New UK bank bailout
Has it not been said that the definition of insanity is trying the same thing while expecting a different result?
David Stringer, Associated Press
January 19, 2009
LONDON — Britain announced a new bank bailout Monday to boost lending into a struggling economy and protect banks from the bad assets sinking their balance sheets — an admission that an earlier sweeping rescue plan didn’t do the job.
The plan outlined Monday would require banks who want to participate to identify their riskiest assets and allow them to pay a fee to insure them with the government. By offering to insure bank loans, the government is exposing taxpayers to billions of pounds of potential losses, though an exact amount can’t be pinpointed until banks start participating.
But banks would have to enter legally binding agreements to lend more money to borrowers, Prime Minister Gordon Brown said.
“The impact of today’s announcements on public finances will be temporary, investments will be held for no longer than is necessary to ensure stability,” Brown said. “We will protect taxpayers’ interests, liabilities will be backed by assets and fees will be charged for the schemes that we are introducing.”
Banks worldwide have taken huge losses on securities backed by U.S. mortgages to people with shaky credit. Those losses in the financial system are threatening the wider economy because they make it harder for businesses and consumers to get loans.
Britain’s economy shrank 0.6 per cent in the third quarter and economists say it is headed into a sharp recession.
Treasury chief Alistair Darling said the new plan was needed because a first bailout announced in October and worth 37 billion pound (about US$55 billion) had not done enough to boost the economy and restore bank lending to needed levels.
“Banks all over the world have got themselves in huge difficulties, and frankly governments all over the world are having to sort the problem out,” he said.
Critics called it a gamble.
“With just three months having passed, the UK government is again rolling the dice in an attempt to revive credit and breathe life back into the wider economy,” said Keith Bowman, an equity analyst at Hargreaves Lansdown Stockbrokers.
The plan also includes efforts to boost mortgage lending and about $74 billion set-aside to create a special fund for the Bank of England to buy high quality loans and other assets directly from banks.
The government announcement coincided Monday with a report by the Royal Bank of Scotland saying its losses for the full year could be as much as 28 billion pounds ($41.3 billion), which would be the biggest loss ever by a British corporation.
Royal Bank of Scotland shares fell 25 per cent in morning trading on the London Stock Exchange, but Barclays was up 19 per cent, regaining ground lost in a late sell-off on Friday. Lloyds Group was up 1.6 per cent and HSBC was little changed.
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