many cash-strapped western banks decided to cash in their lucrative stakes as soon as lock-ins started to expire this year

TO BE NOTED: From the FT:

"Allianz and Amex to cash in ICBC stakes

By Sundeep Tucker in Hong Kong

Published: April 26 2009 22:35 | Last updated: April 26 2009 22:35

Two more foreign investors in Chinese banks are expected to cash in lucrative stakes and raise a total of more than $2bn this week as a lock-in period ends for their holdings in Industrial and Commercial Bank of China.

Allianz, the German insurer, holds nearly 2 per cent of ICBC, while American Express, the US financial group, owns 0.4 per cent, and each is free to offload half of their holding as early as Tuesday.

Such a sale would raise a combined $2.1bn, based on the bank’s closing share price in Hong Kong on Friday.

The remaining shares can be sold in October.

People familiar with the situation expect Allianz and American Express to waste little time in selling the maximum number of shares permitted.

“The timing of any sale will of course depend on market conditions,” said one. “But don’t be surprised if it happens soon.”

The two shareholders invested in ICBC, which is now the world’s biggest bank by deposits and market capitalisation, alongside Goldman Sachs in 2006 as part of a wave of overseas investments in Chinese banks.

Goldman, which holds 4.9 per cent of the Chinese lender, some on behalf of investors, last month pledged to retain at least 80 per cent of that stake until April 2010. Its stake is worth more than $8bn at current prices.

Allianz and American Express are expected to hire investment bank Goldman Sachs to oversee any potential share sale.

In 2005 and 2006, Beijing had sought foreign capital and technical expertise to boost its then moribund banking sector and cement what was billed as the start of a “strategic” relationship.

However, in the wake of the global credit crisis, many cash-strapped western banks decided to cash in their lucrative stakes as soon as lock-ins started to expire this year.

UBS and Royal Bank of Scotland gave up their holdings in Bank of China, raising a combined $3.2bn, while Bank of America pocketed $2.8bn by selling a chunk of its stake in China Construction Bank.

Allianz and American Express said last month that they would explore all potential sale methods that would maximise value and minimise market impact “with a preference for a private sale to investors”.

Regardless of the potential stock sale, ICBC and American Express plan to expand their strategic partnership, which includes credit card products development, marketing, risk management, customer service and staff training.

ICBC has been issuing American Express-branded credit cards in China since 2004.

The raft of stock sales by overseas investors has triggered frustration in China, where senior officials have decided that any fresh foreign strategic investment in its banks will be subject to a lock-up period of at least five years.

A five-year minimum tie-in was necessary to “ensure the safety of China’s banking system”, Liu Mingkang, chairman of the China Banking Regulatory Commission, recently told a seminar in Beijing."

Investment bankers had become the most powerful political lobby in the country

TO BE NOTED: From the FT:

"Labour’s affair with bankers is to blame for this sorry state

Published: April 24 2009 20:24 | Last updated: April 24 2009 20:24

In Wednesday’s Budget statement, Alistair Darling acknowledged that even on his optimistic assumptions a decade was needed to repair Britain’s public finances. The UK government’s reputation for economic competence was already in tatters; the chancellor of the exchequer has now laid it definitively to rest. How did the New Labour project end in such disaster?

The answers lie not in unpredictable global events but closer to home. The government failed to deal effectively with the reform of public services and conducted an indecent love affair with the financial services industry. These two apparently unrelated errors, allied with hubris, proved to be a fatal combination.

When Labour came to power in 1997, dissatisfaction with public services such as health, education and transport was widespread, and justified. For two decades not enough money had been spent, particularly on capital projects. This underspending had contributed to weak and demoralised management, reservations about which led to a fear that simply allocating more cash would provide poor value for money.

There were two possible directions of reform. One – it might be described as Blairite – decentralised management authority and financial responsibility. The other – it might be described as Brownian – tightened centralised control and imposed performance targets on managers, with associated sticks and carrots. Both approaches were pursued, inconsistently, but overall with more Brown than Blair. When, by 2000, there was little to show in the way of beneficial results, the decision was made to spend lots more anyway. There were some service improvements, but the concern that the extra money would not be well spent proved largely justified.

The reasons targets do not work are evident from any study of the failure of planned economies. You can require people to meet goals, but that is not at all the same as encouraging them to meet the objectives behind the goals. By emphasising targets you undermine both their motivation and their ability to achieve these more fundamental underlying goals. In a delicious irony, a major victim of this process would be the Treasury itself. Here is how it happened.

The government’s principal fiscal target was to balance current expenditures with revenues over an economic cycle. This makes sense as a generalised objective: but not as a binding constraint. The financial services sector boomed from 1998 to 2000 and the government benefited from a surge of revenues. The tide then receded. But by mechanically averaging spending and receipts over the cycle, earlier revenues could be used to offset the later splurge in spending. When this resource started to run out, the Treasury redefined the economic cycle to claim compliance with the target.

This is where the two stories become linked. We now know that many of the banking profits of that period were illusory. But they generated substantial revenues from corporation tax and income tax on bonuses. The real funding gap was wider even than it appeared.

But the illusion was at its most influential at the highest levels of government. Investment bankers had become the most powerful political lobby in the country and there was no vestige of political support for action to restrain City excess. Light touch regulation was not just a matter of policy but a matter of pride.

What would have happened if the Financial Services Authority or Bank of England had sought to block the competing bids from RBS and Barclays for ABN Amro – a contest which, we now know, would bankrupt the bank that won the race? The phones in Downing Street would have been ringing insistently and it is easy to imagine the government’s response.

Little has changed. The government continues to see financial services through the eyes of the financial services industry, for which the priority is to restore business as usual. For a time in 2008, it seemed possible to argue that a package of temporary support for the banking industry, combined with substantial recapitalisation of the weaker players, might stabilise the financial sector and prevent serious knock-on effects.

But the problems of banks are much deeper than were then acknowledged and the destabilisation of the real economy has happened anyway. Government now provides taxpayers’ money to financial services businesses in previously unimaginable quantities. But there is no control over the use of the money, no insistence on structural reform or management reorganisation, no safeguarding of the essential economic functions of the financial services industry and no accountability for the damage that has been done.

It is as though the teenage children and their friends were to wreck the house and then demand that the grown-ups clean up before the next party. Their parents are too intimidated to do anything more than ask Uncle Adair to keep an eye on them and excoriate the hapless Fred who made off with some of the silver.

On Wednesday, Mr Darling gave the impression of an honest man who would have much preferred to have been somewhere else, as befits someone caught in a trap not of his own devising. We need a comprehensive reappraisal of both the fiscal framework and the economic and political role of the financial services sector. The crippling consequence of inability to admit error is the impossibility of learning from past mistakes.

johnkay@johnkay.com"

banks acknowledging that "self-help" is a preferable option to taxpayer cash and selling non-core assets may be the best route to take.

TO BE NOTED:From the NY Times:

"U.B.S. Sells Brazilian Unit as Banks Step Up Disposals

By REUTERS

ZURICH/LONDON, April 20 (Reuters) - Two European banks on Monday stepped up efforts to raise capital privately and reduce their reliance on state funding.

Switzerland's UBS AG agreed to sell its Brazilian business for about $2.5 billion while Allied Irish Banks pledged to raise $2 billion possibly through disposals.

Recent asset sales by Britain's Barclays (NYSE:BCS) and Royal Bank of Scotland showed a reluctance to sell assets at low prices may have shifted, with banks acknowledging that "self-help" is a preferable option to taxpayer cash and selling non-core assets may be the best route to take.

UBS said on Monday it was selling Brazilian arm Banco Pactual back to its original owners just three years after buying it. It will make a small loss, but lift its tier 1 capital ratio by about 0.6 percentage points.

UBS surprised investors when its capital ratio fell to 10 percent from 11 percent in just three months, at a time when all lenders are being encouraged to build up a bigger capital cushion to prepare for rising bad debts.

"We consider this operation neutral as it is attacking the most urgent problem (low tier 1 ratio) but on the other hand a leading position in an important market has to be given up," said Georg Kanders, analyst at WestLB.

That dilemma faces many banks. Dozens of lenders in Europe and the United States have been shored up with rescue funds from governments, but many are keen to limit their reliance on the state and selling profitable units is the most realistic alternative.

Barclays this month sold its fast-growing iShares (NYSE:TUR) (NYSE:THD) (NYSE:EIS) (NYSE:SCJ) (NYSE:ECH) (NYSE:BKF) (NYSE:AIA) (NYSE:EWZ) asset management business for $4.4 billion to bring in a net gain of over $2 billion.

RBS last week sold half of a Spanish insurance joint venture for $560 million as the part-nationalised bank pulls back to its core markets and cuts risk.

RBS is also set to sell assets in Asia, and rivals including Lloyds Banking Group and ING are expected to sell non-core businesses, bankers reckon.

UBS, one of the European banks hit hardest by the credit crisis, said its Brazilian sale was part of its strategy to reduce its risk profile and strengthen its balance sheet.

Activist investor and former UBS chief executive Luqman Arnold called last year for UBS to sell the highly profitable Brazilian investment bank to help the Swiss bank return to profitability and rebuild its brand.

By 0920 GMT UBS shares were up 0.6 percent at 14.05 Swiss francs, outperforming a 2.7 percent fall by the DJ Stoxx European bank sector, which has surged over 80 percent since early March.

AIB ASSET SALE

Allied Irish Banks, Ireland's largest bank by market value, plans to raise 1.5 billion euros of core tier 1 capital by the end of this year to supplement a 3.5 billion euro state injection, it said on Monday.

It said the extra capital could come from the sale of assets, in a move seen by analysts as preventing a slide towards nationalisation. The Irish government took control of rival Anglo Irish Bank in January.

AIB said the state injection had turned out to be insufficient to end public uncertainty about its capital adequacy.

Also on Monday, Norway's largest bank DnB NOR said it might tap state financing to help it reach its core capital ratio target but only if the terms were attractive and existing shareholders not penalised.

An improved mood across the bank sector was underpinned by better-than-expected results last week from Goldman Sachs (NYSE:GS) , JPMorgan Chase (NYSE:JPM) and Citigroup. (NYSE:C) Bank of America is tasked with maintaining that tone when it reports later on Monday.

Analysts remain wary that an improved first quarter will be sustained, although optimism has built that the global economy has turned a corner, sending world stocks on a six-week climb.

U.S. President Barack Obama warned of more pain ahead and European Central Bank chief Jean-Claude Trichet said it was dangerous to read too much into recent data suggesting signs of life in major economies.

Greater stability could encourage some bargain hunters to be on prowl.

Libyan Foreign Bank said on Monday it planned to raise its capital 10-fold to $10 billion to finance expansion in Europe and Africa."

The GAPS is basically a good-bank/bad-bank structure

TO BE NOTED: From Alphaville:

"Comparing the Swedish timeline Posted by Paul Murphy on Apr 02 10:56.

A considered piece of research out of Goldman Sachs on Thursday reached the brave conclusion that Britain’s Government Asset Protection Scheme will mark the turning point for Britain’s banks.

The GAPS is basically a good-bank/bad-bank structure, according to Goldman’s Aaron Ibbotson. And, so long as the two participants, Lloyds and RBS, make sure the bulk of their bad assets are in the “bad bank” GAPS, both Lloyds and RBS look to be low risk players compared with their European peers.

Indeed, Britain’s experience (ex-Barclays) may yet emulate that of Sweden during the 1990s. Here are two timelines for comparison purposes. Click to view.

Related links:
Bad bank brewing - FT Alphaville
Knowing our banks, knowing yours - FT Alphaville

This entry was posted by Paul Murphy on Thursday, April 2nd, 2009 at 10:56 and is filed under Capital markets. Tagged with barclays, Lloyds, rbs."

Foreign investors in Chinese banks will in future be forced to accept a lock-up period of at least five years

TO BE NOTED: From the FT:

"China extends banks lock-up

By Jamil Anderlini in Beijing

Published: April 1 2009 18:40 | Last updated: April 1 2009 18:40

Foreign investors in Chinese banks will in future be forced to accept a lock-up period of at least five years, China’s top banking regulator said, after a series of share sales by US and European financial institutions.

In recent months, companies such as Bank of America, UBS and Royal Bank of Scotland have sold down all or part of their stakes in China’s largest state-owned banks immediately after lock-up periods of three years expired.

The new five-year minimum lock-up was necessary to “ensure the safety of China’s banking system”, Liu Mingkang, chairman of the China Banking Regulatory Commission, told a seminar in Beijing, according to people familiar with the matter and also state media reports.

Mr Liu also said Beijing would not reconsider current ownership limits for Chinese banks, which restrict single foreign investors to a 20 per cent holding and all foreign investors to no more than a combined 25 per cent stake in any Chinese bank.

The Chinese regulator decided last year not to allow a higher level of foreign involvement in domestic institutions.

That decision had not been publicly acknowledged until now and could affect the strategy of the few foreign banks that still have the ability and appetite to expand their presence in China.

HSBC, for example, bought 19.9 per cent of China’s Bank of Communications in 2004 in an agreement that would allow it to raise its stake to 40 per cent if and when the government was to raise foreign investment limits.

BofA, RBS, Goldman Sachs, Germany’s Allianz, Singapore’s Temasek and others bought shares in China Construction Bank, Bank of China and Industrial and Commercial Bank of China with promises they would help to improve the Chinese banks’ risk management and managerial capabilities.

But apart from a few minor initiatives, the partnerships largely failed to produce tangible results and when three-year lock-up periods started to expire in recent months most of these “strategic” investors sold all or part of their holdings at a profit at a time when most global banking institutions were in dire need of fresh capital.

Only Goldman has made a public commitment to hold the majority of its stake in ICBC for at least another year.

Temasek, Singapore’s state investment agency that has stakes in both BoC and CCB, has made private commitments not to dump its shares in the market, according to Chinese banking executives."

Citigroup insists that its Asian business is critical to the company’s overall health

TO BE NOTED: From the FT:

"Asian challenge for western banks

By Sundeep Tucker

Published: March 22 2009 22:30 | Last updated: March 23 2009 03:08

How much will stricken western banks, now answerable to domestic taxpayers, be able to continue flexing their muscles in Asia?

The question is being raised across the region, still a relative bright spot, as aggressive competitors try to pinch market share from rivals that have traditionally used balance-sheet strength to expand lending or to provide investment banking services.

The likes of Citigroup and Royal Bank of Scotland in commercial banking, and Merrill Lynch and UBS in investment banking, have consistently been among the region’s strongest operators.

However, Citigroup, UBS and RBS have each recently received unprecedented levels of financial support from the US, Swiss and UK governments respectively. Merrill Lynch has been taken over by Bank of America, itself now shored up by the US taxpayer.

The financial woes of the affected banks have played into the hands of rivals, which are questioning their ability to lend to companies and to underwrite equity and debt offerings.

Among those in relatively better financial health are banks with large retail deposit bases, including Australia’s leading banks and the likes of Standard Chartered and HSBC.

Domestic players in countries such as South Korea and India are also seeking to profit from the decision by stricken banks to curtail lending in some markets.

“There is no way the likes of Citigroup and RBS can continue to lend in Asia in the fashion that they were doing,” says a senior executive at a well-capitalised western bank.

“We are seeing a rise in business because of this.”

However, banks such as Citigroup and RBS are fighting hard to retain market share and claim that they are refocusing Asian operations on more profitable clients and products.

RBS is withdrawing from retail and commercial banking in Asia Pacific, and plans to scale back its wholesale banking footprint to the region’s largest financial centres.

In an interview with the Financial Times while on an Asian tour last week, Sir Philip Hampton, RBS chairman, insisted that the bank remained committed to wholesale banking in the region, and pledged that its 800 core clients “will have access to a substantial balance sheet”.

Sir Philip added: “We are now strongly capitalised and have a strategy to remain in core markets where we have a competitive advantage. A key part of that is Asia Pacific.”

He said continuing to serve clients in the region would generate value for the UK taxpayer.,

Asian central banks hold about 75 per cent of the world’s currency reserves, and Sir Philip said that RBS would continue to help manage them, for instance by trading US Treasuries.

Likewise, Citigroup insists that its Asian business is critical to the company’s overall health, not least because it had to support multinational clients that plan to invest in the region.

“We continue to commit capital to key clients and are also helping them to access the capital markets,” said Farhan Faruqui, head of global banking for Citigroup in Asia Pacific. The bank has this year advised on the largest Hong Kong initial public offering as well as several large rights issues and corporate bonds.

Tellingly, the latest Dealogic investment banking revenues tables are still for 2009, comprising loans, equity and debt offerings and merger advisory services, are dominated by UBS, BofA/Merrill and Citigroup.

However, analysts believe that the real test for the stricken banks will come in the next few years and that the success of their Asian footprint will depend on their ability to retain key staff and government support for lending policies.

Copyright The Financial Times Limited 2009"

The question, in truth, is not only whether the measures will work, but whether the UK can afford them.

From the FT:

"Are UK banks too big to rescue?

By Martin Wolf

Published: January 22 2009 19:55 | Last updated: January 22 2009 19:55

Is the British government on the right path with its recent package of measures to help the banking sector or, as Mervyn King, governor of the Bank of England, put it this week, “to protect the economy from the banks”? The question, in truth, is not only whether the measures will work, but whether the UK can afford them.( BLIMEY )

Here are two frightening statistics: over the past five years, the balance sheets of many of the world’s largest banks more than doubled; and, according to the Bank, the median ratio of debt to equity in big UK banks is more than 30 to one.

The government faces two challenges: it must eliminate the consequences of these past errors and prevent new ones. These errors go in opposite directions: the past one was lending too much; the present one is lending too little. The legacy of the former is destroyed balance sheets; that of the latter is collapsing lending. ( A SPOT OF BOTHER )

So what should the government be doing in dealing with the legacy of past excesses? The first action must be a brutal worst-case evaluation of balance sheets. The government cannot safely guarantee any conceivable losses( ACTUALLY, IT NEEDS TO. ). The big banks are deemed too big, too interconnected and too important to fail. Yet might they not also be too big to rescue( YOU'D BETTER HOPE NOT )?

This last is the spectre that Willem Buiter has been raising for the UK in his Maverecon blog. He notes that, with balance sheets equal to 440 per cent of gross domestic product, these institutions might imperil the fiscal soundness of the UK itself. I suspect this danger is exaggerated( LET'S HOPE SO. ). A recent analysis from Goldman Sachs suggests that the cost to the state should not exceed 8 per cent of GDP. But it is also true that we do not know what would happen to the value of the global assets of UK banks in a depression. Moreover, we have to add in the costly impact of what are likely to be huge ongoing fiscal deficits over many years.

The government’s policies for dealing with the overhang of bad loans had been recapitalisation. Now we have what Alistair Darling, chancellor of the exchequer, told the House of Commons would be “a new scheme under which the Treasury will insure( REMEMBER PESTON'S POST. ) certain bank assets, for a commercial fee, against losses on banks’ existing loans”.

Meanwhile, the problem for new lending is the departure of foreign financial institutions and capital. The government estimates that about 30 per cent of lending capacity has consequently been lost.

The proposals announced this week include three measures to address the capacity reduction: a £50bn Bank of England fund, financed by the Treasury, aimed at buying corporate assets; a decision to let Northern Rock maintain its loan book, to “support prudent lending to creditworthy customers”; and conversion of the preference shares in Royal Bank of Scotland into ordinary shares.

In addition, “we intend,” said the chancellor, “to negotiate with each bank a lending agreement,” which would be “binding and externally audited”. In return, new support measures are offered: an extension of the credit guarantee scheme introduced in October, which already covers £100bn in loans; an additional £50bn of guarantees, initially on new mortgage lending and eventually on other assets; and, finally, a plan for the Financial Services Authority to adjust capital requirements, to encourage lending in the downturn.( NOTICE THE GUARANTEES )

So what are we to make of these proposals? I have three big worries.( THAT'S IT. AN OPTIMIST. )

My first concerns the potential cost to the taxpayers of guarantees, particularly on past loans. Guarantees on new loans may now be unavoidable. Old loans are a different matter. The idea of offering insurance against extreme outcomes is a superior alternative to buying bad assets at inflated prices( YES ). Yet these loans are bygones – sunk costs. The only question is: who bears the losses? The dangers of letting some losses fall on creditors, via debt-for-equity swaps, are evident. Yet there may be no responsible alternative, particularly in view of the UK’s vast ongoing fiscal deficits.( YES )

My second worry is management. The chancellor says that “we have a clear view that British banks are best managed and owned commercially and not by the government”. Recent performance hardly suggests banks are well managed( TRUE ). Above all, who is taking the risk and deciding what the banks should do? The answer to the former question is taxpayers; the answer to the latter is government. Private management of socialised risks is dangerous( TRUE ). This is why temporary nationalisation is logical. I suspect it is where we will end up.( YES )

My third concern is over the apparent hope of recreating securitised financial markets. I understand the appeal of such markets. But, by offering guarantees( YES ), the government could be subsidising the recreation of a market in lemons.

With international confidence in the UK weak and weakening, the government has to take a realistic view of what it can and must do. It has to come clean on the possible fiscal costs and, in the last resort, it has to focus its limited resources on the future instead."

Too true.

"the insurance scheme is a way of staving off nationalisation of the big banks"

Peston on BBC:

"The government really really really doesn't want to nationalise Royal Bank of Scotland or any of the other big banks.( TOO BAD )

That was the thrust both of Adair Turner's interview on the Today Programme this morning and of Paul Myners's article in this morning's Financial Times.

As if you needed telling, Turner is the silken-tongued chairman of the City watchdog, the Financial Services Authority, and Myners is the big-booted City minister who made a modest pile building up a fund management business in the boom years. We can safely assume they speak with authority on this issue.

Turner said that losses being incurred by banks right now are "not dramatically worse" than the FSA expected in October when it forced the big banks to raise £50bn of new capital - with £37bn coming from us, from taxpayers.

That was an unambiguous re-affirmation that they're not bust, in the FSA's view - which matters, since it's the FSA which has the power to determine whether a bank is fit enough to continue taking deposits.

However that's not the end of the story, because the banks could of course suffer losses that would muller them in a fundamental sense - and would of course prompt yet more financial support from taxpayers to prop them up. ( YES )

In that context, it's striking that Turner was dismissive of demands that the banks must "come clean" about the extent of their dodgy loans and investments - which if memory serves me right has been something of clarion call by the prime minister in recent days (is it plausible that the head of the FSA would contradict Gordon Brown?).

Turner said that the banks and the FSA have a detailed understanding of what's on their balance sheets.

However only a soothsayer would claim to be able to predict with certainty how markets will move in the coming weeks or the precise course of our recession.

That's got nothing to do with whether the banks are hiding stuff. It just means that no one can know with certainty the future market value of banks' investments or the degree to which businesses and householders will have difficulty keeping up the payments on their debts.( THAT'S IT. THE CALLING RUN CONTINUES, AND THE ASSETS CONTINUE TO FALL IN VALUE. )

These are, to use the Rumsfeldian cliché, "known unknowns". ( STEADY ON BOB )

And it's because there are these "known unknowns" that the Treasury announced on Monday its scheme to insure( GUARANTEE ) the banks against losses on loans and investments that could destroy their balance sheets and cause them to collapse( YES ).

Or, as Turner makes crystal clear, the insurance scheme is a way of staving off nationalisation of the big banks.( THAT'S ABOUT IT )

In other words, the government has decided that it would be better for you and me as taxpayers to take on the liability for the potential future losses of the banks, while preserving their semi-detachment from state control, than for us to own them and control them outright. ( THEY KEEP DOING SUCH A SENSIBLE JOB, DON'T THEY ? )

That said, Royal Bank and Lloyds Bank can only be semi-detached from the Treasury, because we as taxpayers own 70% of Royal Bank (or at least we shortly will do) and 43% of Lloyds.

But this is what you need to know and what investors in general appear to have missed in an outbreak of mass-hysteria that nationalisation looms: the prime minister and chancellor have made an unambiguous judgement that the general good would be better served by the semi-autonomy of the banks than by making them instruments of the state.

Why?

This is what Myners says in the FT: "The capacity for soundly managed banks and markets to support the generation of wealth in the economy could never be matched by the public sector...British banks are best managed and owned commercially".

Hmmm. On that basis, let's hope that the past, in the form of the banks' grotesquely inadequate management of risks during the last few years, isn't a guide to the future. ( SPOT ON )

All this means that a very heavy burden rests on those at the Treasury who are frantically trying to make a success of the insurance scheme.

The guinea pig is Royal Bank of Scotland. It hopes that by the time of annual results on 26 February it will have made significant progress in identifying loans and investments whose losses above a certain level will be insured( GUARANTEED ) away by you and me.

This is a pretty tall order, because the bankers and Treasury officials will be trying to put a price on "known unknowns": it won't easy to agree the fee that RBS will pay us for being relieved of liability for losses whose certainty simply can't be measured in a scientific way( THAT'S THE PROBLEM WITH THE TOXIC ASSETS ).

But, as by now you'll have worked out, the Treasury will be pulling out the stops to make the insurance scheme work. Because if they can't get it to work, it's difficult to see how the 100% nationalisation of Royal Bank of Scotland - and even perhaps of Lloyds Banking Group - can be avoided." ( THAT'S IT )

The sad part is having to trust known buffoons with our money. It hardly inspires the confidence that we need to get out of the mess. I wonder if this fear of nationalization is even rational at this point, since we're doing it in all but name now. I mean, we've already nationalized the losses for the crap.

"We are not taking the post down, but this disclaimer stands: viewer beware."

A controversial but revealing post on Alphaville:

"Bank picture du jour( DOESN'T KEDROSKY HAVE THIS PATENTED? ) Posted by Neil Hume on Jan 21 12:36.

A caveat - We have received a slew of complaints in the comments and more than one email about this picture. One reader notes, for instance, that the graphic “just happens to make JPM look like the best bank by far. Represented correctly by area, things are not quite so clear cut between JPM and santander/HSBC.”

Points well taken. We are not taking the post down, but this disclaimer stands: viewer beware.Hat Tip JP Morgan (Click to enlarge).

This entry was posted by Neil Hume on Wednesday, January 21st, 2009 at 12:36 and is filed under Capital markets. Tagged with JP morgan."

Any graph can be misread or misleading.

"the government may conclude that full nationalisation of Royal Bank of Scotland isn't necessarily worse than the status quo."

Peston in the morning on BBC:

"It's more than a little local difficulty that Royal Bank of Scotland yesterday suffered the indignity of becoming a penny stock (though it's bounced a bit this morning).

Because of the plans for global domination of its previous chief executive, Sir Fred Goodwin, this bank is known from Wall Street to Shanghai.

It's big in America. It had till recently a symbolically important stake in Bank of China. It was the victor in the world's biggest ever cross-border banking takeover battle, when it acquired the poisonous rump of ABN Amro (but not "ANB Ambro," as Gordon Brown put it, when scolding Royal Bank yesterday).

Whether we like it or not, the collapse in its value from more than £70bn a couple of years ago to £4.6bn represents unfortunate worldwide advertising about the perceived frailties of our financial system and our economy.

In the context of how others see us, here are remarks made overnight by Jim Rogers, the well-known investor, to Bloomberg: "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."

Errr, say what you mean Jim.

Inevitably, sterling has fallen - to its lowest level against the Yen since 1971 and to its lowest against the US dollar since March 2002. For what it's worth, Rogers believes sterling will approach parity with the dollar.

The connection between sterling and the health of our banking system goes like this.

Our banks have colossal overseas liabilities; they've borrowed huge sums abroad. According to Bank of England figures, the gross foreign currency liabilities of British banks are around £4,400bn (having quadrupled over a decade).

Of course the banks all have matching assets. But the problem is that the assets tend to be illiquid, hard to sell. Whereas the lenders to the banks can often ask for their money back at relatively short notice. ( THIS IS A CALLING RUN )

The reason that Royal Bank of Scotland and HBOS - now part of Lloyds - were semi-nationalised in October was that lenders to them were demanding their money back( THE CALLING RUN ). They were hours from collapse and it was therefore vital that the British state should be seen to be standing firmly behind them( TOTALLY GUARANTEEING THEM ), to reassure all lenders to them that their funds were safe( THIS IS THE ONLY WAY TO STOP A RUN ).

But when the Treasury acquired big stakes in Royal Bank and what's now called Lloyds Banking Group - and when it committed £500bn of loans and guarantees to make sure that all the big banks could repay providers of wholesale loans that could demand their money back - at that point the liabilities of the banks increasingly came to be seen as the liabilities of the state( TRUE ).

This is not an accounting issue of whether Royal Bank's £1,900bn of liabilities is on the public-sector balance sheet.

It's about whether, when it comes to the crunch, the state would honour those liabilities( THEY HAVE TO BE BELIEVED IN ORDER FOR THE GUARANTEE TO WORK ).

And, of course, we all know that the Treasury would honour those liabilities. The damage to the British economy of allowing a bank like Royal Bank to renege on what it owes would be unthinkably huge( TRUE ).

So it matters, in the first instance, that our banks are perceived as viable, profitable businesses - able to pay their way( TRUE ).

And it also matters, in the second instance, that the UK state is viewed as being able to honour the liabilities of its banks, in the unlikely event that a mob of overseas lenders to the banks all asked the teller one day for their money back( THE CALLING RUN. YES. EXACTLY. ).

What this means is that if you put any kind of probability on a recurrence of the collapse in confidence in our banks that we saw in October, then some portion of banks' overseas liabilities should be counted as an increment to the ballooning debts of the government - which is why there's a link between the perceived weakness of the banks and a fall in sterling.

Although - as you'll have spotted - there's a dreadful paradox: a fall in sterling actually makes the problem worse. Because, as Royal Bank of Scotland helpfully pointed out in its trading update yesterday, a fall in the pound increases( DEBT-DEFLATION ) the sterling value of banks' overseas assets and liabilities.

All of which is to explain why, in these febrile circumstances, something as nebulous as "confidence" in our banks really matters( VERY TRUE. IT'S ESSENTIAL. ).

In that context, what may count is that investors yesterday believed that short-sellers were once again driving down the value of bank shares - even though I am reliably told there was very little short-selling.

That fear of short-selling may have persuaded other investors to dump bank shares, or given them a further reason to do so. Which is why the lifting of the ban on short-selling of financial stocks last Friday may have been unfortunately timed.

Also, as I said last night on the Ten O'Clock News, the prime minister' may have meant well when giving a stern instruction to the banks that they must come clean about the scale of their dodgy assets. But it unnerved shareholders, who wondered on what basis they could value banks, if even the most powerful man in the country didn't know what horrors lurk inside them( THIS IS TRUE, BUT THERE IS A DIFFERENCE BETWEEN THE VALUE OF BANK STOCKS AND THE OVERALL MARKET. ).

As for the lack of detail in the multi-hundred-billion pounds plans announced by the Treasury to stimulate lending, that was an invitation to the City to fear the worst - to conclude that the banks would become profitless instruments of the state( FOR A TIME THEY WILL. BUT, AGAIN, WHAT'S BAD FOR BANK STOCKS CAN BE GOOD FOR THE OVERALL MARKET. ).

Where does all this lead?

Well if the world's investors already see Royal Bank as a de facto part of the state, if the constant noise about its future in the City and the media is damaging to wider confidence in the financial system, then the government may conclude that full nationalisation of Royal Bank of Scotland isn't necessarily worse than the status quo."( I'M AFRAID THAT'S TRUE. )

"to stem the remorseless contraction of credit that's caused our awful recession.

Peston on BBC:

"A bank insurer, not a toxic bank

• Robert Peston
• 17 Jan 09, 12:04 PM

I don't know why the Government hasn't knocked on the head the idea that it's working on the creation of a bad or toxic bank that would buy our biggest banks' dodgy loans and investments.

What I expect it to announce on Monday (although the timetable could slip a day or so) is the creation of the mother-of-all bank insurance schemes.( GOVERNMENT MUST STEP IN AND GUARANTEE EVERYTHING IN A CALLING RUN. )

By the way, the Treasury is also considering making an offer to Lloyds/HBOS and RBS to convert the expensive preference shares they've sold to the Government into ordinary shares.( GOOD )

If this happens, I would expect RBS to say yes and Lloyds to say no. And the conversion would see the state's holding in Royal Bank rising from 57.9 per cent to around 70 per cent, or a good step nearer full nationalisation( GOOD ) (see below for more on this).

But back to this insurance scheme to give banks and their investors a bit more certainty( A GUARANTEE ) about the losses they would face as the recession undermines the ability of many borrowers to repay their debts.

Our biggest banks would identify their bad( CORRECT ) loans and foolish( CORRECT ) investments. And they would then pay a fee to a new state-backed insurer to protect themselves from losses over a certain level on these stinky assets. ( A PROPOSAL PUT FORWARD IN THE US AS WELL. )

But the banks would retain these bad assets on their balance sheets. They would not be transferred to a new toxic bank. We as taxpayers wouldn't own the stinky loans - though we would be liable for losses on them over a certain level.( TRUE )

Why the urgency of doing this?

Well in just a few weeks we'll see results for 2008 from our biggest banks. As I've already pointed out, Royal Bank of Scotland and HBOS will announce unprecedented, horrible losses.

And the HBOS losses would represent a massive drain on its new owner, Lloyds TSB.

There's a fear that unless the Government has developed some kind of safety net for them by then( A FULL GUARANTEE ), there could be an alarming loss of confidence in the banking system of the sort we witnessed in September and October.( A CALLING RUN )

So next week we'll get the announcement that just such a safety net, in the form of the insurance scheme for toxic loans, is in the process of being designed and built.

In a way, it can be seen as a way of getting capital into RBS and Lloyds/HBOS in particular without fully nationalising them.( THAT'S IT )

That said, the scheme will be open to all( IT HAS TO BE TO STOP THE CALLING RUN ) our very biggest banks. So Barclays too could insure away future losses on certain of its loans and investments if that suited it - although on Friday night it insisted that it had made stonking profits of well over £5.3bn in 2008.

However I don't expect a long and detailed statement on the institutional mechanism by which we as taxpayers will pick up part of the bill for the longest banking blow-out in history.

Nor do I expect, as this stage, the Government to put a number on the likely cost to all of us as taxpayers of putting a floor under banks' losses - although the potential liability would run to tens of billions.( TRUE )

Of course it's entirely possible( TRUE ) that if the new state insurer values the assets properly( THIS IS THE REAL PROBLEM ), taxpayers could end up over the years of the scheme with a profit.

But it seems unlikely that this will be a very popular policy. Readers of this blog have repeatedly asked why we as taxpayers should bail out the banks for the consequences of their greed and recklessness( BECAUSE THE CALLING RUN HAS LED TO A PROACTIVITY RUN ). The question I'm always asked is whatever happened to the old-fashioned idea that we should pay for our mistakes?( NATIONALIZING THEM WOULD DO THIS.)

For those working around the clock this weekend at the Treasury, in Downing Street, at the Bank of England and at the Financial Services Authority, the priority is to restore the strength of the banking and financial systems, to stem the remorseless( MANY PEOPLE ACTUALLY ADVOCATE LETTING THIS GO ON! ) contraction of credit( A CALLING RUN, WHERE CAPITAL MUST BE HOARDED FOR CALLS. ) that's caused our awful recession.

In that context, the Treasury and UK Financial Investments (the institution created by the Treasury to manage its investments in banks) have been preparing to make an offer to Lloyds/HBOS and Royal Bank, to convert £9bn of their preference shares (owned by the Treasury) into ordinary shares.

The reason for doing this would be to remove from them the heavy financial burden of paying the 12 per cent dividend of the preference shares.

In the case of RBS for example, the dividend represents an annual cash outflow of £600m and for Lloyds/HBOS the outflow is £480m.

In theory, if the two banks didn't have to pay this dividend they could lend £27bn more every year (because under FSA guidelines, if the £1080m of dividends were retained by the banks as equity capital, the banks would be able to lend a multiple of that core Tier 1 capital).

My strong sense is that RBS would love to convert the prefs, which it regards as costly debt, into ordinary shares - even though that would see it owned 70 per cent or so by the state.

However Lloyds TSB is less keen, because it's 43.4 per cent owned by the public sector and doesn't want to see state-ownership rising above 50 per cent, which would be the result of converting the prefs.

It will be interesting to see whether Lloyds' shareholders would agree that its worth paying out £480m of cash each year to taxpayers to prevent that creeping nationalisation of the bank.

Anyway, as readers of this blog know, there'll be plenty of other initiatives announced next week by the Treasury, most of which can be seen as deploying taxpayers' resources to encourage lending.( THE ONLY WAY )

One of these will be an extension of the timetable for Northern Rock, the fully nationalised mortgage bank, to repay what it's borrowed from the Bank of England and the Treasury. This would put less pressure on the Rock to shrink the amount that it is prepared to lend.

Which at a time when the problem for the economy is a shortage of credit sounds a bit like an outbreak of common sense at the Treasury."

Sorry Bob, this is the only way. Frankly, nationalization would be better. I'm surprised that you don't see that.

"The line between private sector and public sector, which became blurred in 2008, may become almost impossible to see in 2009."

Peston sums the situation up, as per usual on BBC:

"The past 18 months was a story about the collapse of lending to banks and by banks - and about how we as taxpayers came to the rescue by providing £600bn of loans, guarantees and capital to the banks, to keep them afloat.( WE WERE ALWAYS ON THE HOOK WITH A SYSTEM OF IMPLICIT AND EXPLICIT GOVERNMENT GUARANTEES TO INTERVENE IN A CRISIS )

The story of the next year will be about the implications of this continued shrinkage in the availability of credit and about the implications of this massive, unprecedented support given to banks by taxpayers( LET'S NOT DO IT AGAIN ).

As a nation, our fortunes in 2009 will be conspicuously tied to the fortunes of our banks as never before. ( I'M NOT SURE I FEEL COMFORTABLE WITH THAT, GIVEN THEIR RECENT PERFORMANCE )

First, an economic recovery rests on the ability of banks to support viable businesses during what increasingly looks like a severe recession. ( TRUE )

Second, and as important, the balance sheet of the British public sector can be seen as the aggregated balance sheet of some substantial banks - because the state now controls three banks, Northern Rock, Bradford & Bingley and Royal Bank of Scotland, and will have a huge stake in a soon-to-be created fourth, LloydsTSB/HBOS. ( TRUE )

It means that if the perceived credit-worthiness of our banks - with their trillions of pounds of assets and liabilities - were to deteriorate further, that would have an impact on the perceived credit-worthiness of the state( YES ).

As never before, it matters to all of us that the banks run themselves in a prudent way( HEAR HEAR ). In an extreme and highly unlikely case, if the markets viewed our banks as recklessly managed basket-cases, that would have an impact on the value of sterling and on the ability of the government itself to borrow( TRUE ).

So our prospects and welfare depend to a huge extent on an institution that was created a few weeks ago by the Treasury to manage its investments in the banks, UK Financial Investments (UKFI). ( GOOD LUCK BRITS )

It's probably no exaggeration to say that - for the coming year or two at least - UKFI will be as important to all of us as the Treasury, or the Bank of England or the City watchdog, the Financial Services Authority.

UKFI's primary aim is to "protect and create value for the taxpayer as shareholder"( I AGREE WITH THIS POLICY ) - while also making sure that the banks we own provide "competitively priced" loans to small businesses and homeowners "at 2007 levels"( TRUE ).

Those objectives are not quite irreconcilable( IN THE US THEY ARE ) - in that the banks over which it has sway should be capable of providing substantial credit to the housing and small-company markets without chucking good money after bad, even though this is a dire period of economic contraction and proliferating bankruptcies( I AGREE ).

But, for the avoidance of doubt, UKFI has no ability to increase the supply of credit in the economy as a whole.

Remember that the ability of banks to lend is anyway being undermined by losses on the stupid loans they made in the boom years and also by the collapse in the price of houses, property and shares, which slashes the value of vital collateral that backs loans( VERY TRUE ).

So many banks are lending less to big companies, they are lending less for commercial property transactions, they are lending less to City institutions, they are lending less in the form of unsecured personal loans( TRUE. IT MAKES SENSE. ).

Lots of overseas institutions are cutting back significantly on the bounteous credit they provided directly to the real economy in the UK during the preceding few years( TRUE ).

Also many bigger companies that borrow directly on wholesale markets by selling bonds and other securities are finding it much harder and more expensive to raise money( VERY TRUE. A BIG PROBLEM ).

And credit provided between companies that buy and sell to each other is being massively restricted, by a collapse in the availability of insurance for such credit( TRUE ).

All of which can be summed up as "ouch" for businesses and households - and is the primary reason why some companies are going bust, and why those that will survive are reducing investment and cutting jobs( I WOULD ADD FEAR AND AVERSION TO RISK, SINCE THE "OUCH" SEEMS TO BE UTTERED IN TOO HIGH A VOICE ).

So even with £600bn and rising of support for banks from taxpayers, our banks simply don't have the resources to keep afloat real companies - manufacturers, exporters - that are vital to the future of the British economy( SOME WILL FAIL ).

Which is why early in the new year, the Treasury will announce details of yet more taxpayer lending, this time to ensure that credit is provided to viable and strategically important companies - such as the more efficient carmakers( THAT'S ABOUT IT. JOBS.)

The line between private sector and public sector, which became blurred in 2008, may become almost impossible to see in 2009."

I disagree. We both have Hybrid Systems, in which the public and private commingle. All that's changed is the mix of the mingling, so to speak.

"Bernie Madoff has caused disproportionate pain in the Jewish community, prompting unedifying sneers on the blogosphere."

I can't say that I didn't see this coming. From Andrew Clark in the Guardian:

"It has been a fertile financial week for bigots. The astonishing scale of corruption allegedly unmasked at the offices of Wall Street fund manager Bernie Madoff has caused disproportionate pain in the Jewish community, prompting unedifying sneers on the blogosphere. ( I'M NOT SURPRISED. JEW HATERS LOVE USING BLOGS )

Madoff, who is thought to have lost $50bn of assets, recruited many of his private clients through informal social networks in New York, Florida and Los Angeles.

The sense of disappointment and betrayal is palpable – particularly among Jewish philanthropic organisations. Several charities have had to shut their doors overnight, including the Lappin foundation, which funded trips to Israel for children, and the Chais Family Foundation, which supports educational and health-related projects. ( I'VE POSTED ABOUT THIS )

The Los Angeles-based Jewish Journal noted that the saga gave "ammo to antisemites everywhere" and highlighted mocking comments posted on a popular financial website, Dealbreaker. Another Jewish blogger, Tvzee's Talmudic Blog, complained that he had had to "moderate out many racist comments" after writing about Madoff. ( SAD )

The wrecking impact of Madoff's fraud on Jewish philanthropy has a broad impact which extends far beyond any single religious community. Gary Tobin, president of the Institute for Jewish and Community Research in San Francisco, reckons Jewish philanthropy in the US is worth about $5bn annually.

The money is spent on everything from poverty relief to educational initiatives, bridge-building between religions and community centres – which are open to people from any faith.

"I know the antisemitic websites are picking this up – they love Jewish cabals and conspiracies," says Tobin. "But for most of the world, the antisemitic reaction will be minimal. This is a philanthropic and charitable tragedy – it's more sad than anything else." ( AN OPTIMIST )

The Wall Street Journal noted that older Jewish investors put so much faith in Madoff that they jokily nicknamed him "the Jewish bond". Lawyers for Madoff's victims say that in a close-knit community, people put a disproportionate amount of trust in a small number of individuals. Ross Intelisano, a class-action lawyer based in New York, says: "We've been talking to a lot of direct investors. This is a rare case in which a lot of investors we've spoken to had all their money with one firm." ( TERRIBLY SAD )

Many have lost everything overnight. Arnold Sinkin, a retired carpet-fitter in Florida, lost the nest egg of nearly $1m he built up with his wife, Joan. ( AWFUL )

"We started out by giving $5,000 to him [Madoff] in the 1970s," said Joan Sinkin. "At the time, $5,000 for us was really a huge amount. I think we probably had about $1.75 left in the bank once we'd given it to him."

The septuagenarian couple's retirement planning crashed to earth when Madoff's alleged fraud materialised last week. They will be selling their apartment in New York City and relying on their children for financial help. ( GOOD LUCK FRIENDS. AND YOUR CHILDREN DESERVE KUDOS )

On an institutional level, the impact goes far beyond any single community. Banks as far afield as Japan, Switzerland and Spain are suffering Madoff-related losses, not to mention Britain's HSBC and Royal Bank of Scotland. Even Hampshire County Council somehow managed to stick part of its pension fund in Madoff's business (although everybody says he was choosy about whose money he accepted).

In New York, one secular charity destroyed by Madoff's apparent corruption is the JEHT Foundation, which stands for "justice, equality, human dignity and tolerance". Since 2000, the charity has promoted reform of the criminal justice system to try to reduce the rate of incarceration in the US, handing out $25m to $30m annually. ( I'VE POSTED ABOUT THIS A FEW TIMES BECAUSE I WANT THE DEPTH OF PAIN THIS KIND OF CRIME CAUSES TO BE UNDERSTOOD )

The funds of JEHT's donors, Jeanne and Kenneth Levy-Church, were managed by Madoff and have evaporated overnight. The foundation's director, Robert Crane, has the shattering task of shutting down the charity. ( WOW )

"We're going to cease existence at the end of January," Crane told me. "All of our 24 people will lose their jobs."

It's a pretty dismal situation – and Madoff ought to be ashamed. ( HE OUGHT TO BE IN JAIL )

"It's devastating not only for us but for the people we support," says Crane. "In the areas we operate, there aren't a huge number of other funds, which makes the impact even worse." ( PATHETIC )

"As an investor or trader , you have to perform due diligence not on just trades or investments, but also on your broker or prop firm, your bank,...

I posted that you cannot just trust Banks because they have Low-Information Assets. You must study and examine every place that you invest or put your money. Here's the Trader's Narrative:

"Due diligence has many meanings depending on context. If you pressed me for a definition within finance, I would say it is:

The process of investigation undertaken by an party to gather material information on actual or potential risks involved in a financial transaction or relationship. ( I AGREE, AND WILL KEEP THIS AS "TRADER'S NARRATIVE'S DUE DILIGENCE )

If you suffered losses as a result of Madoff’s fraud, then this lesson is extremely expensive. If not, it is probably the biggest gift Madoff has given the world.

As an investor or trader

, you have to perform due diligence not on just trades or investments, but also on your broker or prop firm, your bank, your accountant, etc. Each link in the chain is vital. Never assume anything. Check and verify every little detail. As this most recent event has shown beyond a shadow of a doubt, you have to take personal responsibility and can not have the SEC or FBI do it for you."

Please note this point well.

"Madoff’s Ponzi scheme has snared not just wealthy individuals but very large instititutions like Nomura, BNP Paribas, Neue Privat Bank, Santander, UniCredit, Lombard Odier, Royal Bank of Scotland

as well as dozens and dozens of fund of funds that allocated portions of their assets under management to Madoff. These institutions supposedly have whole departments full of lawyers and accountants who are given the task of due diligence. Each and everyone of them failed their fiduciary responsibility and will probably be sued by those who experienced losses."

I hope that this occurs. It's absolutely necessary in order to try and avoid this happening again.

"Just out of curiosity, I looked the website for Optimal Investment Services, the hedge fund

arm of Banco Santander. Here is a snippet:

Optimal clients were exposed to the tune of 2.33 billion euros or $3 billion US dollars, according to a report from Bloomberg.

What sort of due diligence did they perform exactly? one that didn’t flag a potential problem with Madoff being the broker, custodian and investment manager, all rolled into one? one which missed the fact that a tiny one person accounting firm did their annual audit?

A lot of heads in “due diligence” and “risk management” departments are going to roll."

Maybe Hempton could do it.

"Walter Bagehot. “The business of banking,” he wrote, “ought to be simple: if is hard, it is wrong”.

Yesterday, I disputed the notion that Low-Information Assets allow more Trust than High-Information Assets. I said that Trust, which Banks need to survive, is never to be taken for granted, and that investors always need to be aware of a Bank' s financial status. Here's Tony Jackson in the FT:

"What are banks for? In normal times, the question would seem redundant. But, with the banks now drifting rudderless in a sea of popular resentment, the answers are alarmingly vague.

Precisely to whom do banks owe their first duty of care? Is it to their shareholders, their depositors or their borrowers? Or all of those?

The thought was partly prompted by a recent letter to this paper from a retired British banking grandee, Sir Ronald Grierson. “A bank is a bank,” he wrote, “and, if the security of its depositors is not its main concern, it should be required to adopt another name. Members of the public are entitled to take this for granted.”

I do not agree with this. We have just learned that such an attitude is not wise. But, together with this notion of Low-Information assets engendering more Trust, I can already see where many of us went wrong.

"Under UK law as it presently stands, Sir Ronald is, strictly speaking, wrong about that. At present – though this is to change – a UK bank is just another company. As such, its primary duty is to its owners."

Is this a surprise?

"More of that in a moment. First, how has the banks’ duty to shareholders been discharged in practice?

In two words, stunningly badly. UK bank shares are almost all below their level of five years ago, in most cases disastrously so. Many may never recover previous peaks."

Job well done.

"To be fair, shareholders sometimes tried to exercise their own duty of control, if ineffectually. For years, they resisted the acquisitive ambitions of Royal Bank of Scotland, only to lose their resolve at the top of the cycle. RBS’s resulting ABN Amro purchase is one main reason for its subsequent collapse into state ownership."

Job well done.

"The same recklessness characterised many borrowers. A depressing number of now-bankrupt companies made big debt-financed acquisitions at the peak of the boom. Others, such as Chrysler and EMI, are in crisis because the banks lent vast sums at the last minute to an equally reckless private equity industry."

Job well done.

"So, in general, you might think, let the borrower beware. The snag is, of course, that too much lending leads inevitably to too little, thus posing systemic threats to the economy – a problem now being urgently addressed by various governments."

If it's inevitable, how come people seemed unprepared? Of course, I don't believe that many were that surprised.

"Nor are all borrowers in the same category. I recently found myself perusing the personal ads on a supermarket notice board in the English Midlands. A striking number were for “house sharing” – seeking other families to move in and share the financial burden.

There is the plain sense here of a duty foregone. Most people know little or nothing of finance. But banks are accredited experts. If a bank says you are good for a loan, it is putting that expertise into practice.

To borrow Sir Ronald’s phrase, you are entitled to take that for granted. And, if the result is a choice between sharing your home with strangers or losing it, you are entitled to feel aggrieved."

You cannot take anything for granted. You should assess the competence of the bank that you put money in, or borrow money from. You are legally and morally entitled to your business with the bank being on the up and up.

"Let us now revert to the depositors. It might seem extraordinary that the UK has no special provisions to protect them from collapse, as opposed to insuring them after it. Most other countries, from the US and Japan to Mexico and South Korea, have had such provisions for many years."

I'm assuming he means the FDIC. Can we imagine how much worse this crisis would be without it? I assume that many free market followers would end it, although I don't hear many calling for it in this crisis.

"The usual method is a so-called “resolution regime”, whereby, if a bank seems in danger, the state intervenes and takes it into protection. It is then sold on, usually to a healthier bank. The implicit assumption is that the interests of depositors trump those of shareholders or creditors."

I believe that this is true.

"In the UK, as Sir Ronald also observed, that task was performed by the Bank of England until its independence in 1997. In the ensuing reshuffle of responsibilities, that part got left out. It is now being reinstated under legislation due for completion in February. But it took the collapse of Northern Rock to bring it about."

I believe that we have that here.

"This is the more extraordinary because, as Professor Julian Franks of the London Business School observes, the UK has had just such a regime for its utilities ever since they were privatised in the 1980s. And a bank is nothing if it is not a utility.

Both the electricity and water regulators, for instance, have powers of last resort to protect customers. If an electricity supplier goes bust, the regulator takes it over and sells it on. This happened in October to a small supplier with some 40,000 customers, Energy4Business. There was no fuss, no publicity. It was routine."

Are Banks like a Utility?

"This all leaves a worrying sense of muddle. In both the UK and US, the response of the authorities to the banking crisis has been piecemeal and uncertain, at least partly because there is no clear sense of priorities. It all badly needs sorting out."

This is true. There is a difference between Pragmatism and Trial and Error, and lurching backwards and forwards in a manner that signals unpreparedness and incompetence.

"Let the last word on this go to the Victorian banker and commentator Walter Bagehot. “The business of banking,” he wrote, “ought to be simple: if is hard, it is wrong”.

Ditto for the legal framework. Lawmakers take note."

As per usual, Bagehot is correct, and his statement is simply a version of Searle's Sagacity.

""The important thing is to get the banks now lending to businesses and to families," he said."

Where have we heard this before? From the FT:

"Alistair Darling, the chancellor, will today unveil details of the arm's-length agency that will manage the £37bn in stakes the government agreed with banks to help them in the credit crisis.

The Treasury said the agency's staff would be tasked with monitoring the lending activities of the banks to ensure that they fulfil the pledge to ensure funding of small businesses and that mortgage borrowers get a fair deal without the banks ramping profit margins at their expense.

As reported in the Financial Times last week, ministers have been in talks with high-street lenders to rewrite their voluntary code on lending to small businesses to ensure that customers are given reasonable notice before loans and overdrafts are axed or made more expensive.

Attempts by the Treasury to strengthen the code, as it has done for mortgage lending, comes amid increasing political concern that the £400bn state bail-out of the sector is not reaping the promised benefits for small companies. Gordon Brown has insisted repeatedly that support for such companies is a condition of the £37bn taxpayer-funded recapitalisation of Royal Bank of Scotland, HBOS and Lloyds TSB.

Yesterday in an interview for the BBC Mr Brown reiterated that his first priority was to get the economy moving. "The important thing is to get the banks now lending to businesses and to families," he said"

Let's see, not lending, keeping money, sounds like TARP. Notice that the British are creating an agency to monitor the lending practices of the banks that received government money. I guess that you can't trust banks anywhere.

Actually, it doesn't sound like the Brits got the banks on paper either. Is insisting like jawboning?

Salmon Likes Where Britain Is Heading

Via Felix Salmon, John Waples and Iain Dey in the Sunday Times:

"THE government will launch the biggest rescue of Britain’s high-street banks tomorrow when the UK’s four biggest institutions ask for a £35 billion financial lifeline.

The unprecedented move will make the government the biggest shareholder in at least two banks.

Royal Bank of Scotland (RBS), which has seen its market value fall to below £12 billion, is to ask ministers to underwrite a £15 billion cash call.

Halifax Bank of Scotland (HBOS), Britain’s biggest provider of mortgages, is seeking up to £10 billion."

Wow.

Because:

"An economist who declined to be named said: “This is the biggest risk of the UK’s balance sheet ever undertaken. No-one knows the extent of the toxic assets these banks are exposed to.”

Salmon likes this plan:

"The British bank rescue could leave the government owning 70% of HBOS and 50% of RBS. As a result it could take board seats at both companies and exercise control over future dividend payments. "

Here's Salmon:

"I like this a lot. It's simple, it's intuitive, and existing shareholders can't complain because they have the right to buy as much stock as they like at exactly the same price as the government. But it's still sobering to absorb the fact that two of the largest banks in the world are about to get nationalized. They won't be the last."

Here was my comment:

Posted: Oct 12 2008 11:01am ET

Does the plan also envision the government selling its shares in the future, or have they thought that far ahead? I like the plan, if the government eventually gets out, and this government guarantee to intervene in such crises gets examined.

By DonthelibertarianDemocrat

We're Going Swedish!

Wow. Check this out:

U.S. May Take Ownership Stake in Banks

By EDMUND L. ANDREWS and MARK LANDLER

Published: October 8, 2008

"WASHINGTON — Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan, still preliminary, resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt."

Read the rest