"But governments were implicitly underwriting the financial system all along. They still are."

Here's another interesting post on the FT:

"Not exactly a private solution. Indeed, even if Barclays is not owned in some part by the UK government, it will still be guaranteed by it – and that matters.

Last month, the UK government asked banks to fortify themselves against further financial shocks by increasing their capital cushions, in return for which it would offer new guarantees on inter-bank lending. To help the banks to raise new capital, the Treasury offered to buy preference shares, albeit only on onerous terms; some hoped that the banks would seek alternatives. This is what Barclays has done."

The British plan is:

1) Banks must increase capital ( The big problem )

2) Government guarantees inter-bank lending ( The resulting problem )

3) Government buys shares in banks ( Seems reasonable to me. Better deal for taxpayers )

4) Terms of loan to be onerous ( Absolutely necessary )

5) Would prefer private solution ( Absolutely )

So, in the U.K., the terms on the loans from the government were thought to be onerous. Really:

"It is striking that these investors are charging more than the UK government’s punitive rate. Given that sovereign wealth funds’ earlier investment in financial institutions have resulted in heavy paper losses, it is hardly surprising that the Gulf royals have driven a hard bargain.

Ultimately, it is for shareholders to decide whether to back this deal. There can be no doubt Barclays is paying a heavy price for a measure of independence."

Now note this:

"The bank, however, is still not entirely independent. One of the great fictions of recent years was that large banks could be allowed to fail and had no state guarantees. But governments were implicitly underwriting the financial system all along. They still are. Regardless of who owns the shares, the UK Treasury must make sure that its large banks are stable – and it has a duty to intervene if they are not.

The Gulf deal has reduced risk for the UK government; in the event of problems, new shareholders will lose out before the exchequer. But Barclays is much too big to fail, and the government would be forced into a rescue if the bank were seriously to stumble. The government may not be in the boardroom but it must keep a watchful eye."

Absolutely. This fiction has been the main point on this blog since the beginning of this crisis. The guarantees are still there. I've already explained what we can do going forward, but it's at least becoming clear to everyone that these guarantees were in place. It only remains to examine how they factored into this crisis.