Last Throw Of The (Bank) Dice?

19 January 2009 - Last throw of the (bank) dice?

The cogitations of the UK central bank officials over the past weekend has produced more proposed actions aimed at getting the credit lines flowing again. Taken as a whole, are these the last throw of the dice. Or, is there a nationalisation double six still needed to finish the game? The new actions can be summarised as follows:-

1. Banks will be offered a Government guarantee on their toxic debt (it looks like an alternative to the much heralded "bad bank" idea). This insurance scheme will, for a fee, cover losses on toxic assets should they fall below a prescribed level. The bank can pay for the premiums in either cash or shares (we could call the latter option a "taxpayer creep")

2. The £10.5bn of preference shares held by the Government in RBS and Lloyds can be converted into ordinary shares. The upside to this is eradication of the penal coupon on the preference shares and a boost to the bank’s capital ratio. The downside is more taxpayer creep, indeed, it might result in the Government having a majority holding in Lloyds (that now formally owns HBOS) as well as RBS.

3. The Government will offer a guarantee on new mortgages

4. Individual banks will be able to swap new loans for Government securities. Effectively this will extend the Special Liquidity Scheme as described in earlier entries in this diary.

All this weekend’s work was aimed at stabilizing the market upon opening this morning (one assumes). In early trading, RBS, Lloyds and Barclays all fell heavily with the latter having to put out a statement of "know of no reasons etc". Only HSBC held steady.

Some super mathematician has calculated that the combined cost of bailing out banks so far by the US, UK, Europe, China and Japan is $3,000bn. This amounts to 2% of global GDP.

But, we can end with some good news. LIBOR lending rates in the US, UK and in Europe have fallen sharply. US mortgage rates have dropped from 6.5% to 4.88% since this diary started in October 08 and finally companies are issuing bonds again

The diary is now taking a break to see how things look from outside the UK. Back in February.