economic situation is dire

[ianrobo1]

Well it appears RBS will be 70% nationalised tomorrow whe preference shares are converted to ordinary shares

who would have thunk that a year ago ??

so much has changed, the city and Wall street are neutered and the whole economic system is under intense scrunity

[drat01]

As someone said recently

"Not caused by government but caused by lack of government. "

[ianrobo1]

yes Ian, that perfectly sums up the whole mess

deregulation has failed (Lev of course totally disagrees)

and it is clear new rules will be upon the banks and the city

the first rule should be that no 'high street' bank should get ito 'investment' banking

[snowychap]

Ed Miliband.

[Richard]

Ed Miliband.

Thanks, explains it all.

[drat01]

Ed Miliband.

Thanks, explains it all.

Seems that the Tory party want to bring back Ken Clarke

A members of the Thatcher gvmt returns

Former Chancellor Kenneth Clarke will return to the Conservative front bench as part of a major reshuffle on Monday, BBC News has learned.

Tory leader David Cameron has given the role of shadow business secretary to his former party leadership rival.

The move will see Mr Clarke take on fellow returning big-hitter Lord Mandelson, in setting out how to help firms through the economic turmoil.

Current shadow business secretary Alan Duncan will be offered another post.

Mr Clarke, 68, met David Cameron for lunch at the Shadow Chancellor George Osborne's West London home on Saturday to agree the basis of his return, according to BBC political editor Nick Robinson.

Conservative sources claim the idea first came from Mr Osborne and that he had a preliminary meeting with Mr Clarke some time ago.

Cameron and Clarke have agreed to disagree on Europe

Nick Robinson

BBC political editor

On Sunday, William Hague described Mr Clarke as "a very talented politician with a great deal to contribute in the present economic climate."

Asked if he would return to the Tory front-line, Mr Hague said: "I think that in many senses has already happened".

However, the idea of Mr Clarke's return had been attacked by euro-sceptics Norman Tebbit, John Redwood and Tory donor, Sir Stuart Wheeler.

Mr Clarke's pro European views - in particular, his support for Britain scrapping the pound and joining the Euro - have alienated him from the mainstream of his party.

This ensured that he lost leadership contests in 1997, 2001 and 2005, despite strong public support.

Our political editor said: "The issue of Europe is still a live one since some now argue that the current economic crisis demonstrates the case for the Euro.

"Also, the Tories are opposed to the Lisbon EU Treaty which Clarke has backed."

'Criminal' VAT cut

However, he added that Conservative sources had indicated Mr Clarke and his party leader had "agreed to disagree" on the issue.

Mr Clarke also suggested cutting VAT to 15% before Chancellor Alastair Darling announced the measure in November's pre-budget report.

The policy has since been branded "a criminal waste of money" by Mr Cameron.

But Mr Clarke, MP for Rushcliffe in Nottinghamshire since 1970, remains popular with the public, who recognise him for his love of cigars, jazz and classic cars.

And the move is seen by some as a counter to Prime Minister Gordon Brown's decision to bring back Lord Mandelson as Business Secretary in October.

His appointment as Business Secretary coincided with a boost to Labour's previously flagging poll ratings.

Mr Clarke brings a wealth of experience to the shadow cabinet, having served as Health, Education and Home Secretaries, as well as Chancellor, between 1988 and 1997.

Seems like the Tory party are admitting to their inexperience in the financial matters.

I like Clarke as a person, don't always agree with his views though. Will be interesting to see where he and Cameron have to speak about business matters in Europe especially. I suspect a lot of tongues will have to be bitten or typical change of views.

Interesting few weeks ahead with the Obama coming to power, people who run the Energy companies having to tell the country how much they have made from us and how Europe starts to react to the realisation of a lot of things that will affect them.

[ianrobo1]

Ed Miliband.

Thanks, explains it all.

explains what ?

what he said was totally correct the amount of deregulation seen i the past 20 years caused our problems all parties are to blame because all signed up to the concept of deregulated free markets

and now the solution to save the banks all over the world is for nationalisation

all started because shite loans were sold in packages no one understood what they were buying

the cause is actually undisputed is it not

Slowdown in the US

Property prices falling and unemployment

bad debts being called in

banks did not have the assets they thought they did to loan vast amounts

banks stoped lending to each other

then to us and business's

we stopped spending

recession

[ianrobo1]

new set of packagaes announced including the 'printing of money to buy up some of the bad assets the banks own

RBS wrote down £47bn of bad assets and annouced a £6bn loss no wonder they are now owned 70% by us

some very bad descions made by banks in the past two years and biy aren't they and us paying for them now

the mystery that will be debated in the forthcoming years is why banks brought millions of mortgages without checking just how secure they were and what they were buying

and no doubt this week we will see the US spring into action as finally Obama gets into power

this wekk will be very interesting

[snowychap]

some very bad descions made by banks in the past two years and biy aren't they and us paying for them now

Just in the last two years? I think you're being rather generous.

the mystery that will be debated in the forthcoming years is why banks brought millions of mortgages without checking just how secure they were and what they were buying

Something about their eyes being bigger than their belly, perhaps.

[Gringo]

the mystery that will be debated in the forthcoming years is why banks brought millions of mortgages without checking just how secure they were and what they were buying

Something about their eyes being bigger than their belly, perhaps.

[ianrobo1]

some very bad descions made by banks in the past two years and biy aren't they and us paying for them now

Just in the last two years? I think you're being rather generous.

the mystery that will be debated in the forthcoming years is why banks brought millions of mortgages without checking just how secure they were and what they were buying

Something about their eyes being bigger than their belly, perhaps.

yep greed took over and now tax payers all over the world will have to pay for it

[snowychap]

yep greed took over and now tax payers all over the world will have to pay for it

Though, the blame must also be laid at the door of the banks shareholders (all of them) and business and government.

If you were watching the programme on BBC2 the other night where they were talking to the former Finance Director of Northern Rock, his point was that even if Adam Applegarth had decided to steer clear of what turned out to be dodgy investments (as I think the hint was a few in Northern Rock were saying) he would have been out of a job in no time and replaced by someone who could continue the returns that the firm had been getting.

When things are apparently going well, anyone who goes against the grain is seen as a fool, a doommonger, &c.

One only needs to look at the ridicule that was flung at Cable to see that one of the most unpopular things to do is to be cautious when no one else can see the trouble looming.

[ianrobo1]

boring profits do not make people loads of cash that is for sure and that is what is needed for the short and meduim term, don;t think anyone denies everyone is to blame to greater or lesser extents which is why Milbrands comments were so refreshing to read

profit is bad when you chase it to excess, what is wrong with growing profits at a steady 2/3% a year, nothing but everyone wanted more

now the chickens are roosting and the next few years will be solemn for those hoping the excess's of the past

[LondonLax]

yep greed took over and now tax payers all over the world will have to pay for it

Though, the blame must also be laid at the door of the banks shareholders (all of them) and business and government.

If you were watching the programme on BBC2 the other night where they were talking to the former Finance Director of Northern Rock, his point was that even if Adam Applegarth had decided to steer clear of what turned out to be dodgy investments (as I think the hint was a few in Northern Rock were saying) he would have been out of a job in no time and replaced by someone who could continue the returns that the firm had been getting.

When things are apparently going well, anyone who goes against the grain is seen as a fool, a doommonger, &c.

One only needs to look at the ridicule that was flung at Cable to see that one of the most unpopular things to do is to be cautious when no one else can see the trouble looming.

Yes, I saw that too. Quite insightful.

Even if those incharge wanted to stop making dodgy loans they couldn't because the shareholders would demand their heads due to the missed opportunities that competitors would have picked up.

The fact that the loans were dodgy didn't matter to the bakn and shareholdes because the risk was "securitized" and sold on making it someone elses problem.

The trouble started when banks started buying up each others dodgy securitized loans becasue they had run out of other avenues for revenue.

[snowychap]

....what is wrong with growing profits at a steady 2/3% a year...

Apart from being based on the idea that perennial growth is sustainable?

[ianrobo1]

it is snowy but better than the throy that shareholders shold squeeze every penny out isn;t it ?

[snowychap]

.... the shareholders would demand their heads due to the missed opportunities that competitors would have picked up.

And I think there is a parallel to be drawn with that situation and what we have heard concerning Heathrow expansion and warnings about banking 'over regulation'.

One of the arguments from those talking about the necessity of a third Heathrow runway was that this is going to happen and if we (in the guise of Heathrow) miss the opportunity then it will go on to the continent and they'll get all of the benefit

Again the same kind of warning has been muttered (though less loudly for obvious reasons) about regulating the financial sector. I have heard a number of people warn that if we, in this country, decide to do that then the financial sector will just up and move to Frankfurt or somewhere else which attracts them with the lure of less regulation.

it is snowy but better than the throy that shareholders shold squeeze every penny out isn;t it ?

Both, however, are still set on course for the abyss. Does it really matter whether we get to the destination before lunch or at supper time if the destination is not a good place to go?

[snowychap]

A long article/blog from the FT:

Her Majesty’s AIG.

Posted by Sam Jones on Jan 19 08:50.

Metaphorically speaking of course. Better perhaps: Her Majesty’s version of AIG.

Or, as they are calling it, the government asset protection scheme.

Details of which have just been released by statement (emphasis ours):

DISCLOSURE

All participants in the Scheme will be required to meet the highest international standards of public disclosure in relation to their asset books.

Subject to maintaining appropriate commercial confidentiality, the Treasury will publish and lay before Parliament the agreements which it enters into with participating institutions in relation to the operation of the Scheme.

ELIGIBLE ASSETS

The Scheme will provide protection for portfolios containing assets each of which must be eligible for the Scheme. The Treasury expects to provide protection for those assets on an institution’s balance sheet where there is the greatest degree of uncertainty about the future performance of those assets.

Assets may be denominated in any currency. It is intended that the following categories of assets will be eligible for the Scheme, subject to assessment by the Treasury for inclusion on a case-by-case basis:

* Portfolios of commercial and residential property loans most affected by current economic conditions;

* structured credit assets, including certain asset-backed securities;

* certain other corporate and leveraged loans; and any closely related hedges, in each case, held by the participating institution or an affiliate as at 31st December 2008.

The Treasury may consider the inclusion of other asset classes in the Scheme, subject to appropriate investigation by the Treasury and its advisers and the determination of an appropriate fee. Assets to be included in the Scheme will be subject to appropriate investigation by the Treasury and its advisers in order to assess the probability of future loss. An applicant will be required to give the Treasury and its advisers open access to all information required for this purpose.

The level of protection offered by the Treasury will be determined following detailed discussions with eligible institutions and their demand for the Scheme.

The reason we draw comparison with AIG is because the new scheme will effectively do what AIG - and other insurers, like the monolines - did for the banks back in the heady days of the Great Moderation. That is, provide regulatory capital relief.

See, Basel II Accord, Part 2, section IV, subsection D, rule 4, paragraphs 583-588: treatment of credit risk mitigation for securitisation purposes:

Credit risk mitigants include guarantees, credit derivatives, collateral and on-balance sheet netting.

…

586. Credit protection provided by the entities listed in paragraph 195 may be recognised. SPEs cannot be recognised as eligible guarantors.

587. Where guarantees or credit derivatives fulfil the minimum operational conditions as specified in paragraphs 189 to 194, banks can take account of such credit protection in calculating capital requirements for securitisation exposures.

588. Capital requirements for the guaranteed/protected portion will be calculated according to CRM for the standardised approach as specified in paragraphs 196 to 201.

Under Basel, banks hold regulatory capital as a cushion against potential losses from their assets. The amount of capital which must be set aside against each asset varies according to those assets’ “risk weightings”: which are calculated according to a host of different models prescribed by the Basel accord. Much of the recent problems for banks then, have been caused by now riskier assets requiring huge extra capital requirements. Indeed, the capital requirements increase exponentially as assets get riskier.

But, as the above pars state, risk-weightings can be offset by credit risk mitigants: insurance. Or in the lingo, wrapping. In non-Basel speak: if you own a risk weighted security, you can reduce its regulatory risk weighting by hedging against it using credit derivatives. To illustrate that in ratings terms: a bank could thus own a security rated BBB but using sufficient hedging - with, in this case, HMT, (but previously, someone like AIG) - treat the security as if it was rated AAA. The difference in risk weightings implied are huge.

Back to details of the scheme:

ASSESSMENT OF “FIRST LOSS” AMOUNT AND FEE

In setting the terms under which protection will be offered, the Treasury and its advisers will take into account their estimation of the performance of the assets of the institution to be included in the Scheme. The fee, “first loss” amount to be borne by the institution and residual exposure will be set

accordingly.

It is intended that pricing of the Scheme will be structured having regard to international practice so as to provide appropriate incentives to participating institutions to meet their commitments agreed with the Treasury to support lending to creditworthy borrowers and to ensure appropriate protection for taxpayers. Participating institutions will be entitled to cancel the protection, subject to the agreement of the Treasury and payment of an appropriate termination fee.

It is understood that the fee will not necessarily take the form of equity, but will instead involve issuance to the government of “capital instruments”.

MANAGEMENT OF THE ASSETS

Assets included in the Scheme will continue to be managed by the institution and will remain on its balance sheet but will be required to be “ring-fenced” by the institution so that actions in relation to them, including enforcement and disposal, will be subject to appropriate Treasury controls.

The Scheme may also provide for the Treasury to take over ownership and/or management of the assets in certain defined circumstances.

The Scheme will include appropriate further requirements as to the management of the assets by the institution.

The Treasury will require open access to all information it considers necessary in connection with the Scheme and will require regular reporting by the institution to the Treasury.

DURATION OF THE SCHEME

The duration of the coverage will be determined following examination of the assets to be included in the Scheme and is expected to be not less than 5 years and to be consistent with the tenor of the assets.

ADMINISTRATION OF THE SCHEME

The Scheme is expected to be administered by the Treasury or an entity to be established or designated by the Treasury. References in this summary to the Treasury include, where appropriate, an entity as described in paragraph 10.1. The cost of establishing and administering the Scheme will be borne by participating institutions.

As with AIG’s business, in principle, the scheme could be very lucrative. And indeed, it shouldn’t necessarily need a huge amount of capital - though that very much depends on the nature of the guarantee contracts which will be written. The problem is that modelling the value of most structured credit products - particularly CDOs - is extremely difficult. The Treasury intends to assess submissions on “a case-by-case basis”, which is plainly mad. The most qualified names in finance have had their fingers burned touching CDOs. There’s a danger that the Treasury’s scheme - just like AIG - could be rather a costly capital sump. Particularly so given that we’d expect a whole load of institutions to rush in and secure guarantees over structured asset classes that have not yet violently unwound (but could well do) - such as synthetic CDOs.

[snowychap]

A desperate attempt to revive a corpse

The second bailout shows that the Government has acted as imprudently as the banks themselves

Yesterday's announcement of a second round of bank bailouts was, unlike the first, badly received both politically and in the markets. This partly reflects growing pessimism about the state of the banking system and the state of the UK (and global) economy.

But there is also widespread scepticism about whether the Government is still on the right track - it now looks like someone giving the kiss of life to a corpse. Yet it is only a few months since the Government “rescued” failing banks with interbank lending guarantees and a £37 billion recapitalisation package for RBS/NatWest and Lloyds/HBOS.

The new bank lending that was expected to materialise has not done so. Large numbers of perfectly sound small, medium and large companies are being starved of working capital, aggravating the recession. The withdrawal of foreign banks is clearly a factor. But, in addition, UK banks have broadly taken the view that capital should be held against future losses, a strategy that may reassure shareholders but undermines the economy.

It is clear that the conditions set by the Government over the original capitalisation was a sham. No effective monitoring and controls were put in place to ensure that the money went where it was intended. The banks do not even seem to have been required to give a full, transparent declaration of their bad loans.

But it is easy to blame wicked bankers. The Government also sent contradictory signals: to lend more but also (via the Financial Services Authority) to constrain lending to build up capital to offset bad loans. The FSA has now beat a retreat on capital adequacy, months late.

The Government's big new idea is to insure the banks' bad loans so that banks can have the confidence to lend. No one doubts that in the mix of policies needed to counter this crisis there will have to be an organised writedown of bad assets. But a government insurance scheme cannot be operated prudently unless risks can be quantified and the bad assets meaningfully valued. There is a real risk that a government insurer could suffer massive losses on its proposed £100 billion scheme as a result of defaults in the current falling asset markets. There are big losses ahead that have not yet been absorbed.

A big consequence of the new proposals is that the Government's shareholding in RBS/NatWest rises from 58 per cent to 70 per cent. The bank becomes, de facto, a nationalised institution; the market response to yesterday's proposals suggests that shareholders are reconciled to seeing the bank taken over. There are serious implications, however, which the Government has yet to address, yet alone deal with. RBS is a global bank with a balance sheet bigger than the British economy. It has massive loans to Russian oligarchs, among other dubious assets. It has hundreds of billions (not millions) of paper - derivatives - much of it toxic, in its investment banking arm.

The big question now to be faced is whether the Government remains a passive investor, putting in taxpayers' money and hoping that normality returns soon, or restructures the bank to meet the needs of sound UK borrowers. The latter is becoming increasingly preferable, perhaps inevitable, if new lending is to be maintained. A similar set of questions may soon face the Government in relation to Barclays if the markets' negative verdict on its underlying health is borne out.

As an economic liberal I am instinctively suspicious of dirigiste solutions. But there are times when collective panic - with the markets not trusting the banks; the banks not trusting each other; and the banks unwilling to lend - when the State has to take over responsibility for as long as is necessary (but not longer).

The Government dithered for far too long before concluding that Northern Rock had to be nationalised. Now, the question is whether the Government needs to acquire the remaining 30 per cent of RBS shares. This will only become an issue if minority shareholders pull in a different direction. But, unlike at Northern Rock, there is good, new management already in place.

The arguments about the future of the banks have to be placed in wider context. All main Western countries are heading for deep recession. That is why continued expansionary monetary and fiscal policy is crucial to keeping economies from a vicious spiral of decline. But Britain - a middle-sized economy without an effective reserve currency - is looking increasingly vulnerable.

Beyond this crisis there are, of course, other big issues looming. Banks will eventually have to be reprivatised but probably as regulated utilities serving UK businesses and personal customers. We will also have to face up to whether the City - Iceland-on- Thames as it has been called - is simply too big for the British economy in its present form. But the issue for now is getting the stricken banking system lending again. Taboos about public ownership of banks have to be broken.

[Gringo]

We're all doomed Part 379b

Pound plunges to seven-year low against dollar as Britain faces spectre of deflation

Sterling has plunged to a seven-year low against the dollar as fears surfaced that Britain could be heading for a credit rating downgrade.

The pound fell more than two per cent this morning to hit a low of $1.3965 as traders reacted badly to the Government's latest multi-billion bailout of the banking system.

It is the first time sterling has dropped below $1.40 since mid-2001. Less than a year ago, it was still trading at $2.

Renowned investor Jim Rogers, who made his fortune after founding the Quantum Fund with billionaire George Soros, said baldly: 'I would urge you to sell any sterling you might have. It's finished. I hate to say it, but I would not put any money in the UK.' ....... more on link

Credit rating tumbles

Can't sell bonds

Can't fund bailouts

Banks crash

Print more money

Sterling falls further