Boe U Turn - Massive News.

[ARIMA]

One of the key questions is what is going to be included in the - 'wider range of commercial bank assets “including mortgage collateral”. I am not too worried about bog standard MBS as most probably will eventually be honoured even in the wake of a housing and stock market crash. What needs to be watched is whether the investment banks and others try to offload the mountain of crud sitting on their books in the form of CDO, CLO and LBO debt. If that happens the the old accusation thrown at our contemporary crony capitalism that it likes to privatise the profits and socialise the risks will be conclusively proven. The one thing that makes such an outcome unlikely is that their is simply not enough money in the public purse even allowing for taxation and government borrowing to cover all the derivatives out there. Should an attempt be made to get the taxpayer to pick up even a modicum of this derivative debt then I think we have reasonable grounds to consider questioning the legitimacy of our current system of government and that it is perhaps time to replace it with something different.

According to the FT the full details of the lending arrangements will be made known on Friday so we will have to wait until then to see what exactly is being proposed.

At the end of the day, it's only collateral. What do you think would happen to an institution that defaulted on a loan from the central bank?

They wouldn't be in business for long, that's for sure.

[Bloo Loo]

cost of new home £200,000

cost of rescuing bank system £4BN

Gordon Brown sacked- Priceless

[uncle_monty]

One of the key questions is what is going to be included in the - 'wider range of commercial bank assets “including mortgage collateral”. I am not too worried about bog standard MBS as most probably will eventually be honoured even in the wake of a housing and stock market crash. What needs to be watched is whether the investment banks and others try to offload the mountain of crud sitting on their books in the form of CDO, CLO and LBO debt. If that happens the the old accusation thrown at our contemporary crony capitalism that it likes to privatise the profits and socialise the risks will be conclusively proven. The one thing that makes such an outcome unlikely is that their is simply not enough money in the public purse even allowing for taxation and government borrowing to cover all the derivatives out there. Should an attempt be made to get the taxpayer to pick up even a modicum of this derivative debt then I think we have reasonable grounds to consider questioning the legitimacy of our current system of government and that it is perhaps time to replace it with something different.

According to the FT the full details of the lending arrangements will be made known on Friday so we will have to wait until then to see what exactly is being proposed.

CDOs could be acceptable depending on vintage, discount/over-collateralisation. I have good connections at the pointy end of the structured credit market - there are very few actual credit events in this type of collateral. Unfortunately, perception of risk/loss has taken over from reality.

[Bri2]

At the end of the day, it's only collateral. What do you think would happen to an institution that defaulted on a loan from the central bank?

They wouldn't be in business for long, that's for sure.

Not really that's what Moral Hazard is all about. What's to stop some of the Hedge Fund sharpies engineering similar scenarios so they get bailed out just the same. Now that they have shown their fear the BoE will be blackmailed into further handouts.

[thedebtisreal]

In the long-term, yes there will be a significant crash in prices. In the meantime, there are opportunities aplenty to make money / gain a home, etc. The government appears to have the guts to inflate this all the way to 2012.

The government are inflating nothing, they are trying to prevent a complete deflationary collapse.

Banks now hate risk. Housing is built on risky loans. Housing IS finished. These interventions are not about supporting the housing market or the mortgage market. These loans are literally the only thing keeping the banks in business.

[TortoiseYid]

Not really that's what Moral Hazard is all about. What's to stop some of the Hedge Fund sharpies engineering similar scenarios so they get bailed out just the same. Now that they have shown their fear the BoE will be blackmailed into further handouts.

All things are possible I suppose, but I would seriously doubt that a Hedge Fund bail-out would get past the front door on Threadneedle Street.

Rescuing people's savings accounts in a high street bank is one thing, saving high net-worth investors in fundamentally risky hedge-funds is quite another.

[Bloo Loo]

I call for a round of applause for the UK taxpayer- saviour of the Banking system- well done!

[DabHand]

If banking is so critical that it cant be allowed to fail and is ultimately inderwritten by the taxpayer, why don't we simply nationalise the whole lending sector so we own it. the current situation simply allows private interests to make hay whilst the public carry the ultimate risk... hmm bit like every other critical industry. (nuclear power, railtrack etc)

[godless]

Banks are entirely different to a normal company. They make nothing but have set themselves up as the blood vessels of the economy.

You could loose an arm or a leg, but loose your blood supply and you are dead.

Thats why they are different

And what happens when you chop arms and legs off?.....bleed everyone one dry is exactly what is going to happen. Thats why some call this a bloodbath in the making.

[stormymonday_2011]

At the end of the day, it's only collateral. What do you think would happen to an institution that defaulted on a loan from the central bank?

They wouldn't be in business for long, that's for sure.

Yes and who would wind up holding the residual debt - the taxpayer.

If the collateral is not good enough for commercial loans why should it be good enough to borrow from the rest of the populace. Free marketeers are always keen to deride state intervention in the economy. Why is it suddenly acceptable now. If the government is so concerned about the impact of the current credit crisis on the wider economy there are lots of things it could do apart from bailing out city institutions. For example, if it is worried that consumer spending is about to dry up surely it would simpler to cut taxes rather than to make funds to banks and other institutions so that they can make yet more dodgy loans and drive the populace deeper into debt. The money would then be fed directly to the people who spend the money without the need for the City to get its cut.

I am starting to wonder whose a*** they are really trying to save here.

Edited September 19, 2007 by up2nogood

[newbie]

cost of new home £200,000

cost of rescuing bank system £4BN

Gordon Brown sacked- Priceless

For everything else (including food, petrol, mortgage repayment, 10BN repayable in 3-Months to rescue banking system) there's Mastercard^TM!!! Now available from your local BoE banch at Base Rate plus 1%.

[TortoiseYid]

If banking is so critical that it cant be allowed to fail and is ultimately inderwritten by the taxpayer, why don't we simply nationalise the whole lending sector so we own it. the current situation simply allows private interests to make hay whilst the public carry the ultimate risk... hmm bit like every other critical industry. (nuclear power, railtrack etc)

Would you really like politicians and civil servants deciding who can and can't open accounts, get loans, mortgages?

Not saying it would be worse, but remove the element of competition and nationalised industries have hardly been models of efficiency and customer satisfaction.

I thought most people on this site would be asking for less government intervention in the economy (HPI, IRs, etc) rather than more.

It's also worth pointing out as well that no taxpayers money has been used to bail anyone out yet. That may change of course.

[uncle_monty]

The government are inflating nothing, they are trying to prevent a complete deflationary collapse.

Banks now hate risk. Housing is built on risky loans. Housing IS finished. These interventions are not about supporting the housing market or the mortgage market. These loans are literally the only thing keeping the banks in business.

The government will be inflating by either cutting rates or not increasing them from current levels (they built in 6% into their forecasts). This will play out over the next 6-12 months.

Housing is far from finished (by this I'm assuming you mean a HPC, by the way). UK mortgage collateral has shown no appreciable decline. Liquidity fears will ease when this is more widely appreciated.

[DabHand]

I am starting to wonder whose a*** they are really trying to save here.

Sorry, was there any doubt?

[stormymonday_2011]

CDOs could be acceptable depending on vintage, discount/over-collateralisation. I have good connections at the pointy end of the structured credit market - there are very few actual credit events in this type of collateral. Unfortunately, perception of risk/loss has taken over from reality.

One of the reasons that the lending markets have frozen up is precisely because these credit derivatives are so hard to value. They come in a myriad of different varieties and all sorts of configurations. If the commercial banks with their large number of professional risk assessors find it impossible to put a price on these things what chance has the BOE got with its tiny number of staff. It is simply not set up to play this role.

[DabHand]

The government will be inflating by either cutting rates or not increasing them from current levels (they built in 6% into their forecasts). This will play out over the next 6-12 months.

Housing is far from finished (by this I'm assuming you mean a HPC, by the way). UK mortgage collateral has shown no appreciable decline. Liquidity fears will ease when this is more widely appreciated.

The lending risk models have been stuck in ongoing HPI gear. Any drop in easily obtainable credit to allow the ponzi to go on will itself stop HPI, increasing the risk calculated in the models further reducing the credit made available. This will literally eat itself.

[Bloo Loo]

The tide has gone out- lets see whos been swimming with no trunks on

[R K]

The tide has gone out- lets see whos been swimming with no trunks on

None of the imagery is pleasant

[Bri2]

All things are possible I suppose, but I would seriously doubt that a Hedge Fund bail-out would get past the front door on Threadneedle Street.

Rescuing people's savings accounts in a high street bank is one thing, saving high net-worth investors in fundamentally risky hedge-funds is quite another.

The way these city whizzkids bamboozle they will find a way to raid the BoE. The fat Scotish Poofta needs time and he will pay whatever he has to put off the inevitable. As a tester of the PM & The Chancellor it don't look good. Those OAP's outside NR have more common sense and courage.

[wotser]

I don't understand what all this means? Does this mean the US "sub prime" mortgage backed securities (which no one dare open, let alone value) held by UK banks are being moved to the BoE?

Also is the credit crunch still on? For instance how are NR still funding, or going to fund their mortgage book?

I suspect NR are dead in the water, maybe there will be a few people shorting but thats about it - if you play wit the shares even now you may get burnt, even if there is a dead cat bounce. Its full steam ahead for the credit crunch, its already happening. The fundamentals are still there and although they may be able to transform one problem into another problem, there will still be a BIG problem that aint going away.

Also the BoE wasnt set up to protect city bonuses and hede funds, Merv was right in that respect

Edited September 19, 2007 by wotser

[Guest Popalot]

None of the imagery is pleasant

No trunks horror contest:

1. G. Brown

2. A. Darling

3. E. Balls

Highly Commended: M. King

[hankdd]

I share a lot of the anger felt here.

Am I alone in feeling that the underwriting of our entire banking system, regardless of fault, is a little bit like when a teenager throws a party and mentions the address on my space?

Are we vulnerable to Sorros like characters taking the p##s?