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Wednesday, 4 February 2009

I told you so

I have been telling anyone who would listen for the last year that this is the only solution, and finally the idiots running the country are waking up.

From the FT:
Darling revives option of 'bad bank'

Alistair Darling admitted UK taxpayers may have to buy toxic assets from Britain's banks to help stimulate lending, adding a "bad bank" scheme to the government's existing plans to insure banks against unexpected losses.

The UK chancellor said the bad bank approach might be necessary with "one or two institutions" in order to remove problematic old loans from banks' balance sheets rather than simply insuring them, to give them confidence to start lending again.

Mr Darling announced on January 19 the government favoured a "back stop" insurance scheme, where the taxpayer charges a fee to banks to guarantee against heavy future losses on certain loans, over a bad bank that would buy the loans outright.
He said at the time that the insurance approach was quicker and more straightforward, but on Tuesday said: "It could be that in some cases it could be easier to do a good/bad bank split."

The government and its advisers are working hard to draw up an insurance scheme for Royal Bank of Scotland, the state-controlled lender.

The agreement, due to be unveiled by the end of the month, is expected to act as a template for negotiations with other banks, including Lloyds Banking Group, the other part-nationalised institution, which includes HBOS.

Mr Darling's comments took banker by surprise because they believed the government still favoured the insurance scheme. This approach has the benefit of allowing the government to insure banks against future losses without immediately increasing the national debt.

It also avoids the government being forced to assign a value to loans for which there is no market price, potentially triggering further losses for the banks.

Mr Darling is looking at a hybrid scheme where some assets are insured by the government, while some are bought outright by the taxpayer and put into a "bad bank". The approach is similar to the one being drawn up by the authorities in the US.
Mr Darling told the House of Lords economic affairs committee:"I've always preferred an approach where you have a menu to choose from and you decide what's appropriate".

The purchase of toxic assets will be controversial, as the state will have to take full ownership of assets rather than being responsible for losses. Fixing a price with the banks is also likely to be highly complicated.

Mr Darling's team argues there has to be some valuation of the assets in any insurance scheme and that it may be more appropriate to buy some asset classes outright – particulary those which tie up capital over many years.

George Osborne, shadow chancellor, said a bad bank solution might be the best approach, but claimed Mr Darling was retreating on his earlier insurance scheme.

He said: "This confusion over such a sensitive area of policy gives the impession that the government doesn't know what it is doing and risks further undermining confidence".

Meanwhile the Tories won an amendment in the Lords to require a quarterly Treasury report to parliament on the extent of taxpayer liabilities in the banking sector.

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