British banking system to be semi-nationalised

[Pavlos]

Source

 

The UK government announced yesterday and expanded on today a plan which will involve the partial nationalisation of the British banking system. Costing £400 billion (or around $692 billion) of public funds, the package is designed to inject extra capital into the financial system in return for a preference share in each of the banks, guaranteeing a return for the taxpayer. Perhaps unsurprisingly, the FTSE 100 dropped by 4% after the measures were announced.

 

The sums involved in Chancellor Alastair Darling's plans are massive. From today's Financial Times: "£50bn to buy stakes in the banks, £250bn of guarantees for the inter-bank market; another £100bn in additional short-term liquidity from the Bank of England." The total figure dwarfs both spending on education (£82 billion) and health (£111 billion).

 

In addition to the shares, the government has demanded a radical change in the banking culture with increased regulation and restrictions on city bonuses.

 

A recapitalisation of the banking system, rather than an attempt to buy poison assets as the US government has been doing, is, in the words of Gordon Brown, designed to "put the British banking system on a sounder footing."

 

So, a stake (pun not intended) in the heart of the British free-market or, as the FT says, "a prudent gamble"?

[Jae Onasi]

That's going to seriously annoy some rich banking executives, I'm sure.

[SW01]

Well, I agree with the PM that 'extraordinary times call for...bold and far-reaching solutions'. That they are attaching conditions is good. At least it isn't going to be a matter of throw money at the problem and pray. As Cameron said, we need assurances that the directors and executives of banks that have behaved irresponsibly will not receive their bonuses.

 

Lord Jones made a good point that if the cost of this plan (if successful) is lower than the potential cost if the government does nothing, then it is good.

 

However, it is somewhat concerning that the PM doesn't seem to have a backup, according to BBC reports (I'm typing this while watching the report:xp:) As the BBC say, this is a several billion pound risk. Once the money is in it won't be possible to retrieve it for many, many years. And it looks as though if this is a failure, we are stuffed...

[Astor]

What did they work out the cost for us all was? £1600?

 

I'm glad that the Government is now actually doing something about it, but it's worrying if they have NO backup plan whatsoever.

[Pavlos]

What did they work out the cost for us all was? £1600?

 

I'm glad that the Government is now actually doing something about it, but it's worrying if they have NO backup plan whatsoever.

Because it's a preference share the holder (i.e. the state and in theory the taxpayer) will receive money before the company pays share dividends. Provided the banks do not collapse (which is unlikely -- never say never! -- with such massive recapitalisation plan) then the taxpayer should see a return. Although it will mean the bankers will wake up to a very different Canary Wharf the morning after, this absurd Zen-mix of capitalism and socialism could well be a better, if more surreal, solution than the buying of toxic debts.

 

Put it this way: At least we have a stake in the profits as well as the losses.

[Litofsky]

This sounds like the US bailout package, except it seems to have less of a drastic effect on the economy. But I'm not an economist, so I don't have an entirely accurate view on these things.

 

I'd rather have the government save these companies (by giving them money and imposing regulations and rules as to how they use their money, in this case) then see them collapse.

[SW01]

It's a bit worrying that FTSE 100 closed yesterday down 239 points at 4367 - it's lowest for four years according to The Times. However, HBOS is up 24%.

 

This is of some interest:

US could copy British-style bank bailout

 

And this:

Gordon Brown's part-nationalisation of banks delivers 25-year-old pledge