benj

OMFG. Bond market rout is pretty much a dead cert, even on the rumour. Will there be a bond market left? How the f*ck would the Fed get out of that one? We've seen the commercial paper markets freeze over and that was bad enough, but now I'm thinking the unthinkable - what if the market for government paper dried up? The whole world's banking system is predicated on a deep and liquid market for government bonds. No, no, it's not that bad. They'll only downgrade it a couple of pips at most, and there are plenty of countries with properly-functioning central banks that have much worse ratings. Get a grip man.

Ooops, duplicate thread.

Yup, that's the bit where the mirrors crack and the smoke starts leaking out and suffocating the audience. The whole concept of the SLS is predicated on the idea that sometime in the not-too-distant future (i.e. a couple of years) there will once more be a transparent and liquid market in these mortgage-related securities. It's because that market froze up that the SLS is necessary in the first place - otherwise the banks could sell these bonds to raise the money they need. So the BoE takes a risk when it makes this swap; the value of these bonds is likely to go nowhere but down, and there may not even be a market for them at the end of the term. So long as the counterparty banks stay in business, this is not the BoE's problem. But, as you say, if a big SLS participant goes down, the BoE is left holding the bag. Now, I'm not sure whether the participating institutions are required to ring-fence the gilts they borrow - I suspect there must be some restrictions in force, but I haven't read the operating procedures in detail. If there is such a clause, then the BoE can probably swap them back at the point of failure and leave it up to the failed bank's shareholders and creditors to fight over the toxic crud. If not, the BoE will have egg on its face. In that case I suspect the offending securities would be left to moulder away on the BoE's books or be flogged off on the cheap to bottom-feeding hedge funds. Either way, the actual damage isn't dealt directly to the taxpayer as far as I can see.

Because in the case of the SLS no money is changing hands - or if it is, it never came from taxpayers. In a nutshell, it works like this. Dodgy bank gives BoE risky mortgage-bond assets with a face value of £2bn. BoE in return gives Dodgy Bank UK government bonds (gilts) with a face value of £1.6bn (say). Now Dodgy Bank can use those gilts as collateral to get short-term money from the interbank market or the BoE's standard liquidity facilities - let's say they can borrow £1.5bn over 3 months at 5% to finance their operations, then they need to find a few hundred million to pay the interest when it comes due which they can do by making a profit (unlikely) or calling in loans and selling other assets they may have on their books. In return for paying off the loan, they get their (borrowed) gilts back. Finally, they reverse the original bond exchange and get back their MBS paper. The net result is that Dodgy Bank has been tided over liquidity-wise but has had to restructure or scale back its operations - i.e. it's been forced to put its balance sheet in order - and there is no ongoing liability to the taxpayer or (long-term) to the BoE. It's all done with smoke and mirrors. Think of the SLS as the BoE essentially offering a courtesy car to the high-street banks who have just wrapped their vehicles round a series of pine trees that no-one saw coming.

It's different this time!

Newsflash: FSA says that HBOS is well-capitalised! Bloomberg's source for the story is the BBC. No indication of who the BBC's source is, but it's too speific a rumour to have come out of nowhere.

Cynic! Shares were down to 88p at one point, according to Doomberg.

Are you sure he didn't just mean the date? The financial turmoil we're seeing might well be worse than what happened in the money markets on and after 9/11. Certainly that's the last time things were this bad - but that upset was extrinsic, and this one is systemic. I don't think even Branson would be so insensitive as to compare a financial market sell-off, however severe, to a fatal terrorist attrocity.

I might just swing by HBOS and get some cash out of an ATM on my way home. I don't bank with them, but, you know, every little helps. Actually, I'd just get crappy old BOS banknotes anyway, so forget it.

OK, perhaps the way I phrased it did sound a little preachy. It wasn't my intention to run anyone down at all. Sorry! I wouldn't mind seeing people lose money they didn't deserve to have in the first place. But that's very different from wishing doom and destruction on ordinary people with savings. In the long term, deposit insurance can be expected to pay out if your bank fails - but it may take time. Holding some cash in hand is a good way to avoid getting caught out should the worst happen. For my part, most of my cash savings are in instantly-accessible forms (some with interest penalties), and I bank with the relatively-safe HSBC - but I'm still keeping a decent-sized buffer of cash outside of the banking system at the moment.

Hey, hey, you asked for advice! It's not too late to run down to a cashpoint and grab a few hundred quid, then do the same again tomorrow. That is a quick and easy insurance policy to take out against the (remote) possibility that your bank is about to collapse. As for "other people's misery", what are you talking about? You haven't lost any money yet, have you? We're all in the same boat here.

This is why you (and everyone) should keep enough cash to cover a month's essential expenditures (food, fuel, utilities, rent) in cash, in as safe a place as you can contrive.

There are a lot of big financial institutions currently trying to fend off total collapse by selling whatever assets they have left at whatever price they can get for them.

Double what? It's more than triple the Fed funds target rate of 2%. Quite some spread. Then again, in the late 90's savings-and-loan crisis the spread between the interbank rate and the Fed's target rate opened to 10% at one point. And that was off a base of about 6%. So maybe we have some way to go.

And Barclays.