Βι¶ΉΤΌΕΔ

Robert:

I'm sure this is good reporting, but I'm really not at all sure that it's helpful under the circumstances.

Today's 6 percent fall isn't much, after the falls in the share price that have already occurred, so what is really new here?

Here, George Magnus, senior economic adviser, UBS uses exactly the same 'inverted pyramid' image to describe the world economy and the origins of the current crisis.

A "licence to operate" for finance people?
Just like doctors or dentists?
Struck-off if they are negligent or incompetent?

And not a shorter in sight, if the ban is working.

So who is to blame now? Couldn't be the management by any chance could it?

Let it topple. The government can then step in with PAYE money to secure the average joe's mortgage via the reciever. This will allow the government to be selective in who recieves what and when. In this case the taxpayer will come first, fat cats last.

Here we will wait till the last minute; then we will do a Northern Rock. Incompetents is so much we find it very hard to quickly resolve like US.

Man this is super hairy!

There is one possibility for a white knight that has not been mentioned anywhere yet (to my knowledge).

NORTHERN ROCK

And once you have all stopped laughing let me explain the reason.

Govt is scared about having a second banking collapse and since no other bank is enthusiatic about taking this on the Govt can see that at present they stand to pay out Β£millions more taking on amother collapsed bank with questionable assets. If however there were to be a placing of say 1,500 million shares at a price of say 50p this would give NR > 50% of the capital - but leave the Listing of BB in place.

This would be sufficient to repair BB's balance sheet and its rating agency rating against any reasonable scenario - more importantly it would give NR the high street presence it so obviously lacks. Once NR has been slimmed down and repaid the Govt finance its clean business can be sold to BB and the merged entity will then be a credible alternative to Lloyds/HBOS in retail business.

Govt can then place its shares in BB (probably realising a good profit) - hey presto, problem solved and everybody happy

The question is:

Who would take on a bank like that? And if they did then the taxpayer will have to be liable for the entire amount (or close enough).

Therefore what will happen to: the pound, inflation ergo, and public spending when the loans start going bust!

Add this liability onto far less tax receipts and greater welfare payments then a picture of the future is becoming clear. And who is going to fund this liability? International investors will be hoovered-up with the 700 billion for the sink fund in America, which, let's face it, is going into the trillions. So the future looks like one of massive public spending cuts and massive unemployment.

AND if it requires global investors to prop-up the banking system, then the pound of flesh required will be open markets, I imagine. Yes, all those Conservatives might actually get free markets which includes free labour markets, which means, of course, that the British worker will compete with people on a $1 a day! There will be massive, massive deflation, greater unemployment and still we'll be heading downward, but slower.

EVEN THEN, it is likely that the worthless paper to the sum of double digit trillions will still fall upon us, so hard times for everyone.

It's no longer a question of whether we get back to normal. It's a question of the rate of speed which we arrive at deep, deep recession. When you think about it, the speed we've travelled at to go from boom to bust has been incredible.

Here's a story: I went into Northern Rock today to open a bank account. It was booked all day. The first time ever, the lady assisting me told me, that they'd had to book appointments! There is a run going on already! It is happening with very cautious older people who have put two and two together.

There are so many ironies in this situation: I'd like to list them but that would be too long.

I like the Northern Rock idea - has some legs in it but let us make sure we get new management at the top- get someone who is not a banker but understands building societies

Intrigued by the form that a possible rescue might take.
The post by FutureFinancier is interesting, and I'd enjoy reading responses to that.

keep an eye on ambac and wachovia. if they go, watch citibank very closely. if citi goes then it's good ol' '29 all over again.

how does that freddie mercury song go..?

why does Robert Peston keep reciting the same tired old mantra (on Βι¶ΉΤΌΕΔ News) that "unless this bailout gets sorted out Sunday night before trading begins in Asia" there will be a financial meltdown?
We've been told that so many times before.
Let markets resolve this themselves - we wouldn't be in this mess if the Darwinian mechanism of determining asset prices had not been so badly distorted by the US government previously.

Robert – this is spot on yet again. The banking crisis is not just a US problem, it is worldwide and the UK banks are facing similar challenges.

The UK government needs to act urgently to restore confidence in the system. We need liquidity, the worst assets to be sucked out and government assistance where required for further recapitalisations of the hardest hit financial institutions.

I also agree that where confidence allows for a government underwriting of a market driven solution this is to be preferred to a direct government investment.

However, there should be no subsidising of market failure and any government investment should be made at a commercial price in order to protect the taxpayers cash.

Another failed bank (nee building society). De-regulation since 1997 has a lot to answer for Mr. Brown.

There is a limit to which the tax payer underwrites corporate failure.

Why is it that pensioners are less well protected than private financial services companies by the taxpayer, when the chips are down.

Are businesses worth more than people or vice versa? After all, the added value chain is created by people.

The entire system of regulation - from Government, through audit and accounting, framework and legal systems need to be reviewed. How did this happen (apart from lemming like attraction to bonuses and volume targets...at any cost!).

I sense a race is on. Who is going to explain fractional reserve banking to the Today programme's presenter John Humphrys first?
The economist John Kay had a good go this morning just before 9:00
John Humphrys still hasn't quite got it though but is clearly desperate to know the truth. Will our Robert take him to one side and explain it to him?

It would be a shame if this crisis were to blow over without news presenters knowing what is going on.

#16

Great comment about Ambac - extend this to every monoline insurer.

What we have here is a systemic and cataclysmic unwinding of every derivative position in layers.

The fact this is taking 12 months to date, with no immediate end in sight, gives a clue to all of us of the scale of this economic iceberg the US and the rest of the world has hit.

Perhaps some of our more quiet (nee smug or frightened or both) economic partner countries could take a more proactive approach and share some burden recovery cost, instead of bleating about "it is the Anglo-Saxon economic failure". They enjoyed the good times fuelled by easy credit just like us - they just took the sales from "Anglo Saxon buyers".

Forgive me for saying, but those who shout loudest have the biggest national debt as a % of GDP e.g. our Teutonic neighbours.

Pot, kettle, black!

8: FutureFinancier

This is a great idea. It really could work.

I'm not altogether clear about maintaining the quote, because placing bank shares in the current market might be a bit of a tall order.

If this was the case, the alternative might be for government to suscribe the capital (a modest sum in relation to the amounts already committed to NR and likely to be required for BB), take it private pro tem, then do an IPO later if the venture becomes a success. This really could work.

My only concern is that the UK doesn't do this sort of thing very well (unlike, say, France). The danger is that, instead of having it run by bankers, we'd have it run by civil servants, who would make the same mistakes but in triplicate.

Incidentally, banks being run by bankers is a bad idea anyway - they should be run by managers/businessmen. Management is a skill in itself, and quite distinct from banking.

You wouldn't want to see a gas company run by a gas fitter, an oil company run by a geologist, a drug company run by a doctor or an aerospace company run by a pilot - so why are banks managed by bankers?

180 times leveraged, is this a record? It is incredible for an ex-building society. Sounds to me like the management had no idea of what they were getting into just thought yippee we're a bank now let's do bank things.

Why on earth did they feel the need to buiy $1bn of sub-prime???

Β£52bn of loans (assets?) and Β£49bn of deposits. The gap of Β£3bn is about 6% of Β£52bn and in these times where more people are losing their jobs that does not sound like much of a leeway to me.

I doubt they will be in business by Monday. The management need to be stripped of all their assets including fat-cat pensions.

I think this is a really big bet Robert. They could be our Lehman Bros. Appropriate to go to the wall so as Govt can say it hedged its bets, then use the excuse to really socialise the debt like the Americans.

Some UK investors have, presumably, lost out already because of Lehman. See alert by Tenet bit late of Tenet don't you think?

My point is bad stuff is already happening!

#15, PrisonerNumber6, yes. BB is simply another link in the chain of this crisis. It may seem premature to look at the future before this crisis has unravelled. But we have to make a few dramatic changes to the regulatory framework right now to maintain a free-competition market system and hence democratic society. The existing breed of regulators has made too many childish errors to be relied upon yet again, so third party input is essential.

For example, regulators could make a single, radical change in the pension industry to reduce the size of the next crisis by at least 60 percent from what it would otherwise have been. Both socialists and those with vested interests in the status quo will try to prevent it. Nevertheless, it will happen, even if only after the next crisis, which means before the end of this century.

All new pension contributions should be placed into gilts, that is, fixed interest government bonds. The term should coincide with the year of expected retirement date. Contributions could be parked on the money market and bundled into bonds in batches. Pension contributions would be voluntary, but people could speculate or make real investments in their private capacity.

There is no competitive element, so pensions should not be run by private enterprise. It could be administered by the employer within the PAYE framework. Regulations should ensure transparency and criminal liability for irregularities.

We know they will not let this proposal happen, but here is why it is fair.

The taxpayer would know they would get the risk-free rate. No more false promise of riches accompanied by small-print disclaimers. Projected interest and inflation rates would be based on historic actual rates. Taxpayers could check the adequacy of their pension provisions decades before they became stark reality.

Financial theory, financial practice and common-sense agree: no-one can predict the future. The essence of a pension is that it should have some certainty. By bringing back this modified money purchase approach, the delusion that pension contributions lead to riches would be minimised.

Society would benefit because contributions would no longer be decimated by fees. There would be less reliance on the state at retirement. Yet if companies go bust the directors could not then steal the pension pot. People would have fewer money delusions and co-operate in minimising inflation: it was only rampant inflation which caused pension contributions to become equity-linked in the first place.

Furthermore, the lifetime of the average country is much longer than that of the average individual, whereas the life of the average financial institution is much less. Money is therefore much safer in government bonds than with institutions, and the guarantee would have no silly limits. It should not actually be run by the state, to prevent legalised theft from a political party gone rogue. Instead it would carry the full guarantees that any holder of gilts would receive.

Why will it not work?

So am I right in saying that their advertising campaign should be ignored? Or is it still OK to invest up to Β£35000, but of course you may not get the interest they promise. In fact how can they be allowed to advertise?

Is this more scaremongering by Robert as in his "sucessful" NR report.

To me it appears so, i know several key people at BB and they have no shortage of cash and havent been as badly hit as suggested.

This is easy for all to see, the 6 months accounts show a loss of (approx) 25m, but last year this was a profit of 185m, so when you offset the two not exactly a massive concern.

I personally have just invested a signifcant amount of money in BB because the share price is ridiculously undervalued and i suggest those with half a brain do likewise.

Robert,
it is now glaringly obvious that the banking industry is just waiting for a bail out from the tax payer.

don't be surprised by any further bad news as it is all part of the plan to get as much of our money as possible.

in the mean time inter bank lending rates will stay high so as to worsen the situation.
mortgage rates will be put up even by banks who fund their lending from deposits and other sources. but they will of cause blame the current situation.

the strategy will be to lend as little as possible which will lead to even worse economic activity and put yet more pressure on the government.

their has been a lot of talk this week about "fairness".
how can it be fair that when two building societies are taken over by another because of poor management. the investors/members get nothing but the management walk away with millions.

how can it be fair that when free markets collapse because of their own making the authorities come to the rescue. yet when modest income people save all year for Christmas and the business runs into trouble Christmas is cancelled

"There will be a financial meltdown unless the bailout gets sorted out Sunday night before trading begins in Asia" - too true and not just financial.

This is the real thing, once the financial market goes, everything else follows. Rough times? If world governments don't start acting soon, and not just trying to prop up collapsing systems, but proactively addressing the underlying problems, then be prepared to see the UK looking like a third world banana republic soon, including troops on the streets to deter looting!

Monetary Reform...

#21

Gilts. That's what my pension funds are invested in and have been for 18 months!. Only bet in town right now.

It's all small talk!!

The inverted pyramid principle is a simple, but fully complete description of the Uk/US finances. The fall from grace has begun!

Any buy outs, bail outs, liquidity injections or other measures are not going to stop the fall, they may delay consequences or slow the inevitable, but we are heading for rock bottom!

The second 'Greater' depression is coming!!

#21 knoseykneel

I stongly agree that some such change in the pensions system is needed. Though in overall effect, isn't this a bit like the old SERPS system that was phased out and eventually buried in 2002? That was probably another bad mistake.

One interesting thing about investing in gilts like this is that individual's savings actually translate into real investment in UK PLC. ie the Government (in theory at least) can invest the borrowed money in useful things like education, training, infrastructure and so on, so that the country as a whole can be more productive in the future, pay more taxes and thus be able to afford the interest on the gilts to provide the pensions.

How much of our existing pension scheme money is actually getting invested in anything that will truly benefit the country as a long term investment?

Robert – is it just me or do others feel the US is being left to deal with a banking crisis that affects us all. We clearly need a worldwide bad asset buyout and large scale government underwritten or assisted recapitalisations and this all adds up to a lot of money.

Any national government is going to have to be very careful how much they are in for and how they are going to finance any asset buyout or cover any underwritten recapitalisations.

Does a worldwide financial crisis not require cooperation on a global scale? Realistically I think we are talking about the North Atlantic World and perhaps Japan. NATO came out of World War Two and I think we now urgently need the financial equivalent to get us through this. Sitting back and watching the US default on its debt obligations in 12 months time is not the answer. Is anybody else with me on this?

#27 There are several reasons the proposal for all individual and company pensions to be, by law, only in gilts will fail.

Firstly, it will devastate the financial services industry, including the share market. Think of children who take marbles to school that are confiscated by playground bullies and seldom returned. Imagine if the children suddenly stopped taking the marbles to school and played with them at home, perhaps with invited friends. Where would the bullies get their marbles?

Answer: It is our money. Why let them gamble with it? What about when we are old and they have frittered it away? In about June next year, we should ask the baby boomers what this feels like.

Economists will not like it. People will save more and consume less. This will hammer the multiplier, and economic growth will appear to reduce. Where will the funds come from to support the share market?

Answer: It is our money. Over 60 percent of share market capitalisation was once pension contributions. Why not look after our own interests and let the invisible hand look after society as a whole? If bankers want to gamble with our money let them ask us personally, after making an appointment. Why let them plunder our pension savings? At present, whether share markets serve a useful social function is moot. If this improves, they will attract their own funds base. We must not be conned.

Politicians will hate it. They will have fewer illusions to peddle.

We have actually had net negative economic growth in the last ten years. The illusion of growth has been fed by the sale of strategic assets and our spending of the next two decades of capital appreciation from our houses. In good faith, we were conned into believing prices could rise exponentially forever. Why? Because the people we thought we could trust told us so.

The reason the financial economy controls such vast amounts of money is that we gave it to them. Without our pension contributions the stock market will be 40 percent of what it otherwise would have been, within thirty years. This is 60 percent less gambling money for the clever chaps from the City.

Future problems would be a fraction of the size if governments took this wise and fair course of action. They will not. Even if you copied and sent this comment to your address book and asked them to repeat the process, and they did, many times over. No ways will governments accede. The party is not over. Not yet.

Treauryman(30)- are you having a laugh? Japan had its financial crisis in the 80's. I didn't notice Uncle Sam riding to the rescue then. The Japanese just had to take their medicine and work it out for themselves.Or did I miss something, Treasuryman? Now the USA is facing the collapse of its own banking system, for entirely home grown reasons, and according to you, everyone else, including Japan, should queue up to help out. Surely the USA should finally learn that stupid behaviour eventually has bad consequences, which you have to pay for yourself? Or is that too hard for you to understand? No other country, especially the one I live in(the UK), should contribute a halfpenny to bailing out these half wits. We need to put our own house in order and move to a sensible banking system on the European model. Joining the Euro right now would also be a very good idea. Anything too complicated in all that?

Friendlycard #18,

BP is run by a geologist - was that a trap? Have I fallen for it?

haufdeed(32) - thank you for your thought provoking response, maybe I am a half wit - but we'll agree to differ in any event.

On the subject of the euro, I don't think now is the time to impose a fiscal straightjacket on the UK economy. We now more than ever need exchange rate and interest rate flexibility.

I only have to look over the sea to the country of my ancestors in Ireland to see what is happening to a country whose interest rate and exchange rate policy is being imposed on them by France and Germany.

Thanks for the response all the same.

Treasuryman, I didn't call you a half wit, that comment was directed at our cousins across the water, and I don't mean our common Irish ancestors. In my opinion Ireland will emerge from all this in a great deal better shape than the UK, and probably with its banking system intact. Yes, they are having a recession, but so will everyone else. I really do wish the UK was having its economic policy set by boring, sensible people in France and Germany, rather than following a bunch of neurotic American Neocons on the road to economic armageddon.

I am not so sure that the concern for depositors funds will be shown to those with accounts offshore such as the IOM should an institution fail. The IOM statutory compensation scheme is of only limited comfort.

What does B and B balance sheet look like today? The accounts for 30/6/08 are on B and B's website. (A rather tedious read.)

In the June 30th accounts there were 42 bn of mortgage advances with 22 Bn to buy to let. 661 Million shares in issue at 20 p = 122 Million as at 26/09/2008 16:35 BST.

It also had/has 24 Bn in savers deposits - about the same as Northern Rock, but B and B has under half the mortgage advances, but a lot more buy-to-let (I think).

I can't think who would want it. I guess if the 24 bn savers funds are to be secured then it will have to be nationalised - and why not bundle it with Northern Rock as a previous poster suggested. It will only cost the taxpayers a few quid (on 30 June 2008), but in reality my guess is that the bank now has net liabilities just like NR when it was nationalised.

Which financial 'institution' will be next?

#32 haufdeed

Re the Euro, and Joining Now.

I agree it would be an excellent plan, if the Euro Zone would let us - which I doubt - what currency would want to be linked to a country that has so much toxic debt hidden in its banking system?

We will have to sort out our banks first I think!

Treasuryman #30, your 911(pm) post reminds me of that fateful time when the "coalition of the willing"(the pc/newspeak term) forced executive control.
Fearful, we, the mob, coalesced. The bombs are still exploding.
Now, seven years on, these same (now richer) faces are demanding executive control of the worlds finances, again ostensibly for global health sanity and security.

What will the next requirement be from our big brother?

I could blame the bank's bosses if one went bust. I might even be tempted if a second got in trouble but when they are all in trouble then there is is something fundamentally wrong with the banking system regulated and monitored by Gordon Brown, the Bank Of England and the FSA. And that fault is the enormous amount of personal and national debt that has been allowed to accumulate both here and in the USA.

"As Britain's Conservative Party leader Margaret Thatcher put it in her favorite phrase, TINA: There is no alternative. And as Lady Macbeth said, if the deed is to be done, let it be done fast."
(Michael Hudson's....will the cure be worse than the disease)

"After all, it is a once-in-a-lifetime chance for every financial institution in America to cash out with a fortune!"

If people plan to ever get over the gloom: Let the debt sort itself out by allowing those to fail who have created the bubble. That's painful but inevitable. Anything else is just cheap makeup. We need a fresh start and that cannot be done overnight. Debt addiction is a very serious and life-threatening illness that requires a lengthy treatment. Nothing is going to be the same but health can be restored one day!

33:

Not a trap. A general point, which is that running a business is a skill in itself, quite distinct from banking.

Re. BP; yes, Tony is a geologist by background, but has been a businessman, rather than a working geologist, for 18 years. He looks a promising leader at BP, though let's wait and see.

Very few of the oil industry's top leaders - Rawl, Raymond, Simon, Stegemeier, Browne, Kinnear, Tillerson - have been geologists.

My general point is that running a business is a skill in its own right.

44 Friendlycard You'll be surprised by how geologists will take the center stage in this new era no-longer-cheap oil. People who can't make a decision without asking their shareholders will be out of business very soon.

I had savings in Northern Rock last year, then moved them to Bradford and Bingley and it looks like that is going under too. Solid building societies like Northern Rock, Halifax and Bradford and Bingley became banks. They used to lend money carefully but lost that duty of care in recent times, so putting themselves and their savers' deposits at risk, and ramping up house prices. Which bank is next, and who can we trust with our savings ? At least a credit union will only lend out what is saved with them and no more, are you prepared to keep trusting banks with your savings after their reckless lending ?

"Oh Mr B",
"Yes, Yes, Yes, Yes, What is it Mr B?"
"Our market capitalisation's up the chute,
Our share price has collapsed,
Our creditworthiness lapsed,
And it looks like nationalisation's the only route!"

It would be a terrible result for Pension funds and small shareholders if this Bank was bought on the cheap by another company.

In effect the shortselling hedgefunds would have won.

And UK pensioners would have lost.

B and B continuing as an independant Bank would be good for the Pension Funds, as in time, it's business model as a savings bank would recover value for its Investors.

Otherwise the ownership of a temporarily impaired British business will go for a song overseas.

what is happening i cant post!

only short posts appear to take

Is Mr Peston attempting to cause a run on another bank?

Rescue in this context seems to mean robbed !

IE the pension funds and small investors, by a conspiracy of analysts, ratings agencies and hedge funds.

Of course, with fewer Banks trading the remaining Banks will be able to charge more for loans and mortgages and pay less for deposits.

So Pensioners, Small Shareholders ( a third of B and B is owned by small shareholders) and consumers, will all lose in this rigged market.

#40 Spot on.

I used to work in financial services when the FSA was first created with tight regulations and not afraid to show its teeth amongst other severe penalties for transgressors. But later on the zealous scrutiny disappeared, and quite why this happened I am not sure.

I do remember though an informal conversation with Actuaries and accountants about the different mortgages available on the market being supplied by household name banks. The prevailing view was that a mortgage at 3.5 to 3.75 times gross salary was a reasonable factor, in order to pay off the debt.

But a couple of banks were prepared to offer (and did sell business) terms at 4, 5, 6 and even 7 times gross salary! Then self certification mortgages were mentioned. For self employed people these products are justified.

However, non self employed people applied for self certification mortgages enabling them to purchase property that given their salaried circumstances was but a pipe dream. In effect they had a mortgage at say 20 times their gross salary!

As they would not be able to pay the monthly repayment charge the ruse was compounded by saying their fictional self employed business "had a cash flow problem", and then taking a premium holiday.

In other words this is the UK sub prime mortgage crisis that is yet to hit. I have another word for this - gambling.

This comment was removed because the moderators found it broke the house rules. Explain.

We're watching 'Terminator IV: Survival of the Richest' being made in real time.

The $700bn dollars will be consumed within days and the Market will be back for more. It is pitiless, without emotion or remorse and completely unstoppable.

Governments and tax payers are a very large food source - and it has already smelt blood, tasted it, even, in NR, Bear and AIG - but only an infinite amount of financial input can satisfy its greed.

This comment was removed because the moderators found it broke the house rules. Explain.

This comment was removed because the moderators found it broke the house rules. Explain.

This comment was removed because the moderators found it broke the house rules. Explain.

This comment was removed because the moderators found it broke the house rules. Explain.

This comment was removed because the moderators found it broke the house rules. Explain.

This comment was removed because the moderators found it broke the house rules. Explain.

Whilst not being pedantic, surely the stock market valuation is not the same as the capital on their books - it is the latter which supports their loans.

Gosh the Βι¶ΉΤΌΕΔ don't like critiscism at all.

61:

Exactly, glad someone has said this.

Robert's article measures market cap against the loan book, market cap being way lower than book capital. The assumption is that market cap is an accurate reflection of what underlying equity capital really is. But is it?

Essentially, market cap reflects the willingness, or otherwise, of investors to own the shares. It is natural that investors don't want to own it right now.

But investors could be sending any one of a variety of messages. One might be 'this company is only worth a fraction of book'.

But another message from the market might be : 'I don't know what the real value may be, but I'm not inclined to risk it; there are better investments out there'.

I suspect the latter is the market's message here.

The essential thing, therefore, might be the publication of an updated, mark-to-market balance sheet.

#16 Of course John Humphrys doesnt understand fractional reserve banking.
He's a rational human being. He looks at it and his brain goes 'thats no way to run a financial system', I must have missheard.

It only makes sense to bankers. If I tried it at home I'd be locked up for fraud!