Britain possibly set to partly nationalise Banking System

[Dartzap]

Roooll up, roooll up, getting yer' baaanks whillle theeeey're hot!

Government to unveil bank rescue

The UK government is poised to announce details of a comprehensive rescue package for the banking system, the BBC's business editor has learned.

It will include a proposal to inject capital into banks and to provide a standby facility to ensure UK banks have enough cash.

It is the government's attempt to stabilise the country's banking system.

It comes after a day of steep falls in UK banking stocks and a high-level Downing Street meeting.

Prime Minister Gordon Brown has held talks with Bank of England Governor Mervyn King.

Chancellor Alistair Darling and the chairman of the Financial Services Authority, Lord Turner, also took part in the discussions.

Downing Street denied it was an "emergency meeting", adding that it would focus on "ongoing action".

The BBC's business editor Robert Peston said the rescue plan would be unveiled within hours.

"In a UK context, this is a very big moment," he said.

Shares hit

Banking shares dropped after the bosses of biggest UK banks meet with Chancellor Alistair Darling on Monday evening - raising fears that the sector needs government intervention.

HBOS dropped 42%, Royal Bank of Scotland (RBS) fell 39%, Barclays shed 9% and Lloyds TSB was down 13%.

Monday's meeting was attended by Mr Darling, Mr King and Lord Turner, as well as representatives of RBS, Barclays and Lloyds TSB.

The Treasury is understood to have been formulating a plan that would allow the government to provide extra funding to the banks in exchange for stakes in them.

The government said it would not speculate about what policy options were being considered.

Savers' fears

Meanwhile, customers of the Icesave internet bank have been warned they will probably have to claim compensation for money held in their savings accounts.

UK authorities are preparing for the bank's parent in Iceland, Landsbanki, to be declared insolvent.

Icesave has 350,000 savers in the UK and Netherlands, with about £4.5bn of deposits.

Apparently we shall be getting the full details upon the breaking of the Murrow, damned party-poopers decided to not randomly announce it this evening

Can our banks in the South West atleast be called Wurzle & Cider? The northerners can keep the Northern Rock

[Bounty]

Partly nationalise banks, not the system as a whole. You're making it sounds like next week everyone's savings will be with the New Socialist Bank of England when in reality your government is doing what all governments are doing right now - injecting cash into the system and hoping they can pour it in faster than dropping shares let it gush out.

[Bounty]

The details are out:

The UK government has announced details of a rescue package for the banking system worth at least £50bn.

It will initially make the extra capital available to eight of the UK's largest banks and building societies.

In return for the funding, the government will receive preference shares in those institutions.

The money will be used to prop up the banking system that has seen share prices plunging in recent weeks as banks have struggled to access funding.

As part of the package, a further £200bn will be made available by the Bank of England for short-term borrowing to provide liquidity to banks and building societies.

The banks that have confirmed they will take part in the scheme are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

The Treasury said that other banks would be able to apply for inclusion in the plan.

Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights.

'Stop the panic'

BBC business editor Robert Peston said there would be strings attached for banks that take the government money.

These will include restrictions on executive pay and dividends for other shareholders.

"Taking taxpayers' money will not be a licence to trade as normal," he said.

It is hoped that the deal will get the money markets going again and assure the future of the banking system.

"They've got additional capital now if they want it, they've got an unlimited source of liquidity," said Terry Smith, chief executive of the money brokers, Tullett Prebon.

"That certainly should stop the panic in terms of people wondering whether or not the banks are safe."

[J]

It worked so well in the US, so let's do it in the UK, with added nationalization for extra flavour!

It all adds up to a big kablooie.

[Bounty]

At least the UK government got shares for their cash. That, I assume, will give them some way of getting the money back.

...right?

[Psychic_Sandwich]

They apparently have first slice of any profits the banks make as long as they hold the shares.

[Sikon]

The longest day in the global economy started at first light in Downing Street as Gordon Brown and the Chancellor, Alistair Darling, went public to announce up to £500bn of new capital to prop up Britain's ailing banks.

From here ... also in other recent new stories like here.

That's relatively a huge amount. Since the total GDP of the U.K. is 1/5th that of the U.S., such a £500bn bank bailout is proportionally vastly larger than even that in the U.S. compared to the size of the respective national economies.

[aerius]

Holy crap! £500 billion is the largest money dump to date, anywhere. The ECB's 500 billion Euro credit facility and the latest US bailout were about tied, but this one just blows them away after accounting for the size of the UK's economy.

[Sea Skimmer]

It worked so well in the US, so let's do it in the UK, with added nationalization for extra flavour!

It all adds up to a big kablooie.

Almost none of them money in any of these bailouts has yet to actually hit the markets, nor have rate cuts had anything like enough time to have any effect because they have to trickle down to borrowers, so you can hardly pronounce it useless based on the evidence. What are banks just supposed to start lending money they don’t have because they’ll just gotten promises from the government they’ll get some later? It will have to be at least 6-18 months to know if any of this has done anything.

[Edi]

It worked so well in the US, so let's do it in the UK, with added nationalization for extra flavour!

It all adds up to a big kablooie.

Almost none of them money in any of these bailouts has yet to actually hit the markets, nor have rate cuts had anything like enough time to have any effect because they have to trickle down to borrowers, so you can hardly pronounce it useless based on the evidence. What are banks just supposed to start lending money they don’t have because they’ll just gotten promises from the government they’ll get some later? It will have to be at least 6-18 months to know if any of this has done anything.

IF you actually bother to study a recent historical case of a recession with almost exactly the parameters of this one in the recent past, Finland and Sweden are perfect examples. Just throwing money at the market the way it's now being done in the US accomplished precisely fucking nothing and it required far more drastic measures before we climbed out of that hole. We had 20% unemployment and a lot of fucking pain and misery before it was done and the US economy currently is in a worse shape than what we started with.

So his assertion of what will happen is far more likely than this benefit of the doubt approach that you are advocating. Only a fool would assume a favorable outcome in the current situation, or even expect one with any kind of optimism.

[Admiral Valdemar]

Not that we have 6-18 months. These plans had to come through now because we had days before the wheels came off. Looking at the Dow currently, it seems the Lehman CDS auction is going to kill the markets. Iceland is already bankrupt and the EU can't fathom what to do.

[Gerald Tarrant]

IF you actually bother to study a recent historical case of a recession with almost exactly the parameters of this one in the recent past, Finland and Sweden are perfect examples.

You sure on that? Looking briefly at both those examples I see fixed exchange rates, with Sweden even taking extreme measures to protect its currency. That suggests that capital and currency markets in both historical examples were less liquid to being with, and Sweden made its markets even less liquid. Apparently Sweden's Central bank briefly set its interest rate @ 500% (just going by what wikipedia says). That's not the policy the US is pursuing, the US is trying to add liquidity and lower interest rates. In light of differing economic remedies, it seems silly to conclude the results would be the same.

[Edi]

The fixed exchange rate baloney was actually a mistake in both cases and the currencies ended up being left to float anyway, but not before a lot of damage was done. The other measures, such as the nationalization and recapitalization of banks along with throwing the investors out on their ass was what finally stabilized things. Contrast with the US solution which is just throwing money into a black hole and bailing out stupid investors instead of addressing the actual problems in a meaningful way, it's going to end badly. Finland was also lucky to be a pretty big player (compared to its size) during the tech bubble, so that helped us get out of the recession back then. I don't see a similar lifeline for the US in the current situation.

[Eframepilot]

The fixed exchange rate baloney was actually a mistake in both cases and the currencies ended up being left to float anyway, but not before a lot of damage was done. The other measures, such as the nationalization and recapitalization of banks along with throwing the investors out on their ass was what finally stabilized things. Contrast with the US solution which is just throwing money into a black hole and bailing out stupid investors instead of addressing the actual problems in a meaningful way, it's going to end badly. Finland was also lucky to be a pretty big player (compared to its size) during the tech bubble, so that helped us get out of the recession back then. I don't see a similar lifeline for the US in the current situation.

From news today, it seems that the U.S. may choose to follow the Swedish and now British plan of recapitalizing banks in return for equity after all. This is a good plan... or at least a less bad plan than Paulson's original "fill the black hole up with money" idea.

[Gerald Tarrant]

The fixed exchange rate baloney was actually a mistake in both cases and the currencies ended up being left to float anyway, but not before a lot of damage was done.

Also Sweden's decision to pump up interest rates to try and defend its currency. This suggests to me that since the US didn't have these handicaps; the damage to its economy will be less relative the damage Sweden or Finland faced before a successful solution was crafted. Which suggests again that the bailout will be more successful than similar efforts would have been in Finland or Sweden

The other measures, such as the nationalization and recapitalization of banks along with throwing the investors out on their ass was what finally stabilized things.

Did they try buying up bad debts? Or had the people already started defaulting? Because if it's the latter then we've still got some big differences. The US situation is different from what I'm reading about Finland's in that a large chunk of the bad US debt specifically Mortgage Backed Securities and CDO's has been made financially unclear through securitization of debt. This is significantly different from Debts that have already been defaulted on.

There's also the freeze in the market for MBS's, combine that with Mark-to-Market accounting rules and you have companies doing write downs that may be unjustified, since a company can't sell it the mark-to-market rules require drastic slice in the value of the security.

Contrast with the US solution which is just throwing money into a black hole and bailing out stupid investors instead of addressing the actual problems in a meaningful way, it's going to end badly.

One of the current problems is the frozen MBS market, which is due to the inscrutability of this and a few other commercial papers. The Fed and the Treasury have the regulatory power and the research wherewithal to take these things apart and figure out what parts are backed by decent mortgages and what part are backed by Sub-Prime mortgages on houses whose value has plummeted. Separate the good stuff from the garbage, and proper risk assessment and pricing can proceed from there. This is an essential part of cleaning up the mess, undoing the financial chicanery that made these things unsalable. It's not a black hole yet, some value can still be recovered. Sooner or later someone's going to need to do that to these things, even if the Banks are partially nationalized and recapitalized. Other financial institutions may be able to do a partial job, but Federal gov't agencies are the best equipped to unravel this.