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Toxic Loan Insurance Scheme 'could Increase Bankruptcies'

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Alistair Darling is to fast-track the recruitment of a top City executive to run the government's toxic-loan insurance scheme, amid growing concerns that trigger-happy banks will force recession-hit firms into bankruptcy.

Professional turnaround firms are understood to have warned the government that perverse incentives in its Asset Protection Scheme (APS) could drive debt-laden companies to the wall and put as many as 1.5m jobs at risk.

The chancellor's top-level recruit will be charged with ensuring that the banks that sign up to the scheme do not behave recklessly and will control a new "arms-length" body to oversee it.

But restructuring firms such as ­AlixPartners have warned the government that its scheme, which will insure £585bn of the most troublesome assets of Lloyds Banking Group and Royal Bank of Scotland, could tempt the banks to force companies into insolvency rather than help them survive.

Thousands of highly indebted businesses have breached the terms of their loans or are on the verge of doing so. Bankers are having to decide whether to extend the loans or pull the plug.

Because the government will bear 90% of the losses on the bad loans – once the banks have endured a combined "first-loss cushion" of £44.5bn – turnaround firms believe its APS could change the banks' behaviour. The banks have to take only 10% of the subsequent losses, so it could be more cost-effective for them to put companies into administration than to restructure loans in an attempt to keep the businesses afloat.

Andrew MacCallum, managing director at Alvarez & Marsal, a turnaround firm, said: "Yes, there's room for abuse, as the scheme was done in a rush. But back then time was a luxury – we should expect there will be mistakes.

"There's a risk of abuse, but the alternative at the time was to let it go pear-shaped, and we couldn't afford to do that."

RBS and Lloyds are burning through their combined £44.5bn first-loss cushion quickly, as the recession claims victims among cash-strapped firms and families. About half the amount is likely to be eaten up this year, so if losses continue at the same pace in 2010, the taxpayer could be paying out on the scheme by 2011. Analysts at Credit Suisse forecast combined losses of £105bn.


I mean the govt really thought this one threw didn't they.

We really must elect Brown again I mean where would we be without him, it's not often we have someone with his genius in charge.

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