Confidence and banks
Bit of a shock from this morning β not the stuff about how much it has lost on collateralised debt obligations as a result of alleged βintentional misconductβ by a few traders (which seems to be a bit less than it originally estimated), but its disclosure that it is likely to be .
It says that it was profitable until the end of February but that βin light of the difficult market conditions in March, at this time, Credit Suisse believes it is unlikely to be profitable in the first quarter.β
Thatβll put a dent in the hopes of those who felt that just maybe β after all the evasive action by the Federal Reserve of the past few days β we could perhaps have seen the worst of the bad news from banks and the financial sector.
Which brings me round to the importance of between the chief executives of the UKβs biggest banks and the Governor of the Bank of England, Mervyn King.
It was originally arranged last week, to discuss primarily what they thought of the governmentβs proposals to reform the regulation of banks and the protection of depositors.
But the agenda has been widened, to include a discussion of the banksβ concerns that the Bank of England is not providing enough loans to them, and loans of long enough duration, to make good the current deficiencies in money markets.
The big and simple point is that the solvency of all banks depends on the confidence of their creditors.
For the avoidance of doubt, that means the confidence of most of us, as depositors in banks.
So at a time of high anxiety in financial markets, all banks are - in a sense - on the brink of insolvency.
If creditors believe - rightly or wrongly - that a bank is in trouble, well then out come the deposits, and the fear becomes self-fulfilling.
Which is why the authorities were so alarmed yesterday at the scaremongering that led to a sharp fall in HBOS's share price.
And it's also why the bosses of Lloyds TSB, HBOS, HSBC, Barclays and Royal Bank will today tell the Governor of the Bank of England, Mervyn King, that he needs to do more to reassure banks' creditors that in the event that any bank suffered a shortage of liquid funds, the Bank of England would provide whatever finance is needed.
As one bank chief executive told me, the Bank of England could eliminate all anxiety about the health of British banks by announcing that it is prepared to provide whatever loans are required by our banks until the money markets are functioning in an orderly and calm way once again.
It would require quite a change of heart by the Governor to give such an assurance. He's been concerned that the Bank of England would in a sense be giving banks impunity to behave impulsively and imprudently.
But I would expect the Bank, as a constructive gesture, to announce later today that it's rolling over the additional Β£5bn of emergency loans which it provided earlier this week and initially had to be repaid within three days.
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What a pretty mess the banks have created for themselves, and us.
While we would love to see them get their come-uppance, the fact is that we would be cutting off our noses to spite our face.
The whole system is teetering on the brink now, and there is really nothing the BoE can do other than try to con the public into thinking it can guarantee their deposits when clearly it cannot.
In the media journalists don't dare to say what they know, in case it causes a panic.
Personally I would like to see a statute that said that anyone involved in the banking industry earning more than 100K last year should have their total assets seized if the bank goes under.Anyone agree?
Banks have gone bust in the past, why can't they be allowed to go bust now ?
Can you explain why banks are more "special" than other businesses ?
It seems to me that this incident is, on a grander scale albeit, similar to me going to my bank and saying "I'm sorry I don't have enough money to pay the mortgage this month or maybe for the forseeable future". The banks seems to expect as a right that the Bank of England should cave in to their demands! I wonder what response I would get from my bank? I expect it would be along the lines of "Well we'll have the keys to your house thank you very much".
I keep my finances in order so I don't get in to this kind of financial trouble. Why haven't the banks? I suspect greed and fat bonus checks may have something to do with it. It is just a shame that, as we are seeing in America, it is the everyday hard working citizens who pay most dearly for these terrible mistakes the banks have made repeatedly.
Isn't all this putting off the inevitable? If money supply has to continue to grow in order for interest to be payable, then its only a matter of time until the amount of money created massively outstrips the 'real economy' i.e. what gets made and done. This will cause inflation - or the bancrupcy of the banks.
If money supply has to grow at 3% the amount of money (essentialy the debt we are all in) needs to double every 23 years! Do you really think we will be getting twice as much done and made in 23 years time? Bearing in mind the problems of resource depletion, especially energy resources? No? So what's it going to be eh? Bankrupt nationalised banks or galloping inflation? This is the choice that is being made now.
Problems with all these banks and other financial institutions will continue. The 'scaremongering' has real foundations. Clear and full disclosure of their exposure to 'off-balance sheet' structured debt is still awaited. The figures for public consumption are being massaged. Waiting for the markets to return to 'normal' is wishful thinking. More big losses from dodgy securitized instruments and other general bad debts are inevitable. THERE IS NO HIDING PLACE!!!
Jamie wrote : "....Money supply at 3%"
=================
Money supply M3 (true meaning of inflation) was at 14.7% in Sept 2007..it is probably nearer 20% now...and still rising !
It seems that the Bank of England has little choice but to provide the banks with emergency funding.
I agree with #1, that we are going to run the risk of inflation especially with a falling pound and a heavy reliance on imports.
I think it's great news that banks are starting to lend more cautiously. The property market has stabilised which is good for the vast majority of the population. If Mervyn's help only lasts a few months at the most then I think we'll be OK. If it's prolonged however, then inflation is likely.
The financial corruption story about short selling on banking shares is very depressing. We're going to struggle if things like this continue and I hope this meeting addresses this.
Spot on Jamie, if the government and the Bank of England agree to provide more billions of pounds in liquidity to the banking system, they know that this will be inflationary, regardless of Alastair Darling sending letters to the Bank requiring maintenance of the inflation target. I am sure Mervyn King will make Darling fully aware of the consequences! What we are seeing now appears to be the beginning of a period of stagflation.
#2 Nick T, unfortunately banks are more "special" thanks to 1) that thing they call globalisation and 2) the nature of their operations, over the course of about the same period as the rise of the aformentioned, becoming a proverbial spagetti-bowl of interconnected finance and interdependence: capital, interest and that stuff they call "collateral".
Put the two together and you start to see that if their movements begin to get caught up, then too the global economy begins to. Or, if you prefer, if they start to go, we all start to go.
Seems like a good time for all businessmen to seek reassurances that the 'necessary funds will be made available' from their bankers when they are next in difficulties.
I think Merv is right to think of the banks as spoilt little brats.
It is fair enough for the govt to stand behind and make good any deposits made by customers, much like a parent would if their children went out and smashed some windows.
What is not right is for the BoE to dilute my savings by printing money to give to the banks so they can just go out and buy more sweets.
I am afraid they are going to have to be sent to their rooms.
"Rights" "Greed" are our down fall
The whole concept of this meeting is wrong. As long as banks keep being told they will be bailed out, they won't bite the bullet and start taking risks with each other again - i.e. lending to each other at reasonable rates. Each of them will be saying to the Governor "I'm really perfectly solvent." In that case, they should start acting responsibly to restore the confidence and trust amongst themselves. There will be risks and some may fail, but ultimately it's down to the banks to find the safe level at which to interact, so that they don't all end up going to the wall.
The retail deposit takers ought to be forced to pay for a system of guarrantees of Β£100,000.00 for each account held by each depositor. This way, there would be zero chance of the Northern Rock chaos and panic that the incompetent management of Gordon Brown's duff control system. The Β£35,000 limit is too small. While Β£35K covers most depositors it is not the actual amount covered but the psychological value of a much larger guarantee that will make the difference. If there is no chance of losing one's deposit why would it matter if the share price were to fall by 17% or more?
#4... I think you meant to say 'nationalise bankrupt banks'... 'cos that's what most of them are.
Do it, do it now.
It is inevitable that our taxes are going to be spent on bailing the banks out of the mess they have got us all into. This is only right and correct, part of the reason we give the government our money is so that it can step in and act to counter the sort of instability we are currently seeing.
However, that expenditure should have some significant strings attached in the form of greater regulation of the banking sector so that this kind of greed driven situation cannot occur again. No doubt the banks will squeal about this but the plain truth is that they obviously cannot be trusted with something as important to us all as financial stability so there must be greater oversight.
Perhaps lender of last resort should be changed to the buck stops here.
A bank is the only type of business around that theoretically should always make a profit, if it lends at a higher interest than what it pays its depositors then a profitable return is almost gauranteed (without discounting for costs and bad debts), and they are licensed to create money using the 'great' fractional reserve system. Yet they still they may a loss! how incompetent are these bankers?
The difficulty with Jamie's analysis is what constitutes the 'real' economy. Is the value of the entertainment industry (computer games, media, entertainment) 'real'?
Personally, I believe allowing banks to finance 'off balance sheet' through te creation of securities is the real problem. By allowing this, central banks can no longer exert any constraints on the creation of money and cannot track the risk exposure. Under this current situation, allowing banks to go under will trigger financial 'nuclear melt-down' that is totally unpredictable.
Unless we want to risk a collapse of our economy, we have no option but to support the current banking system. The key is to figure out how we can regulate the growth of money in a global financial market. That can only be done if central banks can agree on some mechanism to track the risk created by off-balance sheet securitisation. This can only be attempted after we have resolved the current crisis.
The most disturbing aspect of this problem is that it has arisen due to greed & not following the old principles of banking,that is banks ensuring sufficient liquidty .
The chairman and aenior management of our banks have been exposed to be incompetent at the very least or negligent in executing their management responsibilities.
Why are leading shareholders asking for their resignations?
This is a good chance for the Banks to be finally brought under control. Make the assistance fully conditional on tough new regulatory policies, particularly concerning short-term bonusses/commission payments and with genuine accountability, as this has been behind a number of scandals, and might actually induce the necessary good practice and caution.
If more banks go under then its undoubtably going to cause serious trouble for many people but if we bail them out with an endless line of credit then all we're doing is delaying the inevitable - they'll continue to make short term greedy decisions on the basis that the tax payer will bail them out. Until the money runs out and we've got an even bigger mess to deal with.
And when you talk about the confidence of creditors and those creditors being "us" it's important to remember that most of us have no choice but to have a bank account. Sure I can take my account and my mortgage elsewhere but I still need one.
What they're actually bothered about is future custom - will I trust a bank in the future. And frankly that's there own problem.
"So at a time of high anxiety in financial markets, all banks are - in a sense - on the brink of insolvency."
Not in one sense only. Not only at a time of high anxiery. In every sense, at all times.
You are aware of fractional reserve banking, Mr. Peston. The public is now aware of it. When the queues form around the block, the banks run out of money. So it has always been.
How, pray tell, is the provision of these loans fundamentally different from the loans to the Northern Rock? After all, the problems at the Rock were because the credit markets weren't operating normally (or at least as they had done for the last few years).
Does this mean that the government will be nationalising all the banks who clamoured for the available monies? Or is this just the stick that the Northern Rock investors have been looking for to beat the government with? As far as I can remember the government's argument was that anyone who needs a loan from the BoE is essentially bust and should thus be in administration, so it'll be interesting to see if any other directors of banks are hauled over the coals for taking chances with pensioners' money...
Why can't the banks collectively (and publicly) agree to support each other, as this would presumably restore some confidence. Surely all banks aren't going to run out of funds simultaneously, or else where would all the deposits have gone?
Organisations which make such large profits in the good times should be the last to expect special treatment from governments. After all, they make a great play of their worldwide reach, and, by implication, their lack of dependance on any individual government.
Jamie: As I understand it, crudely speaking, inflation only occurs if money supply outstrips GDP growth. Hence if GDP is also growing at 3% per year, the amount of money washing around will not outstrip the real economy. Inflation does not occur.
Which begs the question, is the measure of GDP a good one? If you extract oil from the ground, for example, the associated value is added to GDP. If you then spill it on a sensitive coast and have to spend billions cleaning it up - this , too, is added to GDP! Some economists argue that resource depletion should be seen as a current cost (after all, we are depriving future generations the use of such commodities).
No, most of the current problem is due to greed, pure and simple. Whizz kids (er, sorry, 'innovators') think up new sexy ideas for soaking up investors money, everybody's eyes light up and managers and traders get fat bonuses. Never mind the long term implications - which the whizz kids never addressed. Why waste the time? Innovate! Innovate!
But they should have seen this coming! After all, the Savings and Loans debacle of the mid-eighties was based on securitising mortgages too. So much for whizz kids and their 'innovations'.
This is a good chance for the Banks to be finally brought under control. Make the assistance fully conditional on tough new regulatory policies, particularly concerning short-term bonusses/commission payments and with genuine accountability, as this has been behind a number of scandals, and might actually induce the necessary good practice and caution.
The fundemental problem here is that banks create the vast majority of money in circulation (90%+). That means when they stop lending the whole economy grinds to a halt, collapses etc.
However as everyone knows banks are profit making organisations. This creates a fundemental conflict of interest in that they have to be allowed to make profits but they can expect to be bailed out by the government in situations like these because the consequences for the wider economy are so dire.
The solution is fairly obvious. Banks should no longer be able to control such a large proportion of the money issued. There must be limits placed upon the issue of debt money by such organisations and the govnernment must set up an agency that is able to issue money into the economy in both good times and bad.
There would then be no problem in letting poorly run banks fail and the disgusting site that we currently have of taxpayers bailing out these leeches could be avoided.
I agree with Toby post #1 there needs to be more accountability at the top of these banks. Seize the assets including pensions.
Where did this idea that the economy can have continuous year-on-year growth ad infinitum come from anyway? It obviously can't - and the sooner we realise that the better - and I'm fed up of reading about companies whose profits are down 4%. So what? Only made 756 million profit this year? Stop complaining - you still made a profit.
It's this expectation of continuous growth which is unsustainable and so completely damaging to western society and the global economy.
J P Morgan said UK banks are in denial and they shoudl know!
I wrote yesterday and repeat today, UK banks do not have to go to the Bank of England, they need to come clean about their liabilities and off what is off balance sheet.
Once done they go to the markets and raise sufficient through a deep discounted share offering.
That should be accompanied by a suspension of any bonus payments and a total reappraisal of their lending criteria for derivitive use. We need honesty here and we are not getting it yet.
Don't panic works well when all tehg facts are known but until our UK banks get real we should remain very worried. Can you imagine a bank telling a bog standard business that they shoudl go to tyhe Bank of England for a bail out simply because they screwed up.
Let them work to the medicine they always seek to prescribe.
Having experience of the secondary banking crisis of the sixties it is quite clear we are dealing here with something of a different order,namely a primary banking crisis.
This is not a time for philosophical economic niceties about whether or not a full support operation would be in some way immoral.We are all faced with a situation which the central banks have negligently let develop where banks have borrowed short and lent long,therefore relying on money market and interbank deposits to provide liquidity.As these are no longer readily available the only way that liquidity can be restored without pumping ever increasing amounts of money into the market is by restoring interbank confidence.
The only way that can be done is by central banks backed by the World Bank,guarenteing all the deposits of their countries principal banks enabling them to confidently lend to each other.Anything short of this at this stage could lead to domino collapses of a number of banks which would iturn lead to financial panic and the fall of governments.
There is no alternative.
I would like to see a public enquiry with the power to seize personal assets of those responsible for the running of the banks in a reckless manner.
What would be the implications if the BoE was to give these sort of guarantees? ie what would be the wider cost of underwriting the existing financial set up?
The benefits are pretty clear --whatever any of the other commentators say about letting banks go bust, that is not a wise option in a world dependent on them in the way we are. . . .
So, why are King etc hesitating -- we are long past the point of moral hazard. . . . what dreadful fate awaits us if the BoE secures the existing financial structure. . . perhaps Robert Peston can blog on this a bit please.
thanks. . . tudor from Amman, Jordan
I still don't understand why banks, who are supposed to hire very bright people, deliberately chose to buy such obviously bad "assets". Don't they do any due diligence? Back in 2006, the house market in the USA was already in a terrible state.
So why on earth did these "exceedingly bright" people - gaining enormous incomes - not simply take a quick look at the real value of what they were buying?
Northern Rock had a high-risk business model.
Banks buying into sub-prime debt were simply stupid. So why should we bail either of them out?
In defence of Jamie #4, and response to David #19. No major surprises have happened in the "real" world recently, including the "entertainment" industry. No major plagues, asteroids, or wars that were not unpredictable. The fact that the financial system has gone to pieces is a reflection of a communication breakdown with the "real" economy. You can talk about securitisation all you like, but its just empty jargon relevant to a financial structure that you never question. You want a market where all agents are truly rational? That would require an ideal "no-arbitrage" situation, and no banks would post profits anyway. Thats the only truly rational system. Otherwise the market has irrational agents, and failure is bound to happen. Unfortunately post #1 is right, we will all suffer from this foolishness.
Darling and more so Brown will be with the Banks as they want to be re-elected.
But if all Director incomes should be closely alligned with banks' profitability- downs and ups, & preferably unlimited persoanl liability.
It is clear that the banks won't make profits the way they have in the past few years.
In the light of above please answer the following
What happens to tax taking of the chancellor if the banks don't make Β£40 billion this year
The tax deficit will be around Β£10 billion. Leading to more loan, printing money which will lead to inflation and finally fall in value of pound.
Do you know if they make a loss they can write it off against future profits as well. So no equivalent tax takings for good time.
More fun on the way then
These 'suits' have really made a mess of it this time! I can't believe how inept they really are.
Serves them all right for trying to make money out of money.
GC
Who caused the current problems by lending to high risks and then selling on the high risk loans. The directors of the banks who are now whinging. Isn'it about time the shareholdes of these institutions sack these directors for poor performance! Is this likely to happen or are they going to get large bonuses for bad quality decesion making!
The banks should face the music and yes some of them must go under. Every other industry has to do this and there is no reason why banking should be considered differently. So what if 50% of banks went under. The government would pay up the guarantees to depositors and the remaining banks would take on new customers. At the end of the day at least Northern Rock will never go under.
Wouldn't it actually be great if Robert Peston were Chancellor of the Exchequer-run Bob run!
'Surely all banks aren't going to run out of funds simultaneously'
Ah, but there's the rub - they are.
There is only about 10% 'real' money in the system at all. Banks get a lot of their funds by borrowing from other banks - who are borrowing from other banks - who are borrowing from other banks - who are borrowing from the first bank.
Get the picture? It's a real 'Alice in Wonderland' world we live in!
The storm is upon us but I fear that we would be in a better shape to weather it if Gordon Brown had not handed the Bank of England's regulatory powers to the bureaucratic and bumbling FSA.
The banks should face the music and yes some of them must go under. Every other industry has to do this and there is no reason why banking should be considered differently. So what if 50% of banks went under. The government would pay up the guarantees to depositors and the remaining banks would take on new customers. At the end of the day at least Northern Rock will never go under.
A huge money bubble that is bursting, peak oil and climate change - a 'perfect storm' is on its way.
I agree with the sentiments in Post 1.
Also why should we bail them out?
It's their mess, let them deal with it and if that means culling staff to deal with the costs, then I'm sorry but any other business has to cull staff when a business goes tits up, why should the banks, whose irresponsible gambling and lending by these bankers be any different?
They (Bankers and their political apologists) screwed up big time so not only have we paid in the past by having an economic system designed to help only Financial Services (to the detriment of our manufacturing base) but now we pay again by having to bail out the same financial services system!
Fair is fair - bankers must not be allowed to get footballers salaries and bonuses for supplying us, the workers, (who create their wealth) with such a defective service.
Balance needs to be restored and if the so called 'market' is incapable of paying carers and dinner ladies a reasonable living wage then something must be done about the extreme and growing disparity between the haves and the have-nots. No longer can they claim that the (non existent) 'trickle down effect' justifies their extreme wage packets.
The market is broken and it needs fixing and now is a good time to start.
If banks won't lend to eachother because they worry about losing the money, why should BoE (aka the taxpayer)? Because that's its classic 'speculator' role (speculator's take big risks most don't want)given lack of knowledge about banks' solvency. If the banks collapse, unemployment will be that much higher and so will benefits, which have to be paid out of taxes. Si it hits the taxpayer either way. better to lend the money in the hope the banks aren't insolvent than to let them go to the wall and certainly have recession/higher unemployment. This is the big one: we mustn't make the mistakes of the 30s. Should BoE/HMG/taxpayer be rewarded for its risk-taking, eg by shareholders? Not if everyone is to blame for the crisis, which they are: borrowers, lenders and governments.
I hope the governor carries on being head strong and doesnβt buckle to the pressures of our current government.
For the longer term, some pain now would be well worth the alternatives. If Merv gets involved now, the pain is only postponed and the banks get assurances that regardless of how naive they have been or how little attention they paid to risk, it doesnβt matter...the BoE will stand on their mistakes. Meanwhile, you and I pay through inflation. The biggest losers here are those, like me, who have steered away from binging on cheap finance, lived within their means and saved during the last few years - hard work and 2-3 years of savings will pay off - it'll get me a loaf of bread in 2012!
I'm confident that Mr King would like to do what is right and look after the people. I pray he doesnβt buckle to political pressures and bail out the banks (and, to be fair, Gordon's miracle economy too, if inflation runs away)
Banking crisis, why don't we sit everyone in front of a TV and let them watch 'It's a Wonderful Life' with James Stuart and then people may start to understand where their Deposits are and stop panicing.
However, the Bank of England and the Government, in my opinion, has a lot to answer for with repsect to Northern Rock.
I was in Austria at the time and watched TV and the Internet and was AMAZED that people (the above) sat on their hands as 'Nothing to do with me Gov'.
The 1st banking crisis in 140 years and NOTHING to do with the Bank of England and the Goverment!
Words fail me.
To Chris post 24
There is no difference between these funds and the facility that NR tried to secure previously about which Robert made such a song and dance and led to depositors being worried when there was no need for them to be. Now all of a sudden -because it is banks where Robert has chums giving him 'insider information' or so we are asked to believe- it is perfectly OK -no story after all then really.
Short of liquidity but still able to pay increased dividends. Is there a contradiction here?
Robert,
At para 5,'protection of depositors'
A committment was given by Darling to review the present Β£35K @90% and Β£2K @ 100% limits on small time savings shortly after the NR crisis in October 2007.
If something is done today can you please report same, thank you.
"And it's also why the bosses of Lloyds TSB, HBOS, HSBC, Barclays and Royal Bank will today tell the Governor of the Bank of England, Mervyn King, that he needs to do more to reassure banks' creditors that in the event that any bank suffered a shortage of liquid funds, the Bank of England would provide whatever finance is needed."
The best reassurance I would have would be that each bank has full GOLD or other precious metal, reserves to cover the total extent of their liabilities. I would also feel a great deal more confidence if all the directors and managers said that they would introduce a salary cut / ceiling of Β£50,000 a year and NO DIVIDENDS to any directors of the banks in this period of difficulty. NO-ONE *NEEDS* more than Β£50,000 to live on and anything higher is pure greed.
A huge money bubble that is bursting, peak oil and climate change - a 'perfect storm' is on its way.
And it's also why the bosses of Lloyds TSB, HBOS, HSBC, Barclays and Royal Bank will today tell the Governor of the Bank of England, Mervyn King, that he needs to do more to reassure banks' creditors that in the event that any bank suffered a shortage of liquid funds, the Bank of England would provide whatever finance is needed.
And this is different from the Northern Rock situation HOW???
Why aren't there clarion calls for the immediate nationalisation of any bank - indeed all of them - that is suffering funding shortages? People on this blog and people in the mainstream media were quick enough to do so for Northern Rock. Now that the Government has stolen those shares they've set themselves a nasty precedent, and if they don't want accusations of inconsistency levelled at them, I guess they should be making the necessary preparations to steal the shares of all the other banks...
When the financial going gets tough all rhetoric about free enterprise suddenly quietens.
Public subsidy is OK for billion pound plus profit banks but not for village post offices.
What is need is extensive regulation and control not another fix of financial methadone
#19, we don't need to decide exactly what makes up the 'real economy'. It is not important to the issue I was trying to highlight.
a) Money supply must grow (so that capital + interest can be repaid), and it grows as a percentage, i.e. exponentially. It quickly gets very big, and if you don't truly understand the exponential function do a search for Albert Bartlett and watch his video on Arithmetic, Population and Energy. If money supply grows exponentially it is INEVITABLE that it will grow quicker than the 'real economy' that is limited by resources.
b) The supply of money must not grow faster than the 'real economy' otherwise we see inflation. This inflation can happen while the real economy is shrinking (stagflation).
The fundamental problem is that a) and b) are mutually exclusive. You cannot grow money exponentially (to keep the banks happy) without inflation. You can't restrict the growth of money without creating a state where it is impossible for capital + loans to be paid back. When this happens debtors default and banks go bankrupt.
So unless we can grow the real economy (dig more minerals, and use more energy from fossil fuels etc) then we are faced with a choice. On one hand we have galloping inflation, and on the other hand we have defaulting and bankrupt banks.
In order to fix the problem we would need to derive a system where loans were made for free, with no interest. How the heck are we ever going to do that?
Which leads us back to your reckless reporting at the outset of this crisis with your Northern Rock scoop.
You certainly understand the root causes a bit better now (the credit bubble), but I'm still not entirely convinced you have fully atoned for your past sins regarding Northern Rock.
Somehow there seems to be a need for the BoE to be able to ensure that it will act to keep the financial system functioning and to protect depositors, but to extract maximum pain from the shareholders and senior management of banks who get into trouble by acting recklessly.
The way in which the Fed dealt with Bear Stern is not a bad model. The business was put into the hands of an organisation with the Balance Sheet and management strength to sort it out and the shareholders and management (30% of the share were owned by the management) were effectively wiped out.
Northern Rock is the worst possible precedent where the assets are now being managed by an organsation with no real pressure to end bad practices that got them into the mess, where management have either kept their jobs or got a pay off, and where shareholders have held up the process and are still chasing repayment.
I cannot think that Peston doesn't somehow enjoy "milking" bad news. His takes are always the most negative of financial correspondents, and he certainly made the Northern Rock crisis appear as negative as possible...
Surely having a meeting to discuss strategy is clearly not in the rules of Mornington Crescent?
I think it would keep the banks on their toes if BoE promised unlimited support for the SECOND and subsequent banks that get into trouble. It wouldn't hurt that much if only one more of them went to the wall.
Scaremongering is part and parcel of the prevailing market conditions. 'The market' was improbably lauded by the PM on the way up, so let's just accept what is happening today for what it is - normal market activity. If bank chiefs are given a good sweating then they might learn something going forward. But again, like Iraq it feels like (my) baby boomer generation has blown it. Perhaps the answer is blowing in the wind?
The banks can have our money to bail them out if they agree to the following conditions:
1) The senior management of these institutions are sacked without any form of pay-offs and replaced immediately.
2) All management AND staff bonuses are seized and returned to the balance sheet.
3) The banks must cooperate with criminal proceedings to investigate the level of outright mortgage fraud, i.e. so-called liar loans. Those found guilty will go to jail.
4) All bank assets shall be public property and held in lieu of taxpayer money.
Then, and only then, will sufficient public funds be put in place to allow those that caused this mess to sort it out.
I think it would keep the banks on their toes if BoE promised unlimited support for the SECOND and subsequent banks that get into trouble along with unlimited support for all depositors. It wouldn't hurt that much if only one more bank went to the wall whilst all the depositors were protected - the schadenfreude would be exquisite.
It is interesting to see so many people who haven't got a clue commenting about this. Take the suggestion at #1 that all employees on a reasonable wage at a bank that goes under should have their assets seized and add on #29 which includes pensions in that. If you tried to pull a stunt like that the reaction within banking would be obvious. The most profitable parts of the businesses of the big banks (proprietary traders) would split off into hedge funds, denying the big banks a key source of both income and liquidity. And the top people would just cut and run as soon as things started to look the remotest bit bad.
What we have at the moment is a situation that is completely unprecedented. The biggest error made in managing the whole thing has been by the Governments of UK and USA who have allowed their countries to get heavily into debt during a boom period in an attempt to buy votes. Both governments have also been complicit in the problems in the mortgage sector since neither the US nor the UK have allowed the central bank/fed to manage inflation including housing inflation.
Finally, I have to say I laughed long and hard at the comment at #18 about how banks should always make money. Both Northern Rock and Bear Stearns have lent money at a higher rate than they pay on deposits. The problem is that, as with all debt, provision for bad debt is the hardest variable to estimate. And at a turning point in the economy like now it's the variable that changes the most rapidly. The amount by which the value of your assets can change is truly scary. Just think if you were a car manufacturer with hundreds of thousands of cars in delivery waiting to be sold, and huge factories and workforces that had been built up based upon the car economy. Now consider what you would think if you turned up to work one morning and the value of a car was a tenth of what it was the previous day. This is what is happening in the banking industry, and these types of problems are incredibly hard to deal with.
The banks can have our money to bail them out if they agree to the following conditions:
1) The senior management of these institutions are sacked without any form of pay-offs and replaced immediately.
2) All management AND staff bonuses are seized and returned to the balance sheet.
3) The banks must cooperate with criminal proceedings to investigate the level of outright mortgage fraud, i.e. so-called liar loans. Those found guilty will go to jail.
4) All bank assets shall be public property and held in lieu of taxpayer money.
Then, and only then, will sufficient public funds be put in place to allow those that caused this mess to sort it out.
I think it would keep the banks on their toes if BoE promised unlimited support for the SECOND and subsequent banks that get into trouble along with unlimited support for all depositors. It wouldn't hurt that much if only one more bank went to the wall whilst all the depositors were protected - the schadenfreude would be exquisite.
#4 is right. We are living with a fundamental contradiction. As money is poured into the economy as increased debt, we experience economic growth, but , of course we need to pay it back. If, as it seems our policy makers are, determined to have never-ending growth then our expansion of money requires even more debt to be taken on board. At some point we reach a ridiculous situation where the amount of debt we have is so huge that institutions and individuals have to take on even more massive debt just to make the repayments and keep the economy going. There is no reason why this cannot be done (since there is a licence to print money) nonetheless can you imagine the sheer faith required to continue down this route? The concentrated effort of allowing people to borrow and borrow. We'd need a change of psyche. It's unlikely that people realise that this is how the economy functions so huge debt unnerves them and they then try to do the things that will ensure calamity: stop lending, stop borrowing and try to pay back their debt!
What the banks need to do is to stick to banking. Take deposits for people- i.e their savings, and lend them to both individual and corporate botrrowers, not to mention the government via Gilts, and when you make a loan- keep it , manange it and take the risk.
What they do not need to do; a) devise ways of letting other people take the risks involved in the loans they have made (which is how sub prime loans got going) or b) devise other complex ways of paying the undeserving huge bonuses in return for wrecking thousands of lives.
In banking, as in so much else over complicating things just makes them more and more fraught with risk. Banking has attracted both very bright and fairly dim folk over the years, generally speaking the bright ones originate novel products like packaged sub-prime loans- its the dimmer ones who buy these bits of toxic nonsense.
Would-be purchasers of products they do not understand please note!!
Here are some external debt to export ratios I worked out. It's how much countries owe other countries, relative to the goods and services they export to the world.
USA: 10.7
Netherlands: 6.5
Canada: 1.6
UK: 17.6
Ireland: 13.9
France: 7
Germany: 3.5
Can anyone look at these and see a way out for the UK?
I think it would keep the banks on their toes if BoE promised unlimited support for the SECOND and subsequent banks that get into trouble along with unlimited support for all depositors. It wouldn't hurt that much if only one more bank went to the wall whilst all the depositors were protected - the schadenfreude would be exquisite.
A huge money bubble that's bursting, peak oil and climate change - a perfect storm is approaching..
I don't know if anyone else has noticed but today, the heads of the banks and the BOE are meeting for a 'no business meeting' as invented by President Hoover in 1929. This is where important people meet in order to give the impression that they are in charge and will 'do' something to calm the economy (or whatever other crisis). Unfortunately, they are aware that nothing can be done but reassurance to the public is seen as important. Read JK Galbraith 'Great crash of 1929' for the full story and some very apt parallels to todays volatility.
#19, we don't need to decide exactly what makes up the 'real economy'. It is not important to the issue I was trying to highlight.
a) Money supply must grow (so that capital + interest can be repaid), and it grows as a percentage, i.e. exponentially. It quickly gets very big, and if you don't truly understand the exponential function do a search for Albert Bartlett and watch his video on Arithmetic, Population and Energy. If money supply grows exponentially it is INEVITABLE that it will grow quicker than the 'real economy' that is limited by resources.
b) The supply of money must not grow faster than the 'real economy' otherwise we see inflation. This inflation can happen while the real economy is shrinking (stagflation).
The fundamental problem is that a) and b) are mutually exclusive. You cannot grow money exponentially (to keep the banks happy) without inflation. You can't restrict the growth of money without creating a state where it is impossible for capital + loans to be paid back. When this happens debtors default and banks go bankrupt.
So unless we can grow the real economy (dig more minerals, and use more energy from fossil fuels etc) then we are faced with a choice. On one hand we have galloping inflation, and on the other hand we have defaulting and bankrupt banks.
In order to fix the problem we would need to derive a system where loans were made for free, with no interest. How the heck are we ever going to do that?
Are you sure, Robert, that the expression "all banks are - in a sense - on the edge of insolvency" conveys your true meaning? It sounds like an exaggeration to me.
If all banks are on that edge, then so are you and I, and everyone else and all of the time. But the truth is few of us are.
Banks aren't lending freely to each other only because they're not sure exactly how to value the assets they own to support new loans. Not because they're on any edge of insolvency.
I think we need a few more 'men in grey suits' running our financial institutions. They may be dull, but are by and large , dependable.
Hmm, wonder if the banks will be asking for all those big fat bonuses back they paid out to the guys and gals who got us into this mess?
Really, what did anyone expect? If you reward people for taking risks, and reward them better the more risk they take, is it any wonder they're going to care more about the rewards than the risk? It's clear that the whole sub-prime debacle has been a giant game of pass-the-parcel: now the music has stopped, and those left holding the assets are discovering they are near-worthless.
What a load of fuss over nothing.
Robert you must be delighted that, for a change, many of the comments are more ill informed than yours!!!!
Lets start with the truth. Consumer greed is to blame for many of the issues. No-one forced people to borrow. For sure the banks could have been more cautious. But imagine if they refused to lend to any of your posters!
The problems in world stock markets is down to ill founded gossip, (not unlike the NR gossip) and possible fraudulent trading. Lets eee where we are in 9 months time. Finally to all those who are happy for UK bankss to go under - there goes your pension/ savings etc.
it is quite simple, the government guarantees the customer deposits, then lets each bank sink or swim. always 'bailing out' these banks only serves to ensure that somewhere down the line we will be here again. Banks have got to get back to pure banking, instead of these glorified betting shops that they have become.
It's a bit of a revelation to learn that so many (British) banks and building societies borrow to lend. Now it makes sense why loans are pegged to the Bank of England base rate! Nice cosy little secret.
I must admit I never knew that till this week. It seems barmy. I always thought they lent money against their own deposits and investments.
I wonder how many other people thought the way I did.
It's great to hear folks speaking out and saying how the moneylending business should stand on its own two feet the way the rest of us have to.
GC
#19, we don't need to decide exactly what makes up the 'real economy'. It is not important to the issue I was trying to highlight.
a) Money supply must grow (so that capital + interest can be repaid), and it grows as a percentage, i.e. exponentially. It quickly gets very big, and if you don't truly understand the exponential function do a search for Albert Bartlett and watch his video on Arithmetic, Population and Energy. If money supply grows exponentially it is INEVITABLE that it will grow quicker than the 'real economy' that is limited by resources.
b) The supply of money must not grow faster than the 'real economy' otherwise we see inflation. This inflation can happen while the real economy is shrinking (stagflation).
The fundamental problem is that a) and b) are mutually exclusive. You cannot grow money exponentially (to keep the banks happy) without inflation. You can't restrict the growth of money without creating a state where it is impossible for capital + loans to be paid back. When this happens debtors default and banks go bankrupt.
So unless we can grow the real economy (dig more minerals, and use more energy from fossil fuels etc) then we are faced with a choice. On one hand we have galloping inflation, and on the other hand we have defaulting and bankrupt banks.
In order to fix the problem we would need to derive a system where loans were made for free, with no interest. How the heck are we ever going to do that?
It isn't really a retail issue in any sense apart from sensational reporting (take heed ΒιΆΉΤΌΕΔ).
If you are lucky enough to have cash and you are worried spend your cash down to 35000 on your mortgage or second homes and a selection of underpriced bank stocks.
Its all down to the leveraging principles which are massively exercised by the US institutions in particular even when the patently care only for the bonus and not the true consequences. Snake Oil anyone?
It is interesting to note that the governor of the Bank of England is meeting the chief executives of the major banks of UK on Thursday, 20.03.2008 to discuss their desire for BOE to lend them more money against the security of a wider range of collateral, especially motrgages.
To my understanding BOE is a privately owned bank just like the other banks.
I have several questions I would like ΒιΆΉΤΌΕΔ to ask BOE and put their answers in ΒιΆΉΤΌΕΔ's website.
How will BOE creat the extra money to lend the banks?
Can someone from BOE explain their source of money?
Or is it just credit created out of thin air?
This is not chicken feed.
Against what existing reserve, say in gold, BOE is going to creat this hundreds of billions of Β£?
And who owns the gold if the money is going to be created against that?
If BOE is going to lend the money against mortages as collateral from the poor, struggling banks (who by the way were rich beyond imagination only a short time ago) and if these banks or some of them go belly up, then BOE will own the mortgages. So instead of several smaller private banks holding the mortgages, those will be held by one single, gigantic, private bank which welds much more power than the other smaller banks.
Will BOE guarantee that it would not foreclose if due to economic downturns some mortgage holders have to default?
Or, instead of several smaller banks trying to foreclose in their somewhat disjoint ways, one giant single bank will efficiently run all the foreclosures in a coordinated fashion to transfer the distributed wealth of many to the hands of extremely few powerful ones?
Also what right the banks have to get loans by providing mortgages as collateral?
They did not loan people any real money. They gave credit created out of thin air. If they had something real to back their created credits in the first place, they should not be facing this trouble now. To me it looks this whole charade is extremely carefully engineered. We want straight answers in plain, simple terms, no more mumbo-jumbo. Banking is not rocket science, though bankers would like us to believe so.
I truly don't understand this...
Why, if the banks are reassuring the country that they have plenty of liquidity, are they pushing to have BOE commit to uphold them if they suddenly run into difficulties? Could there be a couple of porkie pies flying around in banking circles????
What also gets under my skin is the fact that injection of cash into the banking sector will drive inflation higher, which is the main reason why interest rates haven't been cut...
If interest rates were cut, Joe Public would benefit, all of our belts wouldn't have to be so tightly drawn, the impact of the credit crunch would not be felt as severely in everyday life, but inflation would climb. NO, of course not, that is too kind to the masses.
Instead, keep interest rates where they are, making life increasingly hard for all normal people, but ease worries over the credit crunch by ploughing even more money into the banking system, achieving the same hike in inflation, save a lot of thick walleted bankers jobs, bonuses, profits and blushes, and expect us all to pick up the slack to maintain the status quo...
The shortsighted attitude and lack of compassion for Joe Public sickens me, but the one point of solace that I hold on to is that it doesn't matter how long this is delayed, the day of financial reckoning is coming, and the longer we wait, the worse it will be, and I want to see some of these banks fall... JP Morgan are still making $billions, and it is all at the expense of other people's misery...
"....Capitalism, regulated by exchange value, the calculation of profits and the accumulation of capital, tends to dissolve all qualitative values: use values, ethical values, human relations, human feelings....."
It's not beyond the bounds of possibility that that this could be a quote today from Mervyn King... Ben Bernanke... or the CEOs of Societe Generale, UBS, HBOS, Northern Rock...et al...maybe they're all Marxists now?
Thereβs a lot of truth in the old adage that stock markets are driven by fear and greed, and for too long banks have ripped-off customers to make outrageous profits. Now that banksβ fear has replaced greed, no longer willing to lend to each other, if a few banks go down β so what. Perhaps a dose of imperfect stock market 'medicine' will benefit us all in the long run!
A huge money bubble is bursting, peak oil is here or here about, climate change is accelerating - sounds like a perfect storm is brewing...
Is it not about time that these sensationalist gloom mongers such as you Mr Peston eased up on the sensalionalist comments ... unless of course you want anarchy and finacial meltdown ????
The banking crisis is quite simply the product of off-balance gearing up by lenders to get loans off their books in order not to have to provide capital which in turn reduces their ability to lend more.
Solution? The FSA must stipulate that all lending must be 'on' balance sheet and therefore transparent. Interbank lending would then be based on a factual analysis of a borrower's credit worthiness and not a matter of speculation. Unfortunately this scenario implies a massive contraction of lending activity but better that than a collapse of the whole banking system.
Jamie, I do understand exponential growth. Your argument is similar to that Malthus used on population growth and is very neatly answered in Tim Harford's "The Logic of Life".
Your argument does not hold since the money supply need NOT grow exponentially. The supply of effective money has grown because we have allowed the financial markets to expand money supply through derivative instruments without oversight by central banks. If there had a been a way of tracking the multiplying effects of these instruments on money supply then the central bankers could have taken action. They did not have the measures so they can only react. Hopefully, they can figure out some way to track the effect on money supply in the future to forestall such crises.
We do need sufficient money to finance economic activity but the concept of 'the real economy' is a tricky one. Why do you just include physical transactions in your examples? Much of our economic activity is based on services and the value of sectors like finance, media and IT where there are no tangibles. Economist measure economic activity through the total value of paid transactions. As long as money supply does not expand beyond this, then there is little chance f inflationary pressure. Sadly, this is difficultto measure
The real problem, as I see it, is that policy makers have surrendered the control of money supply to the market.
Β£35,000 protection for customers is ridiculous. How about a levy on the Hedge Funds to finance the FSCS to the tune of Β£100,000 protection for each customer.
With the customers well protected you can then let the Hedge Funds slaughter any bank that has been stupid enough to load itself up with CDOs etc..
The bankers only did it for the bonuses so as long as we are protected why should we care if they go to the wall.
Not one female has made a comment here and I don't see any female faces on the telly either who are directly involved in this fiasco. Does this have a deeper meaning?
"Unless we want to risk a collapse of our economy, we have no option but to support the current banking system. The key is to figure out how we can regulate the growth of money in a global financial market. That can only be done if central banks can agree on some mechanism to track the risk created by off-balance sheet securitisation. This can only be attempted after we have resolved the current crisis." - David
But of course when (or rather, if) this crisis is resolved, we will immediately be told that regulation is an unnecessary burden, and governments should not interfere with markets. Then when the next financial crisis hits, the bankers will run snivelling to Nanny State again.
It's not for nothing that the collective noun for bankers is a "wunch".
Robert
The simple fact is the fiat currency (debt bonds) generated by the global banks has evaporated when somebody gave the assets a tap and found them to be hollow.
There is not enough money to bail them out.
So the BoE are dancing with the banks to avoid printing too much money too quickly, which will see the demise of Sterling and an impetus to inflation. The banks, no doubt sensing this discomfort, will take us all for another roll.
By the by, talking about confidence and hollow things check out the Β£35k deposit guarantee scheme.
It's a good time buffer to slow down claimants but not exactly 'on demand' safe for the consumer. You may have to wait for bankrupcy proceedings, litigation etc. It could take years to get one's money back.
Not so long ago we were drooling and fawning over the hedge fund mangers that might be making millions and millions in bonuses but he is a good guy because he just gave Β£1 to charity xyz.
They are making their money because they have designed 'new financial instruments'. And the banks just lapped it up. Did no one question how these huge sums were being made? I know I did.
Now we know of course that these new financial instruments were the same old financial instruments but wrapped in such a pretty box that no one thought to look inside and see what the present was.
And so we will all suffer because of this. However I bet the banks still end up making significant profits even with all their bad debts.
However I feel that much of the blame for this lies at the feet of the government who have built the current UK success on a credit mountain.
If you have two companies offering mortgages and one bends the rules and gets all the business the other has the choice of either doing the same or going out of business. If the government is slack with its legislation and enforcement the answer is obvious. And so bad money and bad practices drive out good money and good practices.
Meanwhile why is it no one ever gets penalised by losing their salary for getting it so wrong.
"As one bank chief executive told me, the Bank of England could eliminate all anxiety about the health of British banks by announcing that it is prepared to provide whatever loans are required by our banks until the money markets are functioning in an orderly and calm way once again."
In every crisis there are always winners and losers, but this time we are not being told who is which. The capital markets will not resume functioning in an orderly and calm way until the banks give up their dead. Nailing dead parrots to the perch will fool no-one. A Japan-style deflationary spiral beckons. Time is running out.
The Banks have only themselves to blame for their reckless lending in pursuit of sales targets.
To make matters worse they have let all their experienced staff go in order to cut costs.
What a mess.
Bank of England has followed in the steps of Federal Reserve in providing funds against illiquid assets of banks and other financial institutions. Now these assets are likely to have toxins of sub-prime lending products, even otherwise the market value of these assets is far lower than their assumed value.
Presumably nobody now talks about the market efficiencies especially if it involves financial products.
If the central banks are picking up these worthless assets, who is assuming the risk, obviously the taxpayers. Is there any doubt left now that taxpayers will pay for the excesses of the few people.
Your first couple of paragraphs refer to ''after all the fed has done'' - why on earth do you appear to believe because the FED has done this or that - there should be no more bad news?
Especially as this is not even a US bank; and of course, these figures relate to trading prior to this weeks FED action.
Who are these people you refer to who thought that to be the case? Perhaps they need a straight jacket. Unless of course ''they'' dont exist!
he banks in general have had their snouts in the trough for years and years, profiting from other's money and work. Bankers only turn to farming for a retirement hobby when they are rich. You can guarantee that no monster city bonuses will be returned in time of trouble.
I used to think that the Alex cartoons were cynically over the top - now I realise they aptly characherise the cavalier and schoolboy mentality of the "masters of the universe" bankers who run trading as though everything (except bonuses) was monopoly noney. Sheer greed is the basis of all this chaos - special thanks to the "Land of the Free (for a while)" loan.
Rich.
Had Mervyn King adopted this policy back in Oct 2007, we would not have had the Northern Rock crisis.
Northern Rock would still be in the private sector and the now threatened 2000job losses would not be necessary.
Is it too much to ask that a little foresight is shown by those in authority?
I've done some figures, and they don't look too good! We are told that current UK banking problems are down to lack of liquidity which is due to the inter-bank lending credit crunch, caused by The US sub-prime problem. It is now known that this problem was not caused by the borrowers, (scapegoats), being sub-prime, but by compliance at all levels of the banking system effectively generating sub-prime assets, causing huge amounts of money to be 'secured' against assets whose 'value' had been totally artificially generated by over supply of cheap money. (Ring any bells?). Thus, we are told, this problem is not of the UK's making, we are just suffering from it. However, I am very concerned about the lateset developments in the rules for emergency funding. A few days ago, the B o E asked the retail banks to apply for shares in 5 billion of emergency liquidity, whilst, of course, insisting there was no real problem. The total requests of the banks added up to 22.5 billion! This is just short of the 25 B originally pumped into the NR when it fell over for the same reason. A surprisingly large amount for institutions who still insist that there is no true liquidity problem, and who are now trying to run a witch hunt for apparent scare-mongering short-selling traders!! In the meeting at the B o E, it was then decided to allow our retail banks to get much more emergency liquidity for longer; as much as they feel necessary, in fact! (A major excuse, err, reason for this is to protect them against scare-traders)[Strangely convenient timing, that 'scare-trading'] Coupled with this , they are now to be allowed to offer mortgages as 'security'.(Ring any more bells?)
The average price of a house is ~230k. There are ~ 20M addresses. 230k x 20M = Β£4.6 trillion.
Average UK wage ~ Β£20k. Say household income ~Β£33k. At 3.5 x salary( the maximum multiplier used before lunacy managed the lenders, and brough UK property to its current 'value'), this makes the real value- that which is supportable by earnings- about Β£120k tops. This is a total of ~ Β£2.3 Tr
If a)the world system deciding that it's tired of lending good money to cowboys causes b)further real liquidity issues, which cause c)a substantial down turn in the housing market, which precipitates d) the selling of buy-to-let properties (whose value has been totally engineered by artificially low interest rates covered by inflation denial), and thus e)Merv doesn't get away with his potentially kamikhaze tight rope act, then a property crash, exacerbated and prolonged by major negative equity, (all of which has happened before), will ensue. The difference is that where, previously, reckless borrowers were left to pick up the pieces( not reckless banks), this time it is one huge step bigger. It pervades the UK banking system, to the tune of a staggering sum: it would leave us with a financial black hole of some Β£2.3trillion.
This is 4x the US situation. Now tell me there's no liquidity problem. That could take the B o E out! Even the usual end of the line fall guy, the GB tax payer couldn't foot that bill! Also, no one else is going to be stupid enough to lend money to a nation that exports its industry to China, and then gets into trouble because the half wits who are trying to bring about a social regression into the Rackman days, over bake the cake, and generate a melt down.
Mind you, couldn't they trade on the credibility of the City, use housing stock as security, and borrow it?
I am a simple retired engineer, who would like someone from the financial community to explain to me two phenomena which in any other community would not be treated in such a cavalier fashion.
First of all I cannot understand why short selling is permitted. As I understand the system one trader is permitted to borrow and sell a batch of a company shares from a second party. The trader can then start a rumour casting doubt about the financial well being of the company causing the market price to fall. At which point the trader repurchases the stock at the lower price and hands them back to the second party and pockets the profit. Why is the borrowing of shares permitted ?
The second issue I have is with the so called Financial Services Agency who are supposed to keep an eye out for deficiencies and sharp practice within the banks and investment community who are after all only guardians of our money. How many times is this publicly funded incompetence allowed to occur before we get value for our money? Equitable Life, Northern Rock how many more?
I work for a bank and worry for my job security. Cheers to those who think we should be allowed to go under.
Hello? How many people own more than 1 property out there. Thanks for raising house prices so first time buyers can't get on the ladder! So the bank lends at inflated levels, maybe 6 times their real earnings. Hello?
All readers who borrowed money for that car,holiday, must have NOW item.... SAVE???
All those customers who are only interested in the highest interest on their savings yet the lowest cost on their mortgage - do the sums!!!
Banks are a business not a charity. We are happy to pay the highest price for that must have new car but heavens above banks can charge for money you didn't ask to borrow...
What about harnessing the people power of internet banking, in unspoken alliance with Mervyn and the BoE, to force banks and mortgage lenders to come clean on the real strength of their balance sheets?
Supposing one of the many money advice websites was to replace its βbest dealβ tables with an alternative table on βhighest risk of going bustβ. (This will probably happen soon anyway, by popular demand -- we are all taking a growing interest in which banks and savings bodies are safer than others).
Known data on balance sheets could be backed up with a online poll on βwho may be next, to follow Northern Rock and Bear Stearns?β Loan customers, en masse, have a shrewd idea of where the defaults will surface.
Then we might see some orchestrated stress testing. The website would tell us which institution headed the table as βrisk of the weekβ.
The many careful savers who now have savings spread across several internet accounts would all shift their money out of this weekβs bank in the spotlight, and move it elsewhere. Such transfers are the work of a moment for those who bank online (as Northern Rock became grimly aware).
An unfair bank run? Or a concerted βprudence warningβ, generated by long suffering customers of a sector that has displayed much greed and irresponsibility in recent years.
If the institution concerned is not as robust as it claims, and suffers liquidity problems, Mervyn will be waiting at the new BoE discount window to relieve it of some of its dubious collateral in return for Treasury cash.
Not a bail-out, since the collateral would be valued βaggressivelyβ and in the public interest β with the institution in question not in a position to argue as its capital shrank by the day. People power, through the medium of online self-banking and share-dealing, would force each bank to take their turn in the queue.
Bank profits and bonus payments would take a hit. Sub-prime debt would be flushed out of the system sooner rather than later, and the BoE (and the rest of us) would get a better picture of the depth of a solvency (as opposed to liquidity) crisis. Someone would need to find a way to stop short sellers in the stock market from making a fortune, as each bank takes its restorative cold bath. But otherwise worth a go?
If the Bank of England is to enter into an agreement with the Banks then a condition should be that the BOE should be involved in setting salaries and the criteria for bonuses in the Banks to ensure that investment bankers are not encouraged to make reckless investments, insured by the Taxpayer, just to get huge bonuses.
I think they should bring back the good old days of wage packets,then banks would,nt rely on us the customers for are money.I TOTALLY agree with comment 12 that there are to many fat cats getting rich off the average joe.Banks are not what they used to be.WHAT happened to the one on one with the bank manager.They just turned it to commercialized now they are getting what is due to them they tried making to much profit off the back of there customers and companies now we are all running out of cash.NO CASH NO PROFIT.my heart bleeds for them NOT.
Not wishing to be too cynical but...
On Wednesday "rumours" abound about HBOS in need of talking to BoE about additional support.
Low & behold on Thursday, a shoal of HBOS + others talk to BoE, not about banking regulation system as planned but surprise surprise, additional support for the banking system.
Could the rumours have been true but too sensitive for the "system" to cope with? Was Thursday's meeting just a cover for HBOS to approach the Bank with the convenient sceening of others? Directors buying shares - another bluff to help their story?
Other comments about some honesty and transparency in the system are all spot on! Time will tell.
why are the central banks trying to delay the inevitable ? the inevitable being a huge plunge in the equity markets in the next few weeks.
The ΒιΆΉΤΌΕΔ has spent much of the today's business news applauding the confidence that HBOS Managers and Executives have shown in their company after the scandalous rumours spread earlier in the week that the company was in difficulties. How gracious of them to have invested Β£6m of their own money and made vast profits in space of a few days! Is it just me or is nobody else suspicious that these rumours eminated from these people in the first place???? Is the ΒιΆΉΤΌΕΔ not even guilty of naievity of not even suggesting that this could be at the very least a possibility? Does investigative journalism not exist any more? or does Joe Public have to stomach the arrogance and audacity of the banks for eternal perpetuity because nobody not even the government will let these incompetent muppets be responsible for their own bad business decisions, nor let banks fail if they are run into the ground or it appears to me in this case that blatant profiteering is happening under a thinly disguised cover story of confidence expressed in HBOS by those that seems to me are probably guilty in the first place of spreading the rumours and if not themselves then at the very least vicariously!
I would like to point out two things that are urban myths.
1) Toby said that anyone earning more than 100K per year should have their assets seized if the bank goes funny. Does he *NOT* realise that 100K per year equates to 8333 (recurring) pounds per month ?? Also that a large number of lower and middle management in the City earn much more than that ?? Is he trying to wipe out the entire London Financial Industry at a stroke ??
2) It was suggested that the regulator of NR could not have foreseen the crisis that hit it !! NR was borrowing short-term for long-term purposes. This was the very thing that fueled the Asian Financial Crisis of 97/98. He who does not learn from history is doomed to repeat its mistakes !! How qualified are the regulators to keep an eye on such goings-on ?? And if they are, do they have the teeth to do something to curb them (hopefully, in time to do some good) ??