News - UK bailout unveiled, markets unimpressed

[HEXUS]

The government has announced a £500 billion bailout package for UK banks but the FTSE 100 has lost more ground this morning.

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[nichomach]

Strikes me that we'll know when/if it works, not when the FTSE goes up, but when inter-bank lending for anything other than overnight/short-term recovers, and it'll be a little while before we know about that?

[SiM]

We will see if these bailouts can prevent the 2nd Great Depression... I think it will still take a few years for the system to recover. You must have heard this before, but hang tight to your money people, now is not the time to buy a maserati or 10 bedroom mansion

[Saracen]

We will see if these bailouts can prevent the 2nd Great Depression ......

In all likelihood, it will either prevent it or finally trigger it. After all, if this doesn't work, what can they do next? And if there is something else that could be done, why hasn't it been done already?

[shaithis]

If it doesn't work, that's one huge amount of taxpayers money lining the pockets of the fat cats.

[Funkstar]

If it doesn't work, that's one huge amount of taxpayers money lining the pockets of the fat cats.

Have I got this wrong or is it actually £500bn being made available as loans to the banking industry, not £500bn being given away?

[nichomach]

It's a combo of a pot of money from £25-50bn being made available to recapitalise the banks, £250bn in medium term guaranteed financing and £200bn of immediate extra liquidity; the first of these (if used) would give the taxpayer a stakeholding in the banks concerned and that would be of preferred shares, so if/as/when they get into profit again, taxpayer gets first dibs. The remainder is either loaned or underwriting of loans, to encourage the banks to get inter-bank lending going. It's NOT being given away, and even the loans are having strings attached - the government wants to see the freeing up of loans/overdrafts etc to SMBs and to see more of an effort to get money into the mortgage market, and before anyone goes off on one, no, not to enable silly loans to equally silly people for silly properties, but, for instance, to make remortgaging at the end of fixed-interest deals easier and things like that. I hope it works, and I think it will, so long as the banks play ball - they're looking into an abyss if they don't.

[j.o.s.h.1408]

We will see if these bailouts can prevent the 2nd Great Depression... I think it will still take a few years for the system to recover. You must have heard this before, but hang tight to your money people, now is not the time to buy a maserati or 10 bedroom mansion

as if much people had that sort of money to begin with

[cordas]

I think these bail outs are going to make things worse in the long term... What we have to do is change the way banks do business right now. How they have been behaving and dealing with each other would be considered fraudulent if you or I where to do it....

Imagine I had 15K on my credit card and blagged my into saying that it was 15k worth of assets and used those "assets" as security to borrow more money..... Its a flipping JOKE!!

For the bail outs to work we have to regulate the banks, and make them accountable for their actions... criminal legislation needs to be drafted so that anyone who does these type of things can be charged and locked away.

[Saracen]

.... they're looking into an abyss if they don't.

As, in many ways, are we all.

As for the rest, I agree with your analysis. That does, indeed, seem to be the structure of the proposal.

To perhaps flesh it out a bit, the existing Special Liquidity Scheme is being extended to up to £200 bn. That, essentially, provides very short-term finance, and as that sort of finance is what many companies use to fund cash flow for things like salary payments and supplier contracts, it's the lifeblood of commerce and without it, the economy strangles.

But liquidity isn't the fundamental problem facing the economy right now, that being lack of confidence in the ability of banks to repay loans, meaning that medium-term loans (3 months to 3 years) have more or less dried up. And it's that medium-term finance that funds a lot of operations, and that permits many forms of investment. Businesses are prepared to take reasonable, quantified risks, and that is what drives firms to grow, and make profits, and be able to employ people. But it is usually a risk, and often requires a loan to finance it. If you need a loan for a year or two to finance, for example, for capital investment (like new machines) they will (presumably) pay for themselves over a period, but unless you have all the money you need yourself, being able to make that investment requires being able to get the finance to do it. And without that medium-term finance, that sort of investment dries up and the economy, at best, tends to stagnate.

So this package also includes £250 bn for medium term finance, to grease those particular wheels.

And then, there's the recapitalisation of banks. Far too many of them have far too high a ration of liabilities to assets, and it turns out that a lot of what they thought were assets may in fact be worth a lot less than they though. That's those securitised toxic sub-prime mortgages, in large part. And the fact that banks may not have the capital to support their balance sheet is a major part of what's making other banks nervous and refusing to lend. So, there's up to £50 bn to "recapitalise" banks by, basically, giving them money for shares. That should help to restore confidence in banks, that if bank A lends to Bank B, it'll actually get it's money back at the end of the day.

So, the basic idea is to underwrite banks to get them lending again, and the only way to do that is, via whatever mechanism, to get lenders assured that when they lend, they'll get a return on the money and get it back. In other words, reduce both risk and perceived risk. Then, grease the wheels of day-to-day operations with an increase in the SLS (which, incidentally, was already pretty huge, so that first £200 bn isn't entirely a new risk for taxpayers, and of investment with that £250 billion medium terms finance which, the PM said, will be on commercial terms.

In a perfect world, this reassures banks, gets lending started again (albeit on a MUCH more sound footing than it had been), gets investment restarted, prevents a lot of otherwise sound businesses folding due simply to short term liquidity, keeps unemployment growing, and stops businesses going bust. And, if all that happens, helps to keep the tax take up by keeping the economy working, while keeping expenditure down by keeping unemployment and benefit claims as low as they can be.

If it works.

The problem is, it's a ruddy great gamble that it will work. And ff it doesn't .....



Oh, and the other problem is that the government has been saying for years that it can't do much in the way of tax cuts, even where they cost a paltry billion or three, because it can't do that without cutting public services. Brown even had to borrow to fund the tax cut he tried to use as a bribe to get himself out of the 10p band farce. So, if they don't have a couple of billion for tax cuts, where's the £500 bn for all this coming from? After all, it's not likely that its the small change they found down the sides of the cushions in the Treasury.

What it is, no doubt, is HUGE extra borrowing, as if government debt wasn't already at astronomical levels. And there's something deliciously ironic about trying to buy our way out of a problem caused by unsupportable debt by taking on a vast amount of extra debt.

This package, overall, is really, really bad news. It is a seriously desperate move by a government desperate to avoid the one thing that's worse, which is a recession turning into depression of epic scale. Nobody wants this to be done. Not the government. Not the Tories. It's just that it has to be done.

It's a last-second desperate fling of the dice.

And I just hope, whether it works or not, that the public remembers that if we'd had the "prudent" Chancellor that Brown and New Labour has spent 10 years boasting that he was, we wouldn't be in this mess. If this is not a damning indictment of 10 years of Brown's financial stewardship, I don't know what is. He isn't the cause of the underlying problems, but he's sure responsible for the cupboard being bare when it comes to dealing with it. Personally, I think he's without doubt the worst Chancellor we've had in modern history, and an economic moron, and that history, once free of the distorting spectacles of being entangled in the current crisis have been removed, will support that view.

[Scott B]

Nice summary Saracen, are you trying to nick my job?

[j.o.s.h.1408]

summary? more like an essay, but a good one at that

[davidnewns]

Isnt this Communism??

[Saracen]

Isnt this Communism??

What? Buying shares in banks? Not hardly.

[Stringent]

A person often meets his destiny on the road he took to avoid it. Same probably could be said for the financial situation ...

[G4Z]

Oh, and the other problem is that the government has been saying for years that it can't do much in the way of tax cuts, even where they cost a paltry billion or three, because it can't do that without cutting public services. Brown even had to borrow to fund the tax cut he tried to use as a bribe to get himself out of the 10p band farce. So, if they don't have a couple of billion for tax cuts, where's the £500 bn for all this coming from? After all, it's not likely that its the small change they found down the sides of the cushions in the Treasury.

I would guess that what they will do is have the bank of England invent an extra £500bn which will basically devalue the currency and cause inflation. So you and I are certainly going to be paying for this.