Monday, Sep 29, 2008
A touch of responsibility
BBC Robert Peston: B&B collapse to cost City £9bn
If I understand correctly, the government has handled this one with a touch of thought - and a spot of poetic justice. I am no fan of Gordon's Economic Disaster, but credit where it's due.
In short, the Govrnment have bailed out depositors and dumped risk on the banks. Like it or not, that's a beauty - socialism for people, capitalism for companies.
How does it work? The failure of B&B invokes the Financial Services Compensation Scheme, but we know the banks are broke, so the government steps into the breach and covers the amout due under the insurance, maintaining order. However, and this is the clever bit, the government gets the money back - with interest. Any shortfall after the mortgages have been paid off (or gone toxic) will be made up by the banks. They eat their own risk.
14 Comments
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1. timmy t said...
Great in theory. Until the banks pass on these losses to customers in higher charges. Sounds very similar to the recent energy company fiasco. Either way we will pay - its just that this way the Govt can blame the companies when we get the bill.
2. Stevie Dee said...
And a paper trail for the HMRC for all those wonderful BTLer's. Not enough jails to hold them for tax evasion, so pay your fines with your assets. That'll do nicely! They will have landed on Income Tax, in between Mayfair & Park Lane. Or the dreaded Community Chest card. And an instant housing portfolio!
3. techieman said...
The "good" banks are made to pay twice - first for being undercut uneconomically (as it turns out) by the "bad" banks and losing business and second for having to pay towards the deposit insurance of the "bad" banks. I suppose you could argue that also they have been damaged by counterparty risk on their asset side, so the balance sheet takes a hit, as the assets become bad. Higher charges? Hmmmm thats like the boy with his finger in the dyke....
Do i feel sorry for the "good" banks? Not really - a bit like complaining about losing on penalties, everyone knows (or at least should) know the rules at the begining of the game!!
4. Lie To Bet said...
Is it possible for the surviving banks to sue the FSA for negligence over their inadequate supervision of the likes of B&B, which they are then havinng to pay for.
5. Fred56 said...
Why would you sell the saving side of the business to a foreign bank? Why not just absorb it into NS&I.
6. timmy t said...
techieman - I was thinking more along the lines of 10% mortgage rates than £5 for going overdrawn!
7. techieman said...
Fair point Timmy, if thats right then i feel sorry for anyone on a SVR thats bought in the last few.
8. str 2007 said...
Knowing they'd be picking up the tab for lax lending - why didn't they get things tightened up themselves.
Answer - they had their snouts in the trough aswell.
9. mark wadsworth said...
*sigh*
I've explained how any professional would have fixed the B&B quickly and relatively painlessly in one easy step.
There's no need to waste or risk of taxpayers' hard-earned.
*/sigh*
10. icarus said...
The govt has to be seen to be extracting a pound or two of flesh from the banks because the peasants are revolting.
11. Fjcruiser said...
reward for failure: CEO is paid £3million pounds to get B & B nationalised.
12. stillthinking said...
The banks don't have any flesh, it all comes from the public. Taking from the banks is taking from the banks customers, same as a windfall tax on utilities, quite aside from the 30% of tax revenue the government were getting previously from financial services (also ultimately from bank customers).
Brown is now trying to wriggle out of the enormous liabilities he has taken on, being faced also with a growing deficit just to maintain existing government spending.
I am sure the banks won't have any idea at all how to get out of this, being faced with such New Labour genius. When Lehman went bust they managed to move 8.4 billion (or whatever) overnight to the US and out of UK jurisdiction. They will only be able to grab from business that cannot be moved such as UK mortgage lending, other financial services will probably weigh up the relative benefits and costs of staying in the UK, as they are already doing anyway, and then leave.
Gordon Brown have this naieve fantasy that nobody will ever leave the UK, because its so great here, when actually its just apathy.
13. Davidw said...
It may appeal to our sense of justice but this move is close to clinically insane! Just as the banks are close to folding like a pack of cards the last sensible thing to do it to burden them with futher "toxic" debts. Crazy....
14. Luckyjim said...
Sigh
Why is it that people assume they can understand economics without any formal study ? Would you be happy to be be treated by a doctor who had not been to medical school but had just picked up a bit here and there by reading the health pages of The Times ? No. And yet people seem to think that reading the business pages is enough to gain an understanding of the money supply, inflation and the effects of fiscal policy? Why not ? A degree in history (Brown) or engineering (Darling) is good enough to be Chancellor?
MW is a prime example - he has not got a clue. His ideas are absolute nonsense. He is the economist equivalent of a creationist - with a logic so far removed from fact that you cannot begin to put it straight.
You cannot become an economist simply by reading 'The Economist'.