have lost some money - many of the mortgages will go into default - but until mortgages are sold, redeemed or become uncollectible all the losses you quote are nothing more than educated guesses. Useful as a tool but not reality

  • Comment number 11.


    To put all this into perspective are there any accurate figures in the public domain that corresponds to the annual spend of the wars in Afghanistan and Iraq? Namely how much is spent on the private outsourced military and intelligence companies and how much by the Army etc.

    We really need to debate the need to continue this war, from a financial point of view. If this war drags on at great cost and we merely succeed in bankrupting ourselves, it would be one heck of an own goal - basically game, set and match to Usama Bin Laden and Al Quaeda. We should all be aware that the private firms and defence contractors objectives are very different from those of the UK and US governments. The former want a long drawn out effort; after all turkeys do not vote for Christmas do they?

    We should only be concentrating on getting the economy back into shape. I just get a feeling that either the wrong people are involved in sorting this out or that the behind the scenes effort is half hearted.

  • Comment number 12.

    Robert, Now it all makes sense!!! I have only just noticed that you have had a book published about all the negative thiings in business today!! So you use the BBC and licence payers money to spread your negative news and then people buy your book and you take the benefits. Well done Robert at least I now know your agenda!! You and the BBC should be ashamed of what you are currently doing at this moment in time.

  • Comment number 13.

    Another great story from Mr Peston!

    Why is it that our so called leaders (both Labour and Conservative) have been so keen to sell off our national assets?

    We are now paying through the nose for everything (energy, rail, water etc) and in most cases to overseas companies.

    How can this be in the national interest?

    On top of all this Lord Mandelson is now VERY keen to sell Royal Mail to a Dutch company.

    In light of everything, WHY is he so keen to do this?

  • Comment number 14.

    #2 - 'many of us expect the housing market to fall by 50% over the next few years'

    - who? That sounds like a nonsense figure to me.

  • Comment number 15.

    I dont find this surprising at all given the unfolding geometry of the debt fuelled ride we have all been on for the last decade or more.

    What is clear is that the Government (and I use that term very loosely) prefers to drip feed its electorate the scale of what has happened, who is responsible and the bitter medicine required to get the patient better.

    That is quite disrespectful to the electorate on the one hand.

    On the other hand it also provides a bit of breathing space for the knights of the realm in the boardrooms of the banks and elsewhere to queitly slip away into 'early retirement' or 'resignations by mutual agreement' taking their bonuses and their protected pensions pots with them to some tax haven somewhere out of the way in a nice warm climate. Their pension pots still bloated from gorging on the irresponsibility they were allowed to get away with by the political elite. Leaving a wrecked and horribly imbalanced economy in their wake.

    My words are dramatic, time will tell if they are overly dramatic or not.

    There is a lot of resentment out there which is growing with the broader realisation of what has happened. That resentment and negative feeling will need to be addressed before we can move on together.

    The best way to 'unprime' the resentment would be by a display of humility by the political and financial elite in line with their titles. Titles they so readily accepted but find so difficult to live up to what those titles are supposed to represent. Public service, humility, respect for your fellow man, working for the common good.

    I dont mind if they still make good money as long as they dont sell those principles down the river in the process.


  • Comment number 16.

    The brittish taxipayerrs[whoever they might be when they are at home] have underpinned massive bank debt in a declining market and may[may... indeed!] have to pump in much more in order to appear not to lose ie

    The true cost of the opperation can only be evaluated when all the toxic junk is sold back into the market [which cannot happen without revealing the truth]

    Should the taxipayerrs want their money back in three years, then the massive off loading of the assets they loaned against will likely precipitate further decline .

    Taxipayerrs moneys and more are now tied up to be rolled every three years to infinity and beyond .

    Taxipayerrs have baught into the leveraged structure based on unrealised gains at every level and can no more sell out than they can sell their vital organs without ceasing to be .

    Government will force citizens to invest in pensions based on taxipaterr Financial UK'd Investments.

    Only Anlo Saxon English is addequte to describe these events

  • Comment number 17.

    Just watch the value of that £287bn collateral diminish even further as this depression starts to bite further and further.

    What worries me even more is that we do not have any sort of process for deciding which business' we should invest in and which to let wither away. I have the feeling that when the banks do start lending, much of it will be wasted by propping-up companies that have relied upon greater and greater lines of credit.

  • Comment number 18.

    BOE Property price Index fall by 50% per annum (or 36% fall in 9 months).

    Figures in Billion pounds

    Total committed assets 287
    Total money received 185
    Total loss accepted 102

    Percentage of loss of value assets
    102 100 = 35.54%
    ----- x

    I have not calculated the fee of 1.15% as loss yet. If you want to annualise the loss
    36 * 12 = 48%

    PS. if anything goes up by 100% it only needs to come down by 50% to be the same value.

  • Comment number 19.

    So the value of houses that have been sold through dodgy mortgages (eg 6x salary) have fallen by 16%.


    Is that all they have fallen by? I suspect not.

    I suspect there is MUCH further to go.

    Still I'm sure the banks are good for their debts for a while yet.

  • Comment number 20.

    From this report, I think we can safely assume that, despite the relative quiet pertaining in the media at the moment (I've never seen so much fuss and hype over a snowfall - what happened to good old British insouciance?), we remain at the very thin end of this recession/depression wedge.

    From March onwards we'll start seeing a slew of financial, market and economic data (some of it equally as "jaw-dropping" as Mr Peston's most recent revelation, no doubt) that will resurrect the media frenzy we saw last year.

    It'll also incite certain groups to mimick the recent activities of the Total workers at Lindsey.

    A lot of people are still sleepwalking I fear.

  • Comment number 21.

    "But it shows you quite how serious it was that the commercial market for mortgage-backed securities had collapsed and quite how desperate the banks were to raise cash."

    ... It also shows just how much pressure will be placed on sustaining an overpriced housing market.

  • Comment number 22.

    Bert - no we haven't - stop being so pathetic it is not helping

  • Comment number 23.

    that is all about mark to market. but if you mark these assets to maturity.they won't loose any value...does robert peston's logic mean that if they value of house rise the government will be in would just appear in the balance sheet...
    why is he creating this hysteria...what has changed...did'nt we know what BOE was getting into, when they loaned..ofcourse they did...

  • Comment number 24.

    "The Bank of England says that as at 30 January 2009 it values the £287bn of collateral at £242bn.

    That implies that the value of these mortgage-backed securities has fallen by £45bn or nearly 16%." R Peston

    Robert surely you meant to say that; you have infered that the value .... has fallen.

    The B o E is simply being prudent in its valuation of the assets. Most sensible commentators feel that we have seen the worst of the fall in the housing market. If that is the case then we will see the BoE revaluing the assets upwards later this year or ealy in 2010.

  • Comment number 25.

    The issue of 'writedowns' is a joke! Tax payers WILL NOT make money out of this.

    Asset values will fall at least 30-40% further, but the 'banks' will always show the 'value' of their assets at 'unreal (at least 12 months old) prices'. The 'de=leveraging' process has another 18months to 2years to run, and tax payers will have paid trillions more before we get close to a 're-build'.

    Remember £40 trillion of credit default swaps are still 'out there' in the system dragging us down like a mill stone around our necks! Does anyone think these have just 'gone away'?? I don't!
    Default swaps have clearly been glossed over for the time being because the truth would lead commentators like RP to admit we are on a one way road to depression!

  • Comment number 26.

    If it is such a great deal for the taxpayer, how come the banks could not raise those funds via their shareholders?

    The fact is, as everyone knows, is that these MBS's are completely toxic and are probably only worth 20 p in the pound.

    This idea that we will end up better off from owning these is laughable. Every time the housing market drops by another 1% we probably lose another 10 billion.

    Much of the money we have paid will not even be used to keep the banks trading - a lot will go on salaries and bonuses. Seems like they need to 'retain the best people' in case they 'decide to relocate to Dubai'.

    You could not make this stuff up - how can anyone be taken in by it?

  • Comment number 27.

    TY Robert it all makes perfect sense now!!!!!!

    I was wondering why this Gov seemed to be punishing savers. I mean what was the point in reducing the BOE base rate and applying pressure to the Banks to pass on this random act of kindness - especially as the rates have been very low for years....

    I now realise that it is because the Gov is holding an awful lot of our houses as collateral for money they lent to the Banks

    So I presume we are going to see a lot of initiatives geared towards re-inflating the housing market - after all that's where the Gov has invested all our money

  • Comment number 28.

    Just to be clear, the £45bn hasn't been lost, it is just the difference between the hold to maturity values of the assets and the firesale values they would get if they had to be sold in the market. Which, of course, was the whole point of the scheme. My jaw didn't drop an inch.

  • Comment number 29.

    # 11 excellentcatblogger

    If I may say so, sir, I think spending on wars in Afghanistan, Iraq etc could nowadays be small beer compared to Gordon Brown's spending on welfare-like benefits to the great (?) British people: we're easily talking 5 times the defence budget being chucked at all sorts of weird and wonderful mechanisms for incentivising people to stay at home.

    I'd rather see the armed forces left alone for the time being and have our glorious political elite take an axe to the staggering levels of expenditure and waste wrapped up in funding their beloved "State".

  • Comment number 30.

    When you say 'lent the banks £185bn' would it be fairer to say that 'the government have created £185bn out of thin air' and handed it over to the banks?

  • Comment number 31.

    I would hope that all those banks that made use of the BoE facility are forced to:

    a) Cut or remove completely their dividends whilst they make use of this facility and

    b) Stop the payment of any bonuses for the same period.

    This will have the effect of retaining cash thus allowing them to re-build their capital more quickly and award the taxpayer an element of natural justice over the incompetent bankers (and their investors) who got us into this mess in the first place.

  • Comment number 32.

    Reported in last Wednesdays 'The Times' newspaper 28-Jan-09 (very small article on page 40)

    Merrill Lynch: John Thain, the former chief executive of Merrill Lynch, the investment bank now owned by Bank of America, has been subpoenaed as part of an investigation into bonuses paid by banks that have received US governement bailout funds.

    AIG: Christian Milton, a former executive at the US insurance group has been sentenced to four years in prison for his role in a reinsurance deal that prosecutors said had misled AIG investors.


  • Comment number 33.

    Still on about the Banks?

    Well, when low pay and rising unemployment take hold even more Tax payers money will be needed to cover all the ordinary workers going bankrupt.

    Not to mention business failures.

    People cannot spend money they do not have !

    Whilst ordinary workers salaries are rising less than their cost of living they will inevitably spend less in the shops, leading to yet more unemployment and business failures.

    What we need is an injection of cash into Public Sector pay in order to boost consumer demand and thusly private ector sales and jobs.

    A pay rise of thirty percent across the public sector would cost a tiny fraction of the amount wasted on the Banks and have far greater impact.

  • Comment number 34.

    It is nice of you to finally explain that taxpayers money is not actually taxpayers money at all.

    The selling of govt bonds to foreigners and taking the proceeds of income tax from UK workers and giving it to the banks are two very different things.

    It is now nearly one and three quarter years into this crisis and I have yet to see a proper analysis of the problem. Surely by now we should have been shown a bank's balance sheet on the news.

    Instead I have heard the most pathetic alarmist nonsense principally from Robert Peston more often or not echoed by Vince Cable e.g. taxpayers at 100 billion risk from Northern Rock.

    Given that adequate security is given which it has and a reasonable fee has been charged which it has then I do not see what all the fuss was about and the special liquidity scheme should have been implemented immediately when the wholesale market froze up.

    Unfortunately HMG and the BOE could not understand this and instead let the banks and subsequently the economy go down the tubes. Mervyn King in particular did not understand the crisis see moral hazard.

    If they had bothered to listen to Adam Applegarth at the treasury select committee he told them the problem and the solution however they were far too involved in conducting a witch hunt.

    The BBC is supposed to be impartial but Robert Peston is no better than a tabloid jounalist and if the BBC cannot report news impartially then it should have the licence fee removed and then it can compete with other news channels and Robert Peston can say whatever he likes.

  • Comment number 35.

    It is good that at last we are getting some numbers to attach to the events. This allows us to define some sort of value to what has been going on. It might be more interesting if these numbers were defined by financial institution: on second thoughts, perhaps not.

    Now the taxpayer has done his or her duty by the banks, when are the banks going to do the same by the taxpayer? Some improved funding flows, perhaps?

    I think the nationalisation argument is a bit dumb: why should the taxpayer pay shareholders for assets that are going to collapse into public ownership anyway? The bankers are only friends of the Prime Minister so who cares about them?

    Now what we need to see is how the government is going to restructure the economy.

    Better schools which were open would be a good start.

    Also some more gritting lorries wouldn't go amiss.

    Local councils that served the public rather than their own self-interests.

    One or two British-owned power stations and fuel refineries might help ease some tensions.

    Then we need to start making a list as to what we could make here which other countries would value and pay us good money for? How about improving research and development? How about some decent grants for scientific research? The list goes on.

    Can we do it? Yes, we can! But first we need to dump this dead-end useless government and start again with someone who at least has a democratic mandate.

  • Comment number 36.

    These sums only show a fraction of the real story. More importantly they also show that because money is worthless and assets valued in monetary terms are still almost impossible to value.

    These banks are bankrupt, and have been bankrupt for quite some time. Their losses far exceed the net worth of the businesses and in normal circumstances the institutions would have vanished.

    However having unloaded the rubbish on the Taxpayer it is to be hoped that the net worth of the institutions is again positive - although judging by their propensity to lend this appears not to be the case! I still do question the current valuation of the assets - on what basis have they been valued?

  • Comment number 37.

    Sooooo, Robert.
    We find that the Uk government has invested £185billion.

    Wait that does not do this figure justice,
    £185 000 000 000, thats better.

    So the government has invested that huge amount of money in banks and in retun have taken on debts as "assets".
    Only in a world this crumby could we describe debt as an "asset".

    , Justin150 wrote:

    "but until mortgages are sold, redeemed or become uncollectible all the losses you quote are nothing more than educated guesses. Useful as a tool but not reality"

    you are quibbling statistics that mean nothing. The value of the asset we have taken is not £287billion, it is -£287billion as it is a debt. If it cannot be serviced, sure we will have the underlying asset backing that debt. Seiously though can you see this collection of craven political placemen (and women) who "run" the country forcing repossesions on peoples homes after the property market falls even further.

    We are where we are, because of political expediency over prudent economics, because of political expediency over personal ethics and because our betters could get away with it for so long.

    I have oft wondered at the snobbery that means it is ok to condemn "chav" single mums living in council flats trying to live a life of zero expectation, and yet we must not criticise the islington mafia, who have everything form life, gifted to them through lucky chance and yet expect more and more from the poor proles who pay their taxes.

    Voice from the floor is correct there will be trouble ahead. Some people may lose their heads, but there is something in the air, wafting through Briton, a barely believed hope that is growing in strength day by day.

    Do we dare whisper it out aloud yet.

  • Comment number 38.

    #12 windchrisleeds

    I, along with others, are getting a little fed up of this type of silly sniping

    This is one of the biggest (if not the biggest) financial catastrophe to hit the world and the solution isn't to think positively

    Our world is about to change, the past few years were a unsustainable dream – partly built on ridiculously overconfident decisions all of us made and a presumption that the boom would never end

    Are you really suggesting reading about it is not for us common folk? Maybe more kitten stories eh!

  • Comment number 39.


    Very interesting. I have read the Morgan Stanley / IFD report earlier in January. I would be interested to hear the actual figures but they [ MS] say the bank bailout adds up as follows :-

    Special Liquidity Scheme 200bn
    Bank of England Balance sheet 150bn
    BoE Asset Purchase initial 50bn
    Deposit protection increase ?bn
    Recapitalisation 37bn
    Nationalisation NR and BB 150bn
    Credit Guarantees 250bn
    Guarantees asset-backed secs. 50bn
    Asset Protection scheme ?bn

    Total could be 1,000bn

    OK, they say taxpayers get collateral/stock but then say " downside risks are huge because the payoffs on the support measures are asymetric : taxpayers are much more likely to make big losses than big profits". Deflation and write-offs etc.

    The nasty one is the Asset protection insurance which returns no asset to the taxpayer - we just take the loss.

    Interested to hear your detailed comment on this as well as how this compares with the US measures in comparable terms ( wasnt it 700bn dollars for the TARP ?).

    Also, how is all of this being shown in the government's public accounts?

  • Comment number 40.

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

  • Comment number 41.

    So why doesn't Mr Peston ask the Gov't what it intends to do to increase Britains productivity as an Exporter ?

    Increasing Britains Exports is the only way to rebuild this country.

    Anything else, such as our collapsing exchange rate, will just price out a huge chunk of the British people from Imported goods...........

  • Comment number 42.

    Potatolord (6),

    "I'm assuming that the value of the mortgages held will continue to fall for at least another year, so it's very possible the banks will end up winning and the tax payer will lose."
    For a change, eh?
    ""Our model citizen is a sophisticate who, before puberty, understands how to produce a baby, but who at the age of thirty will not know how to produce a potato"
    -- Wendell Berry ""

  • Comment number 43.

    "So the best way of seeing all this is as a three-year loan of £185bn to the banks, made by all of us as taxpayers, for which we've received £287bn of assets."

    I reckon you should have added this:

    "The worst way of seeing this is that we've given the banks £185bn for pretty much worthless assets and we still have a maniac running the country."

  • Comment number 44.

    Well I have noticed that in my city good properties are being snapped up pretty quickly and there is a dearth of newly marketed properties....and to me that means that the property market is on the turn, so all you cash rich folk who have been waiting for more doom and easy pickings...the joke will be on you because...and you heard it first from me...a property boom is just around the corner,doomsters!

  • Comment number 45.

    Hmm, I wonder when the FTSE will reach 3500 ?

    With firms profits generally falling, presumably Dividends will also fall, (after all not very many companies have saved any profits, in fact a lot have not, and have borrowed money to repay excess Capital, blame aggressive shareholder activists for that one (hedge funds again)).

  • Comment number 46.

    28 morebalancepleas You forget that even if the loans are held to maturity and fully paid off with interest , investors could still lose out if inflation should rear its ugly head [quantitative easings downside]

    At the moment investors want low yield and secure government SHORT TERM BONDS and seem to concider long term inflation inevitable .

    Your jaw should have dropped ,is it locked?

  • Comment number 47.

    so we taxpayers are making a good return out the banks !

    will the Tories and their bloggers find a reason to moan about this ?

    I bet they do !

  • Comment number 48.

    All of those loans received from the banks have been securitised or turned into tradable securities.

    Wha has scutinised them, the ratings agencies?

    Oh that's alright then.

  • Comment number 49.

    A clever way of doing Quantitative Easing without saying that you have done it.

    If you read the BOE release about the haircut applied to the different types of secuirty that have been exchanged, its clear that these are 3 types of security:

    RBMS not in the lender's own name - i.e. American
    Credit card debt - not in the lender's own name
    US GSEs - Fannie Mae and Freddie Mac debt

    The haircut level can only be of the order of 20% when these three types of security make up the bulk of what has been swapped. These are not UK loans and are not as was previously claimed, the highest quality securities. In fact, its largely subprime so expect to see 20% up to 35% by the end of the year.

    The BOE won't demand that the difference is paid back by the banks if the haircut rate falls - they'd need to ask for about £40bn back. That would be foolish if you want to encourage lending. For me, this would be a definitive start point for quantitative easing.

    But I would argue that the 20% haircut already applied to these securities is wrong, since they can't be swapped on the open market today for that value. They are illiquid and no-one wants to buy them. So what we are looking at here is the first tens of billions of pounds being pumped into the system, by the back door.

    More will effectively go in as the US economy falters and US mortgage defaults continue, because the Bank won't ask for the bonds back. The question really is whether and how the bank can get it out of the system before inflation kicks in, since I suspect that inflation will kick in before any economic recovery.

  • Comment number 50.

    The real question here is 'on what basis is the Bank holding these assets'. If they are held as available for sale, and so marked to market, then this really is quite good news. However, I suspect that they are held as long term investments, and so are based on what they expect to get back on them.

    At this particular point in time, if the Bank thinks that it will be getting back 16% less than face value on these assets (i.e. before significant real world impact (job losses) outside the financial sector) what happens when things really hit home, and lots more general workers get made redundent?

  • Comment number 51.

    So does that mean our safety zone has fallen by 44% already (from 102bn to 57bn)?

    I must have got this wrong, as it reads like you're telling us this is good news and the money's safe?

  • Comment number 52.

    Don't panic Mr Mainwaring.

    Even if the property value drops below the value of the debt it still isn't a problem if the underlying borrower doesn't default on the debt. The majority of customers are good for the money and historically, if you discount the crazy 100%+ mortgages agreed by some of the more stupid lenders, most customers will repay their mortgages in full. Remember, many are over 25-30 years and even allowing for future property rises in line with inflation, over the long term there isn't a problem.
    Also, not all of the banks needed to raise money from the State and pay the fee. Most prudent (if I dare use the phrase anymore)lenders would quite happily lend against a 1% fee and 130% security cover on residential property.

  • Comment number 53.

    #10 you are dead right, but lets face it the your sensible comments would not fit well with Pestons doom and gloom I told you so comments, its not the first time he has over egged the downside in all this.
    Comments like
    Or to put it another way, the Bank of England calculates that our banks and building societies have lost £45bn on just these mortgages and loans.

    Only encourage the likes of #18 who fail to understand that the current MTM (mark to market) value of anything is no more than a bookkeeping exercise, it is of no surprise that in CURRENT market conditions MTM values will drop but that doesn’t mean this is the true value, the MTM on these assets has little to do with the underlying value of the mortgagees and is currently more about market liquidity. Any loss, or profit for that matter will only be realised when every mortgage in any particular asset backed security has either defaulted, been repaid early(fully) or matured which could take up to 30years, and don’t forget whatever the value of these securities are when the banks come to repay their loans, they will only have to pay 185bn even if in a few years time conditions have returned to normal and the then mark to market value is above the original 287bn.
    What the bank is doing now and what is proving the system with the oil to get the wheels of the system moving again, it will take time but it is not the end of the world as Mr Peston would like us to believe.

  • Comment number 54.

    Well when the banks have borrowers over a barrel they would charge the earth so it seems fair!.

    the valuations are a little scary though.

    to me, very roughly it would only be mortgages since 2004 that are toxic as very roughly collateral should be greater than the loan.

    Do these figures anticipate further massive declines in property prices or is my logic wrong?

  • Comment number 55.

    If the collateral is in the form of loans made by the banks, i.e. residential and commercial mortgages, presumably these loans were originally made on a loan to value ratio (LTV) of less than 100%. For example, if the average LTV was, say 85%, the actual value of the real assets secured against these loans would have been in the order of GBP340bn.

    If the value of the loans has been reduced, this can only be because the value of the security is believed to be less than the original amount of the loan, therefore the reduction in the value of the security is the difference between the original security value (GBP340bn as illustrated above) and the current value of the loan book (GBP242bn), a drop of GBP98bn or almost 30% in nine months (or an annual rate of 40%).

    In order for the BoE's loans to be under threat, there will need to be a total fall of around 45% from peak to trough, which happens to be about where most people believe the true market values will be.

    The chances are, therefore that the taxpayer will not bear a significant loss, but the banks will see further significant write-downs over the next twelve months. Prepare for Bank Bailout 3.0 around about May or June.

  • Comment number 56.

    Will Mr Peston run a feature on the increase in personal bankruptcies over the last three years ?

    And how much of that will be to do with loss of job, fall in salary, or even rises in Bills ?

    The big mistake that people who have borrowed money have made is to believe they will be treated fairly.

    Not at all, they bear the entire risk themselves !

    Should their pay fall, they have to deal with it, should interest rates rise, they have to find it, should their House price fall, they will be the loser.

    Not for nothing is a Mortgage called a Mortgage (' Death Grip , Mort Gage, latin or Norman French').

    Of course falling Salaries and rising unemployment will lead to greater costs for the Taxpayer.

    The Pound is low now, but its going to go much lower at this rate.

  • Comment number 57.

    Here's another number to give you the willies: despite all the government support you talk about, the banks' situation is so grim, their debt on the open market trades at extreme junk-bond type yields.

    Check RBS prefs - today's yield 36% !

  • Comment number 58.

    If we now have 'partially' nationalized the UK Banks, does this not amount to "protectionism"? and if it does, should the EU not complain about this as they complained about the 'Americans saying to buy american products rather than overseas products. And how about "british jobs for British workers" is this not in the same league too? (although I think 'british workers' should read: british tax-payers/bentift takers regardless of nationality).

  • Comment number 59.

    "32 British Banks and BUILDING SOCIETIES"? I understood building societies were more prudent and held adequate reserves? They could surely fund themselves by increased redemption activity and leave the taxpayer to mend the banks?

    Or will their greed and stupidity bring themselves, building societies, the government and us all down?

  • Comment number 60.

    44: Commercial property is in the doldrums.

    Lots of empty Office buildings old and new, and as firms close down and economise
    even more will be empty.

    Around my town there are literally dozens of Houses for sale.

    This time last year, there were a handful.

    Now, there's half dozen just in the road of the Village I live in !

    House Prices have collapsed.

    Demand for Houses has fallen through the floor ( and a lot of this is job uncertainty).

  • Comment number 61.

    Mark to market does equate to profit and loss.
    The accounting year end will have marked all the trading books and the P and L will have been posted accordingly.

  • Comment number 62.

    44: the cash rich people are losing out already due to Exchange rate falls and low interest rates. Goods Inflation is also on the up.

    Property prices may not return to 2007 levels until 2015.

  • Comment number 63.

    So OK we have bailed out the banks. We had to or the whole system collapsed with unimaginable consequences. But please stop wittering about the values of domestic properties. We all know that something only has its value determined when it is sold. Only a madman would willingly sell his property when values are seen to be low. Historically domestic property has increased by about 10x over a 25 year period. (Please ignore the distraction of inflation we borrow 150K we repay 150K - that it may not buy so much is immaterial to the point.) Given this historical norm why be concerned about a temporary blip in notional values?

    Only a percentage of property is coming to the end of its mortgage period and if they are repayment mortgages then they are paid off and no problem. Maybe help those who chose, or were more probably incorrectly sold, interest only mortgages because they will be needing to raise capital to secure their homes but otherwise leave well alone.

    Instead stop the banks devaluing their own collateral by rushing to force "defaulters" out of thier homes and selling too cheaply property that in a few years will be "worth" what it was last year or probably more.

    By harping on about this inaccurate assessment of the value of property you are only undermining the confidence of the public at large. The one thing that Capitalism must have is confidence. Destroy that and you destroy capitalism and the world as we know it.

  • Comment number 64.

    Supercalmdown stop repeatedly asking for a pay rise.

    The government needs to cut taxes and public spending now.

    You in the public sector are the problem not the solution.

    We can start with your pensions.

  • Comment number 65.

    #31 - KiwiSeven

    10% bonuses to Northern Rock staff last week tell me that the "bonus culture" is here to stay!

    Get me a job in a bank! Safest and best rewarded place to be

  • Comment number 66.

    The 242bn is what the current value of the asset that the borrower has acquired, the outstanding debt owed to the banks by the borrower, the best guess as the valuation of the debt taking into account the likely sustainability of the borrowers credit worthiness, the value of the asset if liquidated overnight (ie at auction) if that value is less than the outstanding debt ie negative equity or some rule of thumb where the banker do not have to think too hard about the true meaning of the asset.

    Mark to market has to be more of a notional valuation particularly in an unstable and declining market. The only time one approaches a realistic figure would be mass loan defaulting forced asset sales at 20% or so of original sale value - hmmm!

  • Comment number 67.

    Decent, hard working people of this country are starting to turn

    The recent strikes should, and I think will, just be the beginning (never mind that the BNP tried to hijack them - the decent striking men and women did not allow them too)

    All this talk of bank bail outs - the figures are mind boggling for most of us, im sure- but I think the ordinary man in the street is cottoning on to the fact that, when the time comes, there will be no help for him and his family. Stuff his firm, stuff his job, stuff his mortgage, stuff him and stuff his family. He even gets a patronising speach from unelected lord mandelson, telling him how wrong and xenophobic he is, just to rub it in

    We have bailed out the bankers. Thats it. Check the bonus figures for 2008. The year in which the banking industry imperiled our national security, losing more than their combined profit for the previous 25 years, and there were still obscene bonuses being paid, on top of already obscene salaries. It beggars belief.

    These people already have very well paying jobs. What about the ordinary, hard working man who loses his job? What help is there for him?

    But the ordinary man in the street is starting to realise. And the politicians are scared. As well they should be. Perhaps why the magnitude of the problems we face is being kept from us.

    Lets stop chucking what little remains of our national wealth at the already very well off, and use it to start rebuilding our country. Ordinary people of the country unite - kick out this useless shower, and if the tories are no better, we kick them out at the next opportunity as well. Only that way will we have a political class that actually listens to the people - rather than dictates to them.

  • Comment number 68.

    Dear BBC Blog contributor,

    Thank you for contributing to a BBC Blog. Unfortunately we've had to remove your content below

    This decision has been made because it contains material on which the copyright appears to be owned by someone else. ...
    If you wish to reference external sources of information, it's better to include a link to an appropriate external website....
    If you can rewrite your contribution to remove the problem, we'd be happy for you to post it again.

    The BBC Blog Team
    Posting:[suitably redacted]
    Voice from the floor (4),

    "...another reason is that for the past eighteen years successive governments have subjected the UK to a creeping cancer of bloody-minded bureaucracy and petty regulation which, in general terms, has had disproportionately large effects on small business, which is regarded by many as the backbone of the UK economy."
    This is very much true of the destruction of "family" farming, as detailed by Wendell Berry, and it has been going on for more than eighteen years. I sit in the gentrified remains of a farm which was milking sixteen cows in 1948, but which was eventually bankrupted by several phases of "industrial improvement" and increasingly expensive compliance with regulations.

    The idea that an agricultural unit can increase its output without limit ignores the limitation of its basic resource. The land which supported sixteen milkers (and some sheep, hens, a couple of pigs, etc.) cannot support sixty milkers. The difference must be made up with diesel (trucking in extra feed, fertiliser, milking machinery, etc., and trucking out the milk, spreading the muck, etc.) and the farming family find they are running on a treadmill with little more benefit than when they had only sixteen coos...

    From 1948, this place saw an average tenancy of around five or six years duration until we (the gentrifiers) arrived. If we had depended upon industrial farming for a living, we would be long gone too.
    "When I was working on this book [see above link]
    "IN OCTOBER OF 1993, the New York Times announced that the United States Census Bureau would "no longer count the number of Americans who live on farms " [see link]
    Conserving Communities
    Bigger is not better.

  • Comment number 69.

    #4 Voice from the Floor

    If you will stand for parliament, I will vot for you.

  • Comment number 70.

    It's so hard to know what is going on with banks. All Citibank branches in the UK are now closed until further notice. Adverse conditions, apparently. There's a hard rain falling.

  • Comment number 71.

    #24 You say "Most sensible commentators feel that we have seen the worst of the fall in the housing market."

    Who are these commentators, and what or who defines them as sensible?

    You don´t need a PhD in maths to work out that the long term fair value price of the average house is about a 10% deposit plus about 3.5 times the wage of the average worker - i.e around GBP100,000.

    Markets tend to overshoot both on the upside and the downside. The downside overshoot will be exacerbated by rising unemployment levels and continued downward pressure on real disposable earnings.

    Over the years people have deluded themselves that the cost of housing is an investment cost; In most cases and for the most part housing is a consumption expenditure.

    House prices continue to have a long way to fall, and price falls in this asset class will ultimately force a general recognition that vast swathes of the banking system are irredeemably insolvent.

    Once the nadir is reached recovery will be materially hampered owing to the fact that all possible financial reserves at all levels have been irreversibly committed to attempts to shore up the housing sector which is already beyond salvage.

    The longer people deny the reality of the housing market the more savage the losses will be and the more desperate the consequences.

  • Comment number 72.

    #14 kligoneranger

    Take a look at the IFS green budget report,

    particularly chapter4:

    The IFS is expecting a further 30% fall in house prices based upon basics and an economic outlook of a short sharp recession. A long drawn out recession will make this situation far worse with a correspondingly higher drop in house prices and I do not appear to be the only one expecting this:

  • Comment number 73.

    Like several other posters I would suspect that the value of the collateral is unknowable at the moment - so we (the govt) might get the 'loan' back but equally possible they won't

    Given the comments from Obama yesterday about more US banks being likely to fail, we are clearly still entering the woods and certainly not out of it! The downturn has a long way to run. It is impressive to see a few 'green shooters' coming on here though to claim that house prices are about to go up.

    What's happening in the US will continue to exert the largest influence on matters here - the new danger there is the Buy American clause that has been put into their recovery bill; it is interesting to see that they are trying to build consensus and transparency though and want to involve people

    You can even run your own Economic Recovery meeting from your Home - a bit like a Tupperware party; shame that us bloggers here in the UK can't do the same

    Have a look:

    Generally good for people to get involved, though there is a danger that grass-roots pressure in US will be for protectionist moves, mainly because of China but applied to all, even Canada, which is in NAFTA !

  • Comment number 74.

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

  • Comment number 75.

    As these mortgage held assets now with the Government fall further, the IMF and sterling speculators will be looking carefully at 2010 onwards, as to how on earth we are going to not only service this new debt, but when can we actually pay it back?

    It seems that the only way will be inflation as sterling falls futher. No one is going to belive we can have a balance of payments and pay for our imports in foreign currency if we hold such huge domestic debt.

    The Public Sector will have to be cut, both budgets and glod plated pensions, for any currency purchaser of sterling or our gilts to think we can ever service such debts, particularly as unemployment is rising and gathering pace, even now.

  • Comment number 76.

    #4 Voice from the floor.

    I could not agree more.

    I hope to get a website up that will be expressing that very view, of the need for a complete change in politics as all of the current crop lab/con/libs are out of touch.

    How a government can spend billions propping up banks so that they can repay foriegn investors when it's people are homeless, starving, and out of work, is beyond me.

    It may be a global problem but a Government's first duty is to it's people, not saving the rest of the world, they have their own Governments to do that for them.

  • Comment number 77.

    How much due diligence did the Government undertake in checking the £287bn of collateral?

    Not very much I suspect.

    The banks have probably pulled another fast one on the New Labour clowns and Joe There-To-Be-Had Public.

  • Comment number 78.

    The pound is not going lower......70p Euro by Xmas.....count on it.
    Gloomy numpties the lot of you.

  • Comment number 79.

    More garbage from Peston.

    Nearly as bad as last night's Panorama

  • Comment number 80.

    Is the fat lady singing yet Rob??

  • Comment number 81.

    Like many more people I am finding this web is becoming so tangled it will be impossible to find enough strands to ever begin to untangle it.

    Companies can run indefinately on a web of deceit and the crunch does not finally come until it runs out of actual hard cash.

    Unfortunately this does not apply to governments who can keep on printing money infinitum.

    This is chaos spreading and although it is becoming increasingly difficult to predict how it will effect the economy timewise there is no doubt that the end result will be the same.

    Complete disaster for years to come.

  • Comment number 82.

    The bank is so glad to have my money that at the last count they were paying 2% gross on a cash ISA, and that is to a public who as Robert points out, are holding diminishing assets bought for an unprecedented outlay, and also pay higher mortgage charges and live in fear of livelihood, job and home. The current strikers and the French protesters have very much the right attitude. If the British have anything like the same vision they will vote - and more - accordingly. Let the government realise that every penny that does not protect the citizen - not the venal well-off - is grudged.

  • Comment number 83.


    We've bought something we can later sell.

    We've bought at a discount.

    The value of what we've bought is likely to keep dropping for a while.

    Some MBS's will have defaults hit them further reducing the value of what we've bought.


    The above almost sounds like a speculative investment.

    Only after the inevitable shakeout will we be able to see the final underlying value of what we've invested in.

    At this points its not even clear on how many defaults we will see on these MBS's

    Surely its the uncertainty on the expected level of defaults that's affected confidence between institutions?

    If 1 million mortgage holders default on an average 100K mortgage and we assume the underlying asset can in each case only be sold for 50% of its "value" then that's half of 100 billion quid off the value i.e. nearly the discount we've got on the asset.

    Hands up if you think 1 million people are going to default and lose their homes?

    Personally I think although the numbers are scary this may prove to be OK.

    Heads down, weather the storm and see where we are in 12 months.

    All the blogging in the world ain't gonna influence this mess.

  • Comment number 84.

    Large flaw in the arguement. Robert Peston says "put another way ... the banks have lost £45 billion on these mortgage backed securities". This would only be the case if the loan to vale ratio was 100%. If the loan to value ratio is less than 84% (which is more likely), the banks have lost nothing. The people/businesse who have lost are the people who have taken out the mortages. Until the loan book is equal to the value of the value of the asset the only people who lose are borrowers and even then it's just a paper loss.

  • Comment number 85.

    Let us just take a step back and consider what that 287 billion of assets actually is. Everyone assumes that those assets are mortgages, but what we should be aware off is that until recently only top quality debt could be placed with the bank of England. That could mean the banks lost 45billion on the least risky loans they made, which is a very scary thought. This loan has all been made available not with taxpayers money but with government Gilts which of course is OK because that it comes out of our childrens tax payments.

    It is not true of course, as if we could not guess. What happened was that greedy American banker lent money to Mr no job in America to buy a 10 bedroom house. This debt was insured with an insurance company (monoliner) who could not really pay up and then rated as top class assets (AAA rated by the ratings agencies) which has been foisted eventually on to the UK tax payer(long term). Last year these valuable assets were trading at less than 22 pence on the pound meaning the actual value of that 287 billion was probably around 60 billion. For those who argue that the security is adequate let us remember that lone star bought Merill Lynch MBS assets at 22 pence on the pound, with Merrill lending lone star the money to buy them at a discount, only for Lone Star to loose lots of money on that portfolio. Yes it was a fire sale price, but sometimes they reflect the truth. That 285 billion is gone as Mr no job in America is unable to withdraw equity to pay his mortgage and the world banks and ultimately us get lumped with the bill down the road.

    Most people want to focus on the faults that occurred in lending in the UK but loan default rates of around 0.4 percent pale in comparison to American 5 percent default rates. Banks around the world got burned by lax lending regulations in the US where non recourse loans mean there is no penalty for just walking away from your debt and starting again. Now the US has drained our banks there is very little left to help us through our downturn as defaults pick up in the UK. For all the rule failings here and there were many the rules on lending were a lot tighter than in some other countries (pointing no fingers at the US of course).

    Causing moral hazard seems to be the aim of the governments here and abroad with bailouts for failing, getting into too much debt and that is without looking at the failures in social welfare which seems to take up half our tax. Labour policy seems fine for those who have not saved or do not have a mortgage, in other words the very bottom rung of society. The other political parties seem intent on protecting the very top rungs of society with nobody actually speaking up for the working class and middle class in the middle who at the end of the day will be the ones who really pay the bill. It seems to me this is an imbalance much like the others discussed recently in this blog which will most likely rebalance over the coming period. How hard can it be to invest in ordinary decent people, in their communities and their education, without scamming, scheming, skimming or otherwise over burdening the workhorses of Britain?

  • Comment number 86.

    I remember reading similar sentiments in the papers in 1994 ,saying things like
    "no longer should property be considered as a get-rich-quick investment, houses will for the next decade be best regarded as for living in" etc and there was a seemingly incurable glut in the housing market..... six months later the boom was in full swing ....and prices doubled in 2 years. Many of the unsold properties are very desirable and very cheap. Many are horrid newbuilds that were overpriced and will not appreciate in value at all,but your mainstays...period houses and flats, family properties, bungalows and semis are still what people aspire to and need.....and the moment people realise this there will be a slow onset but definite stampede.
    Cheer up and get househunting if you can or you will kick yourself....this is a fantastic time to buy property,absolutely unbeatable !
    The ones who are hoovering up the bargains are keeping schtum, as ever..... the worst time to buy is always the best time to buy, and vice-versa!

  • Comment number 87.


    Nice piece on the whole.

    However, it doesn't matter who you vote for: the government always gets in........

  • Comment number 88.

    my daughter put an offer in on a house for sale that had been repossessed last november. It was accepted and the estate agent had to publish the offer for two weeks to ensure that the maximum price was obtained. her offer was then accepted. she has an outline offer of a mortgage but needs to take possession before seeking a valuation and completing the mortgage, so i am lending her the money. one condition was that a deposit had to be provided within two weeks and completion in a month. since then her solicitor and the estate agent have been tearing there hair out tryingg to get the legal department of the 'owner' ie a bank, to complete the paperwork but to no avail. i presume that the original owners mortgage was subprime and probably passed arround so noone wants to take responsibility for agreeing to sign off the papers. SO, a willing housebuyer, with an offer of a mortgage, an empty property, a parent putting up a good deposit - but no activity. what hope is there for the housing market!!!

  • Comment number 89.

    And Robert every penny of that £185billion has been wasted.Robert when is somebody going to start running the banks in a proper fashion yes it was reckless behaviour on the banks part that got us inti this state but its even more reckless for them to be allowed to do what they are doing now,these guys have no idea how the real world works yet they are given this money blindly can you imagine how many jobs that would have been saved if business had got even £90 billion Robert why doesnt one of them be let go to the wall off course deposites will be protected but it would waken up the rest of the dosy lot and force them to come clean and while im still on my soapbox when is Goodwins Knighthood going to be stripped of him,after all Lester Piggott who done the taxman for less that 1m lost his and got Jail time for these bankers to be made repay the vast sums they got in the good years falsely as it turned out

  • Comment number 90.

    This obsession with house prices only being sustainable at 3 times earnings is depends on the prevailing interest rate, at 15%... go for 2 times earnings,but at current rates 4%...6-7 times earnings is sustainable.
    The Americans go on 28% of earnings being the max for a mortgage payment....if interest rates are low the multiple of earnings is higher.
    If you think prices are going to fall to 100k,you'll be living in your dingy bedsit until you prices are always marginal or too high.....if they weren't we'd all live in Buckingham Palace.
    Wake up and smell the roses you dim pessimists.

  • Comment number 91.

    Agc (72), From your pdf link (before the moderators remove it)

    "The UK economy is already in recession and the near-term outlook is worse than it
    has been for many years. But our central forecast is that the UK will avoid a deep
    and prolonged recession, thanks to enormous monetary and substantial fiscal stimuli
    already announced. However, we expect a decidedly slow recovery."
    My advice to the authors: Don't give up the day job (writing the astrology column)

    P.S. PDFs are very unpopular with the Mods (who are as Gods)

  • Comment number 92.

    Onward Ho (78),

    "The pound is not going lower......70p Euro by Xmas.....count on it.
    Gloomy numpties the lot of you."
    and is your money where your mouth is?
  • Comment number 93.

    Before debating the merits or otherwise of the accounting treatments, commentators should have a greater understanding of what is being referred to here.

    In its simplest guise, owning a mortgage backed security gives the buyer the right to a series of cash flows. It provides the seller with capital immediately.

    The MBS is usually made up of several mortgages secured on property. For the purposes of this, assume property means houses though it could be flats/factories etc.

    Each mortgage, and let us assume these are standard amortising repayment mortgages with a steady repayment, is for a term of years.

    The security is originally priced assuming lots of variables in rates of repayment of capital and interest and, again simplifying, the cash flows are valued against the appropriate yield curve to the final maturity. This gives the willing buyer and willing seller a mark to market price, ie what they can get/give in cash now in exchange for the right to the future cash flows. This is a net present value NPV calculation, again simplified here.

    Where it gets complicated is that each MBS is made up of mortgages where not every borrower is behaving as anticipated, because of unemployment, wilful non payment, divorce etc etc.

    The market is assuming that many of the MBS will not pay as expected, even if the run to maturity, and institutions become unwilling to buy, hence the low MTM values.

    Unfortunately, international accounting standards and Basel capital adequacy require these securities to be marked to market, unless they have been designated as to be held to maturity; this designation has to be made pretty much at the time they are taken onto the books. This is intended to serve to prevent companies taking profits too much up front.

    The B of E/UK taxpayers’ problem is that if the underlying mortgages do not get serviced then the houses will be repossessed, losses will be crystallised, and the taxpayer will lose.
    The dire state of the economies in all countries where MBS are secured substantially increases the likelihood of such repossessions and losses.

    I am afraid these will be all too real. Sorry to all you optimists out there, hoping to hang on in there for the duration.

    MTM is all too real a concept and it does result in real P&L reporting.

  • Comment number 94.

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

  • Comment number 95.

    It's all clever, clever smoke and mirriors. The debts are colossal and all this parcel swapping and "vehicle" creations are just designed to hide the real truth of how much the nation and the banks are bust. Add to that private individual, non-mortgage debt and a total inability to service any further borrowing and the picture gets ever more gloomy. The only way out is to cut costs, build reserves and pay down debt.
    Applies to banks, Governments and little old everybody else.

  • Comment number 96.

    Despite increasingly desperate attempts by buy-to-letters and estate agents on this blog to talk-up house prices, its clear that the 'assets' are now untradable and will collapse to at least 20% of face value over the medium term.

    The requirement for another rescue mission for banks is now only a few months off. This is now effectively a war situation, with more and more taxpayers' money being diverted to 'the front line'.

    The real issue now is UK sovereign default. This might seem extreme and last year the 'Iceland Model' appeared unique, but not now: just as Northern Rock went down not many thought the major clearing banks would follow, so the same is now happening with previously stable nation-states.

  • Comment number 97.

    Hello... This post just concerns this bit of the article.... well...directly any way...

    (though the Treasury's new scheme to insure the banks against some of these losses may prevent nationalisation).

    Hmmm!... what's in a name....??

    As we all know if we're honest...if it looks like an elephant, smells like an elephant and shops in Boots in the elephant toiletries section --- then it is an elephant

    The entire banking section IS nationalised and was when Northern Rock went down... ' the lend more..but prudently' edict followed by the snapping to attention noises proved it---- but there's been dozens of examples anyway, so whatever we choose to .

    ON a bit of a tangent... ie addressing the main point ..isn't it equally as likely that we have paid loaned £185 Bullion against somewhere around £00.00 and will receive one years interest at 1.5% then suspend the need to pay any more...then when the loan has to be repaid in three years... just let 'em off...because as shareholders we'll be 'only robbing ourselves if we bankrupt them'.... or let 'em off by rolling it over forever...

    To be honest there are so many elephants in here that we like to keep ignoring, there's hardly any room for us taxpayers now..


  • Comment number 98.

    What many bloogers do not seem to realise is that current bank share prices and property values already reflect current doom AND future gloomy if everything carries on that is where we are, but if things end up being not as bad as we have thought ....there will be a boom....people start to say they cannot put off moving,they will sellup,or they will pay up...and as we all now today's glut leads to underproduction leads to tomorrow's price rise.
    Get in to the housing and equity markets before the bargains are gone forever!
    Countercyclical is the only way to be when everyone is down in the mouth.

  • Comment number 99.

    so if house prices continue to fall and the banks lose another 57m we the taxpayer will be breaking even on the deal

    and if house prices continue to fall we the taxpayer will not be expecting to get all our money back

    lets hope house prices hit the bottom and start to rise again in the next three years

    is this possible?

  • Comment number 100.

    # 8 - I like the way you think.

    Rather than bailing out the banks, assist mortgage owners with paying off their mortgages instead.

    However, I would say that those who were very sensible when taking out their mortgage, and ensured they did not over-extend themselves, should be rewarded for their prudence by having their mortgages cleared in full. Those who stupidly mortgaged themselves right up to the hilt should have a portiion paid off but they have to pay off the remained in order to teach them not to spend what they don't have.

    This would then assist the general economy because it would free up more cash which would then be pumped back into the system because the tax-payers would actually have the cash in their hands to spend. How many people hold mortgages? Multiply that by a guess-timate value of say £350 a month? THAT is a lot of spends that I'm sure all business would benefit from.

    As it is, unfortunately, this is merely a pipe dream that will never happen and our money is being given to the banks so that they can squirrel it away and hold onto it instead of lending out to those who need it - the hard-working tax-payers who gave them this money in the first place.


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