"The trouble with this is not just that it is very difficult to know what a sensible price would be for such loans. "

Also from the FT:

"Taxpayers must plug the big companies’ credit gap

By Richard Lambert

Published: January 15 2009 19:52 | Last updated: January 15 2009 19:52

The credit crunch is now approaching its most dangerous moment for ordinary businesses up and down the UK. Decisions within the next few weeks will have a lasting impact on the shape of British industry in the years ahead.

The problems are at their most acute for those large companies that are rated below investment grade and that for one reason or another – an accident of timing or a sudden worsening of business conditions – need to refinance their debt. It is these businesses that face most difficulties right now.

Of course, life is far from easy for small and medium-sized enterprises. Credit is scarce, not least because overseas lenders are pulling out of the market, and terms and conditions have become more onerous. But the big British banks have increased their loans to this sector over the past year and these smaller companies are not so exposed to the very large funding gap at the heart of the banking problem.

The gap arises because of the freezing up of wholesale financial markets around the world and you can measure it in different ways. Sir James Crosby, in his November report on mortgage finance, suggested it would take about £100bn spread over this year and next just to deal with the shortfall in mortgage finance.

Another way to look at it is to consider that back in 2001, customer lending in the UK was roughly comparable to customer deposits. By the first half of last year, the surplus of lending over deposits was about £700bn. That customer funding gap had been made possible by capital inflows from around the world, which have now more or less dried up. This means that replacing – let alone expanding – existing lines of credit is becoming increasingly difficult for all but those companies that are the very best risks.

The phenomenon is global and its adverse impact is visible everywhere – whether in car sales in Brazil, in consumer goods in Russia or in the pace of economic activity across the eurozone and the US. There are few strong markets in the world for UK businesses to turn to: meanwhile a shortage of working capital is leading to sharp production cuts across a range of sectors.

The large companies most exposed to this problem are also the biggest employers and the main engines of business investment. Thousands of small suppliers are dependent on their well-being. Small wonder that the pace of job losses is increasing and that business surveys are showing a sharp cutback in investment intentions.

One way or another, the taxpayer will have to help plug this funding gap for the time being, leaving the public balance sheet to substitute for the shortfalls in the damaged financial system. The best way to do this would be through a much expanded credit guarantee scheme( YES. AS I KEEP SAYING, THE ONLY WAY TO END A CALLING AND PROACTIVITY RUN IS THROUGH GOVERNMENT GUARANTEES. IT IS SIMPLY A FACT THAT NO OTHER SOURCE HAS THE RESOURCES TO BE BELIEVED. ).

Sir James Crosby suggested the most effective form of intervention would involve the government auctioning its own guarantees in a form that could be attached by lenders to AAA tranches of mortgage-backed securities, issued to fund their new lending. Rather than skewing the system to support just one sector, that approach could be expanded to cover all kinds of viable businesses.

It would also be worth thinking about ways of putting Treasury guarantees around syndicated loans and corporate bonds and allowing them to be bought directly by the Bank of England.

Then there is the question of regulatory capital. The Basel II arrangements mean that banks need to set more capital aside just to maintain their existing lending levels. This makes no sense at this stage in the business cycle, especially at a time when governments everywhere are in effect standing behind their banking systems( IT MAKES SENSE TO THEM ). These requirements should be modified – ideally globally but if necessary unilaterally – so as to allow banks to lend more from their existing capital base.( IT WON'T MATTER. THIS IS A BAD IDEA. )

Other ideas that are floating around include hiving off toxic loans into taxpayer-funded “bad banks”. The trouble with this is not just that it is very difficult to know what a sensible price would be for such loans( I KEEP SAYING THAT THIS IS THE UNSOLVABLE PROBLEM ). It is also that as business conditions deteriorate, more loans are shifting into the toxic category.

These are not easy decisions. But the longer that decisive action is delayed, the more damage will be done in terms of lost output and lost jobs( I AGREE. GUARANTEES SHOULD HAVE BEEN MADE RIGHT AT THE BEGINNING.). In the past few weeks, the government has been addressing the fringes of the problem, and there is a sense that it has been falling behind the curve( IT HAS ). Now is the time to be bold.( ACTUALLY, SEPTEMBER WAS THE TIME, AT THE LATEST. OTHERWISE, THIS IS A GOOD POST. )

The writer is director-general of the CBI employers’ organisation"