大象传媒

A stinking septic bank

• Robert Peston
• 25 Sep 08, 10:51 PM

So it looks as though the Whitehouse will have its wish: Congress will probably allow it to create its Septic Bank, into which $700bn of poisonous excrement will be sucked out of Wall Street.

Assuming there are no further hitches, will this plan to purge the banks actually work?

Well, conditions in money markets have already become a little less fraught - although banks are still reluctant to lend to each and the rates they are charging for doing so for more than a few days remain punitively high.

And stock markets have bounced.

But all that tells us is that immediate Armageddon has been skirted - this time.

The more important question is whether the Septic Bank (a name I nicked from a banker chum who's been around for a few cycles) will be the comprehensive long term solution to the financial crisis which its architect - the US Treasury Secretary, Hank Paulson - wishes it to be.

That is moot.

Paulson would fear - as per his testimony this week - that some of the compromises he's been forced by legislators to agree will limit the bailout's effectiveness.

These concessions include the payment of all that mega-wonga in instalments, so that Congress could cut off the supply after the first $350bn or so, if it didn't like how Paulson bunged the initial hundreds of billions.

Also, he's being forced, against his will, to punish banks and bankers who expel their toxins in the Septic Bank: there'll be limits on the pay of the executives of bailed-out banks.

Also the government will receive warrants over shares (basically equity stakes) in the rescued institutions, in the hope that taxpayers can share in any gains generated as the detoxed banks return to form.

So one unanswerable question is whether poisoned banks will refuse to detox because the price of doing so - in respect of pay cuts and wealth reduction for their shareholders - would be too great?

Such behaviour on their part may be mad and irrational. But it's now clear that bankers haven't distinguished themselves by their rationality over recent years.

Another unanswerable question is whether $700bn will be enough - given that as one set of assets, those linked to subprime, is written off, the economic slowdown we're experiencing in the US, UK and eurozone will lead to vast quantities of conventional mortgages and loans going bad.

Then there's the question I've raised before of whether Paulson will buy these assets at a high enough price to recapitalise the banks, so that they can start lending with confidence again. And to do that he has to in effect absolve them of their past sins, by allowing them to generate a profit from these sales to him.

All of these uncertainties can be boiled down to one dilemma: if the bailout is used to punish the banks it probably won't save the global financial system; but if the banks aren't punished, then US taxpayers may well feel that their pockets have been picked, and that the Whitehouse has allowed the perps to run off with the spoils.

• Permalink
• Comments (0)

Bank of England unmanned

• Robert Peston
• 25 Sep 08, 11:52 AM

Conditions in money markets have worsened again overnight and this morning.

Rates for lending between banks for longer than just a day or so have risen again.

Hoarding by bankers is on the rise. Given the choice between making a bit of extra profit by lending cash and simply keeping the cash at hand to meet any possible emergency, well bank treasurers - under pressure from their chief executives - are opting for extreme caution.

This is very bad news for the . It means that - again - there has been a partial breakdown in its ability to control demand in the economy, and hence inflation and growth, via changes in its policy rate.

The Bank does not explicitly target three-month sterling Libor, the three-month rate for lending between banks.

But when it moves its policy rate, the Bank of England expects that to have an influence on the rates that households are charged for mortgages and personal loans and that companies are charged for their debt.

The Bank of England hopes to transmit its changes in interest rates to the rates we pay via interbank rates - of which probably the most important is three-month Libor.

So it must be worrying for the Bank of England's Monetary Policy Committee that it has maintained its policy rate at 5% but three-month Libor is well over 6% - and still rising (the BBA's fix this morning was 6.28 per cent, up from 6.2 per cent yesterday).

What's more, this rise in thee-month sterling Libor has come at a time when the market actually expects cuts in the policy rate (as shown by the three-month OIS rate I mentioned yesterday in my note on "interbank hysteria").

There are already signs of banks and building societies pushing up mortgage rates again. And I've been contacted by businesses who say they can't obtain new loans at any price.

The most basic function of the banking system, to channel funds at the right price to those who can best use it, has broken down.

Which, to reiterate what I said last night, is why it is almost inconceivable that the Bank of England won't take corrective action by lending tens of billions to banks at maturities significantly longer than overnight (as I said yesterday, paradoxically there's far too much overnight money sloshing around).

The Bank of England's existing emergency scheme, which allows banks to swap mortgages created before the end of last year for liquid Treasury bills, the equivalent of cash, was helpful. And banks should count their blessings that the closing date for this scheme has been extended to January.

And I can see why the Bank of England may want to wait a bit before doing more - to obtain a firmer grasp of just what kind of bank bail-out scheme may eventually be approved by Congress.

But it may be a long and nerve-wracking wait before a sensible assessment can be made of whether the US Treasury has done enough to restore some kind of stability to the global banking system.

And it may be dangerous to rely too much on the US to solve our domestic banking difficulties.

If we want our banks to do their job properly - if we want the basic infrastructure of the economy to function as it should - the Bank of England will surely have to prime the pump again.

• Permalink
• Comments (0)

Bank of England must lend

• Robert Peston
• 25 Sep 08, 12:00 AM

The reluctance of banks to lend longer than overnight to each other - as described in my earlier note on interbank hysteria - will surely force the to take corrective action.

If it does nothing, well then the cost of money for all of us - in the form of the interest rate we pay on loans - will soar. Which is not what we need when the economy is so weak.

Also an ever growing number of businesses and individuals perceived as even a slight credit risk will not be able to borrow at all.

Money will become painfully tight.

And there could be worse. As the weaker banks become ever more dependent on overnight loans, as they find it increasingly difficult to borrow for any length of time, so grows the danger that one or more of them could suffer a fatal run.

So I expect the Bank of England to provide some of the credit that the banks are unable or unwilling to provide to each other.

This would have to take the form of tens of billions of pounds of loans to the banks at maturities much longer than overnight, including a chunk of three month money.

Maybe the Bank of England will take this evasive action tomorrow. Maybe we'll have to wait a bit.

But with so much fear and uncertainty in the world, it's got to happen soon.

• Permalink
• Comments (0)