Brown Orders Banks To Come Clean Over Bad Loans

[A.steve]

http://uk.reuters.com/article/domesticNews...0090117?sp=true

Banks must reveal the true scale of their bad assets to help revive frozen global credit markets, Prime Minister Gordon Brown said on Saturday as his government thrashed out another bank rescue package.

...

Brown held talks on the crisis with Chancellor Alistair Darling, Bank of England Governor Mervyn King and the Financial Services Authority's chairman Adair Turner.

Details of the latest rescue plan are expected to be unveiled within days and could include state guarantees of mortgage-backed securities, a Treasury source said.

The taxpayer may end up underwriting 200 billion pounds of bad banking debt, the Daily Telegraph reported on Saturday, citing unnamed sources.

Either the journalists are confused or the government still doesn't understand the basis for the current crisis. It's all well and good to say that banks must declare their bad assets - but the entire problem has arisen because banks have gone out of their way for a decade (or longer) to obfuscate their lending so as to make it impossible to identify bad assets a priori. Listing all the bad assets is no easier a task than establishing a revelation allowing the perfect prediction of the future fortunes of debtors. It's preposterous - the government aren't even willing to define what criteria must be met for an asset to be 'bad'... It would be laughable if it weren't serious.

I'm also unnerved by the plan to underwrite mortgage backed securities. If the securities that get a government guarantee are only the old ones, then there will be absolutely no incentive for banks to support the housing market - they will be absolved of all risk to their portfolio - and as defaults escalate, the tax-payer will become directly responsible for the substantial losses arising from the reckless arrangements between banks and borrowers. On the other hand, if the guarantee extends to current and future mortgage backed securities, essentially, I think we're saying that the government has decided that it can dictate house prices - which is so mind-bogglingly stupid, I don't know where to attack the idea first.

Anyhow - it seems - another interesting weekend for the BoE, Treasury and FSA. I wonder if this bale-out will amount to the nationalisation of Barclays?