“In the end, either banks will have to be nationalized or have their bad loans split off into another institution."

From the NY Times:

"In Europe, New Efforts to Bolster Lending

By DAVID JOLLY

PARIS — After a first round of costly bank bailouts and stimulus programs came up short, governments in Europe and the United States are moving more forcefully to assure that bailed-out banks lend more money( MORE LIKE DON'T NEED TO HOARD MONEY ) to offset the recession that has engulfed both continents.

On Monday, a day after officials of the incoming Obama administration promised to take steps to force banks to lend, Britain outlined details of a new £100 billion, or $147.5 billion, plan to limit banks’ losses from troubled assets in exchange for their pledge to increase the flow of credit.

“In return for access to any government support, there will have to be an increase in lending, and that will be legally binding,” Gordon Brown, the British prime minister, said.

As if to illustrate the depths of the problem, the Royal Bank of Scotland warned on Monday that it faced losses of up to £28 billion or $41 billion for 2008, a record for any British company. The bank’s already depressed shares fell nearly 67 percent, touching off a rout in European financial stocks that could extend to United States markets when they reopen on Tuesday.

The second round of efforts in Britain and Europe to jump-start lending comes as the region girds for a more painful recession than expected. The European Commission warned on Monday that the 27-nation European Union faced a “deep and protracted recession” that would shrink the economy by 1.8 percent in 2009 and cut 3.5 million jobs across the bloc.

Adding to the sense of urgency, Standard and Poor’s ratings agency downgraded Spain’s sovereign debt from its AAA rating. Greece’s sovereign debt was cut on Wednesday, rekindling worries about what might happen to the euro zone as a whole if a member were to default on its public debt.

The bleak prospects have prompted leaders to try other ways of urging banks to lend as it becomes more clear that the bailout measures pledged by governments at the height of the financial crisis in autumn have not flushed away the bad loans that still clog the system( THEY ARE STILL BEING CALLED ). If anything, the problems are set to worsen as the downturn accelerates( YES ).

President Nicolas Sarkozy of France is to meet on Tuesday evening with French bankers to press them to lend more money to French businesses. “The banks must understand that the times have changed,” Christine Lagarde, the finance minister, told a business daily, Les Échos, on Monday. The French plan would require banks receiving new capital injections to make “precise commitments,” including giving up bonuses this year, she said.

Late Sunday, Denmark announced an $18 billion aid plan for its banks, saying it would inject the funds on the condition that the recipients increase lending.

In Germany, Deutsche Bank’s chief executive, Josef Ackermann, who is also chairman of the Institute of International Finance, an organization of the world’s largest financial institutions, suggested last week that the creation of so-called bad banks might be the way forward( A POOR WAY, BUT IT IS A WAY. ).

In a bad-bank arrangement, governments would buy up scorched( ANOTHER NEW TERM? ) assets, said George Magnus, senior economic adviser at UBS Investment Bank in London. That contrasts with the method now being used in the United States and Britain, where troubled assets remain on the balance sheet, but losses beyond some limit are insured by the government.( COULD ALSO WORK. THE GUARANTEE IS THE IMPORTANT THING TO ENDING THE CALLING RUN. )

“There is no ‘right’ way and both schemes have their merits and drawbacks( A FAIR POINT ) under given and local circumstances,” Mr. Magnus wrote in a research note. He said the bad-bank plan might be more suited to the United States, while Britain might be able to manage with its plan for an insurance program because it has far fewer banks.

Members of the incoming Obama administration are considering proposals that include buying up bad assets, a return to the original vision of the $700 billion Troubled Asset Relief Program.

“The focus isn’t going to be on the needs of banks,” Mr. Obama’s chief economic adviser, Lawrence H. Summers, said on the CBS program “Face the Nation.” “It’s going to be on the needs of the economy for credit.”

Simon Adamson, a banking analyst at CreditSights, an independent research firm in London, said he thought that Europe was also “edging toward the creation of bad banks.”

Under Britain’s latest bank bailout, its Treasury will “protect financial institutions against exposure to exceptional future credit losses on certain portfolios of assets” in return for a fee. Participating institutions will take the initial losses, with the Treasury bearing about 90 percent of the rest( YIKES ).

Britain’s central bank could buy up to £50 billion worth of “high-quality assets” from banks, giving it more monetary policy tools after it cut its benchmark interest rate to a record of 1.5 percent this month. The government is also extending measures to increase liquidity, including a £250 billion program to let banks to issue government-backed( THE GUARANTEE IS THE IMPORTANT THING ) bonds. The latest steps would cost taxpayers an additional £100 billion on top of the £37 billion plan announced in October and a £20 billion stimulus plan announced in November.

Mr. Brown said he was angry at Royal Bank, whose losses include as much as £20 billion of good-will write-downs from the acquisition of a portion of another bank. “Almost all their losses are in the subprime markets in America and related to the acquisition of the bank ABN Amro,” he said. “And these are irresponsible( NEGLIGENT ) risks, which were taken by a bank with people’s money in the United Kingdom.”

European bank stocks fell sharply on Monday on fears that more pain, including the wiping out of some shareholders, might lie ahead( TRUE ). Last week, the Irish government nationalized the Anglo Irish Bank, rendering equity stakes worthless.

Peter Dixon, a global equities economist in London for Commerzbank, said the latest British rescue plans were “a step in the right direction.” But, he added, “In the end, either banks will have to be nationalized or have their bad loans split off into another institution. That’s the only way they will be clear( GUARANTEED. ONLY THE GOVERNMENT CAN DO THIS. ) about their capital positions( YEP ).”

Carter Dougherty contributed reporting from Frankfurt."