Sunday, 18 January 2009

UK Government insurance scheme for Banks


OK the bit that will surprise people. Brown is right to say the Banks need to tell him all the bad debt that they have.

A solution can only be found when the problem is fully known. However, we were assured back in October that such a hard case had been made to the Banks that they could not possibly need to come back for more cash...ah, well. Plan fails at first test of battle (Shorting of banks was removed on Friday, Barclay's, RBS and LLoyd's near collapse within a couple of hours).

So, we have a new plan, to offer insurance to the Banks for their bad debt. Seems quite sensible, could allow credit to flow freely again. More sensible than printing money....

However, hang on, no one knows how much the toxic assets are worth - that is the entirety of the credit crisis problem. How is the Government going to be able to value them for Insurance purposes. Better to recapitalise the Banks again by far than try this plan. I see no insurance experts in Government able to pull this off - who are they going to ask, the rating agencies?

Given the last attempt in October the track record is pretty poor. I see much more taxpayer money going down the swanny. Worse, at this rate the Country will run out of money in 2009 and be forced to go the the IMF.

The UK perhaps is the Bad country after all.

12 comments:

mick said...

Stupid question; but as a layman, is the level of bad debt not what they should have established by due diligence last time they pumped billions in.

I'm beginning to think they should let the whole lot go to the wall and see what happens.

The Great Simpleton said...

A technical queston: What happens if you are shorting a stock at the ccompany goes in to administration? I nw its unlikely to happen to a bank but technically it could.

Not a sheep said...

Let's have a think. You sell shares you don't own and the price you sell at is £5 a share. If the share had just dropped in value to say £0.10 you would buy the shares at £0.10 and supply them to the third party, so the third party would lose £4.90 and you would profit by the same amount. So if dealings in the Company's shares are suspended you such that you cannot buy the shorted stock and so supply it, might it not be argued that it is the third party who loses out on the whole £5.00? Or does the fact that you have broken the contract by not supplying any shares mean that you are liable? The answer must lie in the small print of the contract to trade stock in the first place...

CityUnslicker said...

Mick - Exactly. The level of Due diligence by the Government cannot be trusted. If they really could work this sum out then the credit crisis could be answered by the banks.

CityUnslicker said...

Shorting - the only loose when you short a share that is nationalised is the 5% you paid to borrow the share in the first place. So not much of an issue for the shorter. The lender is in trouble as their asset has disappeared.

Tim Worstall said...

Price of siad insurance? Umm, that's what the CDS market does. Easy enough to look that up in hte only credit market still properly functioning.

Only question is, why does the government need to provide the insurance when there's already a market willing and able to do so?

CityUnslicker said...

CDS still functioning properyl. I have to take your word for it but I am not sure. If you belive the CDS then the market has already taken its view on the viability of the banks with these debts.

I wonder why with all these initiatives the Government has not learned it s lesson and susoended trading in Bank shares on Monday.

sidsid said...

Money, i.e. cash, i.e.the number printed on the bit of metal or paper is a representation of the value of the productive effort of an individual doing what is known as work.
The cost of all things bought for money is nothing but the value of the labour put into it. The raw material, because that itself is just there in the ground waiting for some one to come along and do some work extracting it and processing it.
So how is it possible to buy and sell, to lend and borrow, imaginary tokens for work that has not been done?
What is more, how does that clown Brown expect that more lending and borrowing of imaginary tokens will put right the previously insane,nay criminal, lending and borrowing of imaginary tokens???

Anonymous said...

sidsid: fair comment, and i like this kind of analysis that breaks things down into real terms. but you need to think of some of the money being tokens of value already given in terms of labour and some as tokens of value yet to be given in terms of labour but where the labour is already under contract. Of course, it all goes wrong when the labour is not delivered according to contract and there are then too many tokens around. This is especially likely where you have many people betting that they will have the opportunity to put in the labour to justify the tokens they were given upfront when in fact they were given far too many tokens in the first place and the labour market is contracting.

Anonymous said...

To be fair to the government and banks the situation is dynamic. As time goes on the lack of credit and the distaste that some have developed for spending either cash or money causes yet more money to be dissappear from the economy causing exponential ramp-up in failing businesses which then cause a rapidly increasing bad debt in the banks books. The banks can give a figure for bad debt today that would be miles out tomorrow. The government can't actually provision for all the likely bad debt because it wouldn't be able to plug that hole anyway - any attempt to do so will prove extremely expensive and only delay matters a few months. Of course what the government should do is admit that things really are that bad it can't come up with a good solution and then pump enormous quantities of printed cash into the system to openly write off all the bad debt. Right now, if it fails to get on and do that it risks serious deflation which will not only force debt money out of the system but real cash will be forced to the sidelines too. That really would cause a major depression. The situation is clearly that desperate and further delay serves no purpose. Naturally the government also needs to rebalance the books of UK PLC which means reducing public spending dramatically and finding ways to stimulate the export sector. The easiest way to do the latter in the short term is to look into reducing fuel consumption to return to being a net energy exporter again.

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