Bank Bailout

[petetong]

Good article:

http://blogs.ft.com/maverecon/2009/01/can-...gn-debt-crisis/

Extract:

Both countries allowed the unbridled growth of banks that became too large to fail. In the case of Iceland, the banks also became too large to rescue. In the UK, the jury is still out on the ‘too large to rescue’ issue, but I have serious and growing concerns. Incrementally, the British authorities have guaranteed or insured ever-growing shares of the balance sheets of the UK banks. And these balance sheets are massive. RBS, at the end of June 2008 had a balance sheet of just under two trillion pounds. The pro forma figure ws £1,730 bn, the statutory figure £1,948 (don’t ask). For reference, UK GDP is around £1,500 bn. Equity was £67 bn pro forma and £ 104bn statutory, respectively, giving leverage ratios of 25.8 (pro forma) and 18.7 (statutory), respectively.

With a 25 percent leverage ratio, a four percent decline in the value of your assets wipes out your equity. What were they thinking? The fact that Deutsche Bank used to have a leverage ratio of 40 and is now proud to have brought it down to just below 34 is really not a good excuse.

Lloyds-TSB Group (now part of the Lloyds Banking Group) reported a balance sheet as of June 30, 2008 of £ 368 bn and shareholders equity of £11 bn, giving a leverage ratio of just over 33. Of course, for all these banks, the risk-adjusted assets to capital ratios are much lower, but because the risk-weightings depend both on private information of the banks (including internal models) and on the rating agencies, they are, in my view, worth nothing - they are the answer from the banks to the question “how much capital do you want to hold?”. That the answer is “not very much, really”, should not come as a surprise. For the same date, HBOS, the other half of the new Lloyds Banking Group, reported assets of £681 bn and equity of £21 bn, giving a leverage ratio of just over 32; Barclays reported total assets of £1,366 bn and shareholders equity of £33bn giving a leverage ratio of 41, and HSBC (including subsidiaries) reported assets of £2,547 bn and equity of £134 bn for a leverage ratio of 19.

The total balance sheets of these banks about to around 440% of annual UK GDP. The government seems to be well on its way towards guaranteeing most if not all of it. No one outside the banks (and perhaps even no-one inside them) has a good sense of the true value of what they hold on and off their books.

[wonderpup]

But, apart from that, were ok

Edited January 20, 2009 by wonderpup

[huw]

Bump, this is long but well-worth reading.

He offers an alternative to the current open-ended commitments that will end up wiping us out:

A modest proposal

So here is my proposal:

(1) Take into complete state ownership all UK high street banks. This has to be mandatory, even for the banks that still like to think of themselves as solvent.

(2) Fire the existing top management and boards, without golden or even leaden parachutes, except those hired/appointed since September 2007.

(3) Don't issue any more guarantees on or insurance for existing assets - regardless of whether they are toxic, dodgy or merely doubtful. Issue guarantees/insurance only on new lending, new securities issues etc. A simple rule: guarantee the new flows, not the old stocks. This will reduce the exposure of the government to credit risk without affecting the incentives for new lending.

(4) Transfer all toxic assets and dodgy assets from the balance sheets of the now state-owned banks (or from wherever they may have been parked by these banks) to a new 'bad bank'. If possible, pay nothing for these toxic and dodgy assets. Since the state owns both the high-street banks (I won't call them 'good' banks) and the bad bank, the valuation does not matter. If the gratis transfer of the toxic or dodgy assets to the bad bank would violate laws, regulations or market norms, let an independent party organise open, competitive auctions for these assets - auctions in which the bad bank, funded by the government, would be one of the bidders. Whatever price is realised in these auctions is paid by the new bad bank to the old banks.

Capitalize the bad bank with the minimum amount of capital required to meet regulatory norms. Fund the rest of the assets through a loan from the state to the bad bank or through a bond issued by the bad bank and bought by the state.

As regards the bad bank, that's effectively it. With toxic and dodgy securities on the asset side of its balance sheet and with the state owning all the equity and as the only creditor, the assets can either be sold off, if a market develops again, or held to maturity, earning whatever cash flows they may yield.

...

The miracle of limited liability applies also when the state is the owner. As long as the state-owned bad banks (which could be merged into a single super bad bank) don't obtain sovereign guarantees for their obligations, the financial exposure of the sovereign is limited to its equity stake and the existing guarantees and insurance it has provided in the past.

[South Lorne]

..the point ..

(2) Fire the existing top management and boards, without golden or even leaden parachutes, except those hired/appointed since September 2007.

...needs to be addressed now...without the necessary action the government continues to display ineptitude as much as these 'weaklings' described as Bankers....

[zinny01]

Capitalize the bad bank with the minimum amount of capital required to meet regulatory norms. Fund the rest of the assets through a loan from the state to the bad bank or through a bond issued by the bad bank and bought by the state.

A bit of a moving feast this one though and a potential bottomless pit.

When you think you have sufficient capitalisation today, tomorrow your liabilities may be 2 or 3 times greater than first thought.

But at the end of the day the only way to move on is to recognise the losses and move them away from the current lenders. There needs to be strong regulation on future lending to make sure this does not happen again... then in 80 years time we can do it all again!

[laurejon]

The Laurejon Martial Plan

1. Nationalise all Banks

2. Every Citizen has an account and pay their NI contributions into that account, when ill they draw on it, whats left is their pension.

3. The Ni contributions are lent to First Time Buyers at an reasonable fixed interest rate for the term and the interest accrued is paid into the Ni accounts.

4. Charter a ship and collect the 1,500 tons of timber adrift in the English Channel.

5. Build some gallows with the Timber and bring those to justice who engineered this mess.

[huw]

A bit of a moving feast this one though and a potential bottomless pit.

When you think you have sufficient capitalisation today, tomorrow your liabilities may be 2 or 3 times greater than first thought.

But at the end of the day the only way to move on is to recognise the losses and move them away from the current lenders. There needs to be strong regulation on future lending to make sure this does not happen again... then in 80 years time we can do it all again!

Perhaps I should have excerpted more (really the whole article needs to be read, I quoted some key parts in the hope of encouraging more to do so). But he seems to be advocating allowing bad banks to bust, rather than to be supported beyond the initial stage:

It is key that there be no further injections of funds by the state into the bad banks until there are no longer any private creditors. If a bad bank becomes balance-sheet insolvent or liquidity insolvent and it still has private creditors (as it would, in general, under the model of item (5)), the bad bank should be put into administration and its debt to parties other than the British state should be converted into equity. That equity would be then be purchased by the UK state. With the bad bank now not just 100 percent state-owned but also without private creditors of any kind, the assets can be managed as the state sees fit - one hopes in such as way as to maximise the present discounted value of their held-to-maturity cash flows.