Needing to conserve capital and fearful that other firms might collapse soon, they largely stopped lending

TO BE NOTED: From the NY Times:

"April 29, 2009

Economic Scene
Time for Bank Creditors to Share the Pain?

By DAVID LEONHARDT

The big debate about President Obama’s financial rescue plan has centered on whether he’s been right to avoid nationalizing the country’s biggest banks. But there is another, more pressing question about the plan that has received considerably less attention.

After the Federal Reserve’s stress tests identify the country’s sickest banks next week, who will bear responsibility for shoring up their balance sheets?

Will it be solely the government? Or will the government force institutions that lent money to sick banks in better times — their creditors — to take a hit by forgiving some of the loans?

Timothy F. Geithner, the Treasury secretary, and other officials are reluctant to force losses, often called haircuts, on banks. They worry that haircuts could create a cascade, in which some of the creditors that take losses become insolvent, while creditors of healthier banks begin wondering whether they will be subject to future haircuts. In the ensuing panic, financial markets could freeze up, as they did last fall.

But relying on the government alone to shore up the banks brings risks, too. In the long term, it could leave taxpayers with an enormous bill. In the short term, it could destroy the already thin political support for the rescue plan.

Recently — and, I’d argue, fortunately — the Obama administration seems to have become more open to the idea of encouraging loan forgiveness in certain situations. Beyond those situations, officials hope that no others are needed.

Yet that may turn out to be wishful thinking. The Treasury Department has only about $130 billion remaining in its Troubled Asset Relief Program, or TARP, fund. By comparison, American banks are probably facing an additional $1 trillion in losses over the next two years, the International Monetary Fund projects.

The gap between those numbers means that the debate over haircuts could be with us for a while.

•

The case against haircuts starts with Lehman Brothers. When Lehman collapsed into bankruptcy on the night of Sept. 14, its creditors were left with billions of dollars in loans to Lehman they would never recover. Needing to conserve capital and fearful that other firms might collapse soon, they largely stopped lending.

“That’s when this crisis took a quantum leap up in terms of seriousness,” as Janet Yellen, the president of the San Francisco Fed, recently said.

So imagine that on Monday, when releasing the results of its stress tests, the Fed says that several banks need more money to survive a deep recession. Assuming private investors are not willing to put it up, the government will then have two options.

It can increase the banks’ assets, by giving them more taxpayer money in exchange for an even greater ownership stake. Or the government can reduce the banks’ debts, by using its influence to encourage, or even demand, loan forgiveness.

Debt reduction, in exchange for an equity stake, is a standard strategy for dealing with failing companies. It’s what the Obama administration is trying to do with Chrysler’s and G.M.’s creditors. Under the tentative deal worked out on Tuesday, Chrysler’s creditors would receive about 28 cents in stock for every dollar of loans they forgave.

But banks aren’t like other companies. Like it or not, they are the heart of the credit system and thus the economy. No matter what happens to Chrysler’s creditors, Honda won’t stop making cars, and people won’t stop buying them. Imposing losses on Bank of America’s creditors, though, has the potential to freeze the financial markets.

One sign that such concerns are legitimate is the fact that they’re shared by some economists who saw the financial crisis coming well before Fed officials or Mr. Obama’s current advisers. At a Fed conference in 2005, Raghuram Rajan — then the director of research at the I.M.F. and now a University of Chicago professor — criticized Alan Greenspan for turning a blind eye to risk (and was in turn criticized by Lawrence H. Summers, now Mr. Obama’s lead economic adviser). Today, Mr. Rajan says that haircuts really do have the potential to make some financial firms insolvent and cause worldwide problems.

Yet he also says that the government should study whether it can sensibly impose any losses on creditors, rather than unquestioningly accepting Wall Street’s self-interested view that haircuts would be bad for the economy. “We constantly have to question the arguments the Street puts forward,” he said, “and ask whether they are really these holy cows who can’t be touched.”

Ever so gradually, the administration may be moving toward this more skeptical position.

In February, the Treasury began twisting the arms of some holders of Citigroup preferred stock to get them to convert it into common stock. (Preferred stock, despite its name, is something between a loan and stock.) The credit markets hiccupped, but quickly returned to their previous state. In the wake of the stress tests, the Fed and the administration may well push for more conversions along these lines.

The trickier issue is what to do with holders of so-called subordinate debt. In the spectrum of investments, subordinate debt is considered safer than preferred stock and tends to be subject to haircuts only when a company slides toward bankruptcy. Pushing a bank to the brink of bankruptcy would raise the specter of Lehman Brothers.

Now, some debtholders may be fearful enough of bankruptcy that they would willingly accept haircuts, figuring they are better than the alternative. On “Meet the Press” on April 19, Mr. Summers said one option for increasing the banks’ capital was “asset liability swaps,” by which he meant a voluntary exchange of loan forgiveness for equity.

The government’s main role would be to force existing equity holders to offer the swaps to creditors. Equity holders often oppose such swaps because their own stake is diluted. But government regulators could insist that the offer be made and then allow debtholders to accept or reject it. If the offer were, say, 60 cents on the dollar and the market price of the debt only 50 cents, the creditors might accept.

If steps like these, along with TARP, are enough to repair the financial system, haircuts won’t be needed. If not, the only remaining options will be more taxpayer money, more haircuts or both.

We already know what the bankers will say about haircuts, regardless of how carefully they’re devised: that they’ll end up hurting the rest of us. Remember, though, they said the same thing about stronger financial regulation, and they turned out to be spectacularly wrong. Stronger regulation would indeed have hurt many bankers. It would have benefited the rest of us.

This month, I interviewed Mr. Obama for a Q. and A. to be published Sunday in The New York Times Magazine, and I asked him why his economic inner circle was dominated by protégés of Robert Rubin. These protégés, like Mr. Geithner and Mr. Summers, are deeply thoughtful people, just as Mr. Rubin is. But in retrospect, they all gave too much deference to Wall Street.

Mr. Obama replied that his economic team also included people from outside the Rubin circle, which is certainly true. Still, Mr. Geithner and Mr. Summers remain the dominant forces in the team.

When they — and the president — consider Wall Street’s warnings about haircuts, I hope they also consider its track record. Lately, taxpayers haven’t done very well when they’ve listened to Wall Street’s advice.

E-mail: leonhardt@nytimes.com"

"As was the case in the 1930s, we also have a choice"

Martin Wolf on Keynes on the FT:

"We are all Keynesians now. When Barack Obama takes office he will propose a gigantic fiscal stimulus package. Such packages are being offered by many other governments. Even Germany is being dragged, kicking and screaming, into this race.

The ghost of John Maynard Keynes, the father of macroeconomics, has returned to haunt us. With it has come that of his most interesting disciple, Hyman Minsky. We all now know of the “Minsky moment” – the point at which a financial mania turns into panic.

Like all prophets, Keynes offered ambiguous lessons to his followers. Few still believe in the fiscal fine-tuning that his disciples propounded in the decades after the second world war ( TRUE ). But nobody believes in the monetary targeting proposed by his celebrated intellectual adversary, Milton Friedman, either( TRUE ). Now, 62 years after Keynes’ death, in another era of financial crisis and threatened economic slump, it is easier for us to understand what remains relevant( I SAY USEFUL ) in his teaching.

I see three broad lessons.

The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”( I AGREE ).

The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand( AS A WHOLE, I CAN UNDERSTAND THIS ). An individual may not spend all his income. But the world must do so( TRY TO ).

The third and most important lesson is that one should not treat the economy( ECONOMICS IS FINE HERE ) as a morality tale( HERE I DISAGREE COMPLETELY. MORALITY IS PART OF POLITICAL ECONOMY ). In the 1930s, two opposing ideological visions( THERE WERE OTHERS, THANKFULLY DEFEATED ) were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order(I DON'T AGREE WITH HIM HERE. VON MISES CRITIQUE OF SOCIALISM WAS MORE THAN A MORALITY TALE, AND SO WERE HAYEK'S VIEWS ABOUT THE MARKET AND THE DANGERS OF TOO MUCH STATE CONTROL); the latter in the idea that the identical motivation could lead only( IT WAS THIS MECHANISTIC APPROACH TO POLITICS AND POLITICAL ECONOMY THAT MADE MARXISM, FOR EXAMPLE, NOT SUITABLE FOR HUMAN CONSUMPTION ) to exploitation, instability and crisis.

Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge( WRONG ). He wished to preserve as much liberty as possible( I AGREE. AS DO I. ), while recognising that the minimum state( HERE I DISAGREE ) was unacceptable to a democratic society with an urbanised economy( I CAN FORESEE A TIME OF LESS GOVERNMENT INVOLVEMENT, BUT THIS IS CURRENTLY TRUE ). He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds( I WOULD SEEM TO AGREE WITH HIM ).

This same moralistic debate is with us, once again. Contemporary “liquidationists” insist that a collapse would lead to rebirth of a purified economy( COMPLETELY UNBURKEAN ). Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold( I WOULD LIKE TO SEE THE PUNISHMENT OF CRIMINALS ).

Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable( TRUE. THEY ARE USEFUL. ). They are indeed the underpinnings of a productive economy and individual freedom( TRUE ). But they can also go seriously awry and so must be managed with care( TRUE ). The election of Mr Obama surely reflects a desire for just such pragmatism( TRUE ). Neither Ron Paul, the libertarian, nor Ralph Nader, on the left, got anywhere( TRUE ). So the task for this new administration is to lead the US and the world towards a pragmatic resolution of the global economic crisis we all now confront.( I AGREE )

The urgent task is to return the world economy to health.

The shorter-term challenge is to sustain aggregate demand( YES ), as Keynes would have recommended. Also important will be direct central-bank finance of borrowers( YES ). It is evident that much of the load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak( TOO MUCH BEGGARING ON THEIR PART ALREADY ). Given the correction of household spending under way in the deficit countries( SPENDER COUNTRIES ), this period of high government spending is, alas, likely to last for years( BTREATHE DEEPLY MATE ). At the same time, a big effort must be made to purge the balance sheets of households and the financial system. A debt-for-equity swap is surely going to be necessary( IT WON'T NEARLY BE AS LARGE AS HE THINKS. TOO MANY PEOPLE WANT THE OLD SYSYEM BACK. IT SUITS US. ).

The longer-term challenge is to force a rebalancing of global demand. Deficit( SPENDER ) countries cannot be expected to spend their way into bankruptcy( TRUE ), while surplus ( SAVER )countries condemn as profligacy the spending from which their exporters benefit so much( THAT'S WHY THEY'RE STRUGGLING TO KEEP THIS SYSTEM ). In the necessary attempt to reconstruct the global economic order, on which the new administration must focus, this will be a central issue. It is one Keynes himself had in mind when he put forward his ideas for the postwar monetary system at the Bretton Woods conference in 1944.

No less pragmatic must be the attempt to construct a new system of global financial regulation and an approach to monetary policy that curbs credit booms and asset bubbles( WE'LL TRY ). As Minsky made clear, no permanent answer exists( TRUE ). But recognition of the systemic frailty of a complex financial system would be a good start( OK ).

As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us ( I AGREE ). The objective is also clear: to preserve an open and at least reasonably stable world economy that offers opportunity to as much of humanity as possible( I AGREE ). We have done a disturbingly poor job of this in recent years. We must do better. We can do so, provided we approach the task in a spirit of humility and pragmatism, shorn of ideological blinker. ( WE GET THE POINT )

As Oscar Wilde might have said, in economics, the truth is rarely pure and never simple. That is, for me, the biggest lesson of this crisis. It is also the one Keynes himself still teaches( I AGREE )."

He gets a bit simplistic, but I generally agree with what he's saying, except for the fact that, long term, I believe that less government with a growing and balanced economy is possible. Keynes view is still too rooted in the 30s to be of major use to us undigested, and is much too pessimistic and mechanistic, as that era tended to be. Again, Political Economy and Politics are underpinned by the context and presuppositions of the time.

What Keynes offers us is a little useful wisdom and a narrative of perceived success at helping the world out of a crisis, which goes a long in times like these.

"Here’s an interesting thought: saving Bear Stearns increased risk in the financial system"

From Alphaville, an excellent and very important post by Sam Jones:

"A systemic risk counterfactual

Here’s an interesting thought: saving Bear Stearns increased risk in the financial system.

From Bank of America:

…the support of Bear Stearns appears to have unintentionally exacerbated the systemic risk of the Lehman Brothers’ default as short-term investors did not reduce their exposures leading up to the default despite the steady erosion in Lehman’s stock price and CDS spreads.

That leaves the potential interpretation that by supporting Bear Stearns, systemic risk from its default was postponed, but in having done so, unintentionally that action exacerbated the systemic risk resulting from the Lehman Brothers’ default.

After Bear Stearns, counterparties to banks were lulled into a false sense of security — assuming that default risks were reduced - or at least recovery rates increased - by a sort of faintly implicit guarantee from the US government against too-big-to-fail banks.

The principle example that would support that being the collapse of Reserve Primary — the money market giant which broke the buck the week LEH went under. Reserve Primary failed because it had bought a lot of commercial paper issued by Lehman. Commercial paper is, of course, unsecured.

Anyway, here’s what happened to the commercial paper issuance of both Bear and LEH in the runup to bankruptcy:

And the after-effects of Lehman’s collapse:

…money fund investors responded to the “breaking of the buck” issue at the Reserve Fund by withdrawing funds from “Prime” funds and placing most of those proceeds in Treasury or Government-only money market funds. That’s the 21st century equivalent of a “bank run,” and its consequences contributed to the severe freezing up of interbank lending in September and October.

Here's my comment:

1. Nov 27 16:27Posted by Don the libertarian Democrat [report]

   "After Bear Stearns, counterparties to banks were lulled into a false sense of security — assuming that default risks were reduced - or at least recovery rates increased - by a sort of faintly implicit guarantee from the US government against too-big-to-fail banks."

   My only disagreement with this is that the implicit guarantee had been in effect since the S & L Crisis. Although there was a chance of not being bailed out, as Lehman showed, the underlying belief was that the government could not allow large and interconnected financial institutions to fail. This was so well understood, that there was really no Plan B for these large institutions.

   From my perspective, the reaction to Lehman was panic at the thought that the government wouldn't intervene, and that there was no real Plan B.

   I think that the idea that the people involved in this belief were adherents of zero government intervention on principle has been proven false. Rather, they believe that the government and Fed are an essential backstop to our financial system. Simply because people try to get around regulations or have them abolished for their own ends, doesn't entail that they don't welcome and depend upon government when it suits their interests. Free market rhetoric is very useful when you're trying to get the government out of your way, but it's not a binding contract on future behavior or behavior in other circumstances.

   Phil Gramm and others might have actually believed their rhetoric, but the people with the real money are not so foolish as to not believe and expect that when they could really use government help, they damn well better get it. Surely actions speak louder than words, and the actions, after Lehman, said, "For God's sake help us, and don't bother mouthing nostrums about the free market, because if we go down we're taking you with us. Did you think we gave you all those donations for your eloquent defense of principles?"

“The markets got awfully shook up when Paulson spoke,”

This story from Bloomberg merely illustrates a few themes that I've been harping on:

"Paulson may ask Congress for the remaining $350 billion from the Troubled Asset Relief Program as he puts together plans to boost consumer credit. Treasury and Federal Reserve officials are working on an effort to buttress the market for securities backed by auto, student and credit-card loans, Paulson said last week. He’s also assembling an office to address mortgage foreclosures. "

I've been arguing that TARP was sold as a Credit Stimulus Plan without the Stimulus, which would be lending. Sec. Paulson said that wasn't the point of TARP, but the point was rather to buttress up the financial system. In doing so, he managed to drop any value that there was in the CDO market and further calcify it, one effect of which is the bailout of Citi. He also managed to terrify everyone that banks might not lend until the downturn was beginning an upturn. I can understand the banks feeling this way, but not accepting the TARP money as well knowing what lawmakers wanted them to do with it. This is a case of very bad faith on the part of the banks.
It also seemed that he was leaving the mortgage problem to the FDIC.

If you read the above statement, you'll find that it's an about face. Some people will blame Paulson, and I'll be one of them, for a dizzying array of positions. However, in my opinion, this "any way the wind blows" policy making is built into TARP. TARP is a Hybrid Plan, and, if there are any merits to Hybrid Plans, and I, for one, don't think that there are, it's that you can expect to feel like you're on a Tilt-a-Whirl when you're in them, and you'll have the freeing feeling of constantly changing your mind and holding opposing positions while you're in them. It's quite a ride, almost always expensive and inefficient. That doesn't mean that no good can flow from them, just that it's not cost effective or easy to get out of. Hybrid Plans have a bad habit of morphing on indefinitely, often taking on other acronyms and guises.

"Paulson’s pivot is the latest in a series of changes."

Let's go along for the ride. Whee.

1) "He won authorization from Congress in July to aid mortgage companies Fannie Mae and Freddie Mac by saying he doubted he would need to use it, seven weeks before doing exactly that. " ( Well a doubt isn't a certainty )
2) "Two weeks ago he abandoned the TARP’s original intent of buying bad bank assets in favor of direct capital injections. "
3) "The Citigroup rescue came five days after Paulson told the House Financial Services Committee that Treasury and the Fed’s actions had resulted in “a significantly more stable banking system where the failure of a systemically relevant institution is no longer a pressing concern rattling the markets.”

This isn't even the whole list. What has the effect been?

“The markets got awfully shook up when Paulson spoke,” said Fred Dickson director of research at DA Davidson & Co. in Lake Oswego, Oregon. “The credibility right now in terms of Treasury and the administration is part of the problem. We’re not at all past concerns about financial institutions".

“You have systemic fear everywhere,” said David Winters, who manages $3 billion as chief executive officer of Wintergreen Advisers LLC in Mountain Lakes, New Jersey. “People don’t know what to believe” and “confidence is completely drained out of the system.”

"President-elect Barack Obama today said at a press conference that there has been “confusion on what the overall direction might be” of the Bush administration’s plans for dealing with the financial crisis. "

He's been to financial panic, what a pryomaniac is to a fire. A Panicmaniac. Would things have been worse without the Hybrid? Yes, because there was no Plan B, which would have meant a "Go directly to meltdown card, and please don't stop at "Go" ". On the other hand, this whole mess of lobbying, unclear and unspecific legislation, reeling markets, calcified markets, conflict of interest, finger-pointing, etc., is a function of choosing a Hybrid Plan.

Here's a funny line from President Obama:

"In announcing his nomination of New York Federal Reserve Bank President Timothy Geithner to succeed Paulson as Treasury chief, Obama also pledged to “honor the commitments” of the outgoing teams, suggesting he has no plans to overhaul the implementation of TARP funds committed so far. "

Paulson can drive the car in any direction he wants, but President Obama needs to stick to the road. What's wrong with this picture?

"Paulson, with less than two month left in his tenure, spent much of last week defending his actions."

Here's where I feel sorry for him. He might have to spend his whole life doing this, and know that some history books will be written featuring him as a disaster. It's not all his fault by any means. If anything, he's one of the only Bush people who's intelligent enough to try and change course. In this administration, he a breath of fresh air.

“Some have chosen to scapegoat the Lehman failure as the cause of the deepening crisis in September, as opposed to a symptom,” he said. “That is at best naïve, and at worst disingenuous.”

He's terribly wrong about this, and I'd gain a lot of respect for him if he'd admit it.

Plan B Is We're Screwed

ChumpChanger gets the picture:

"The consensus wisdom emerging about the Big 3 automakers is "Let 'em fail." There are some awfully good arguments for this. Yes, what's happening with the automakers is their own fault, the consequence of decades of bad decisions. Yes, to extend the bailout beyond the financial industry invites every ailing business in the country to run to the bailout trough. Yes, the shock therapy of bankruptcy may be the only way to make the US auto industry viable in the long run.

But what other choice is there? This is not a rhetorical question. I really don't know. It's easy to say that we should let them fail. But if John Dingell stares down at you (and I've sat in the audience when Dingell's stared down from his elevated perch--trust me, you can go many years without seeing a stare as blood curdling as his) and asks what your plan is for all the autoworkers who are going to be displaced, what's your answer? It seems to me that at the moment we have none. And anyone who says we should just let the industry go bankrupt and let it sort and downsize itself out had better have some answer to this.

PS: If you want to get some historical perspective on the dialogue here, check out A Step Toward Feudalism: The Chrysler Bailout, a paper from back in 1980 that the Cato Institute has put online (points to them for not just throwing out the sillier stuff when they were digitizing the archive). We bailed out Chrysler and the nation survived -- though it did mean years of listening to Lee Iacocca's turnaround story. "

Well, you and Cato both have a point, because that's how the world works. On the one hand, we aren't the USSR, on the other hand, government intervention leads to more government intervention. In the case of Chrysler, the terms should have at least been more onerous, including a vow of silence from Iacocca, even though I don't believe in vows for myself.

So, in this case, you're right again. There's no Plan B for any of this, because everyone's been working under a system of implicit and explicit government guarantees, based partly on the past government interventions. We're in a huge bind because of this, and are having to intervene to attempt to lessen an outright panic against risk.

On the other hand, Cato is right. We need to get out of this government guaranteed system, or at least radically alter it, because those guarantees made this outcome more likely.

So, you're both correct again, because that's the way the world works.

Was This Panic Dealmaking By Barclay's?

Today, a fascinating post by Robert Peston on BBC. First, a refresher:

"Wednesday, October 29, 2008

"Barclays non-governmental recapitalisation efforts don’t exactly appear to be thundering forward."

Interesting post on Alphaville about banks not taking bailout money and how they're doing in getting investment:

"To bailout or not to bailout…

Barclays non-governmental recapitalisation efforts don’t exactly appear to be thundering forward. In the US, meanwhile, as observed by footnoted, banks’ are exhibiting some peculiarly similar recap-PR lines:

NorthernTrust put out a press release yesterday to announce its $1.5 billion infusion because it “fully supports the U.S. government’s efforts to strengthen our nation’s financial system.” There’s also this one from Valley National: “Although Valley is a well-capitalized organization, we believe such a program provides an excellent opportunity for healthy strong banks like Valley to participate in and support the recovery of the U.S. economy”. Even relatively small banks seem to be on message, like First Niagara which said in its press release yesterday, “We are supportive of the Treasury Department’s efforts and remain strongly committed to supporting the economy in Upstate New York.”

Banks’ boards, indeed, face quite a tough call when it comes to using government money. The below has been sent to us from Hilary Winter - a partner at Orrick:"

Do read the whole post."

So, Barclays is attempting to weather this turmoil without government largess, but was having a rough time of it. Next:

"Monday, November 3, 2008

"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."

So, Barclays found outside investment, even though, as my post claims, their ultimate guarantor is the government. But they paid more for the private deal than the government deal would have cost. Once again, they paid a premium to remain independent. But, did they act prudently in this deal, or rush to get it done to stay out of the government's clutches? You tell me. From Peston:

"Here's what you need to know.

When Barclays only 19 days ago sold £3bn of these Reserve Capital Instruments (RCIs) to Qatar and Abu Dhabi, it threw in warrants to purchase 1.5bn new Barclays shares at any time in the next five years at a price of 197.775p each.

According to Sandy Chen of Panmure Gordon, each of these warrants is worth around 16p, which would value the lot at just under £250m (and, by the way, some analysts have argued that the warrants are worth a good deal more than this).

They were apparently an important sweetener to persuade Qatar and Abu Dhabi to buy the RCIs. What's more, Qatar and Abu Dhabi were also paid a £60m commission in cash for taking the RCIs.

In other words, Qatar and Abu Dhabi were paid a bit more than £300m for buying £3bn of securities - and these securities pay a stonking 14% rate of interest until June 2019 (many of us would love a bank to pay us that kind of interest).

So, Qatar and Abu Dhabi got a good deal. So what?

"Here's the thing.

Other investors yesterday bought £500m of the RCIs without the inducement of the warrants or the cash commission.

Perhaps unsurprisingly, although Qatar and Abu Dhabi were prepared to release £500m of the warrants for sale to other investors - following complaints from British investors that they should have been offered these in the first place - the Gulf investors didn't give back any of the commission or warrants.

Qatar and Abu Dhabi therefore ended up being paid over £300m for taking even less risk on their investment in Barclays.

It's worked out very nicely for them indeed. Now there's a proven appetite for these RCIs, they could presumably sell the rest on the open market, should that be appealing to them. In which case, the £300m would become pure profit attached to zero investment risk.

So why on earth did Barclays less than three weeks ago feel it had to pay so much money to Qatar and Abu Dhabi, to persuade them to buy these securities?

Well, it points out that market conditions were fraught at the time.

But there was no urgent rush to raise the money. As Barclays told me back then, the Financial Services Authority had given it till early next year to raise the capital it needed.

Arguably therefore Barclays has needlessly given away £300m."

That doesn't sound good.

"Could the board make amends? Well Barclays' four executive directors have volunteered to forego their bonuses.

But they would probably have to do without bonuses for around 10 years to compensate for the shareholder wealth given away in this transaction.

Which means that the decision by the board to offer itself up for re-election may turn out to be more than a symbolic gesture.

In particular, there is likely to be pressure on the chairman, Marcus Agius, to explain why he and the non-executives permitted the deal with Qatar and Abu Dhabi to be transacted on such generous terms."

I should hope that they are called to account. But, I also want to file this one, unless otherwise informed, under panic selling or dealmaking. I simply wonder how much, in retrospect, of this kind of panic will turn up.