Wednesday, January 30, 2008

Secret! – nothing new hear then

Secret bank rescues to be allowed

Chancellor Alistair Darling is to give new powers to the Bank of England to mount secret rescue operations for banks requiring emergency funds.

Posted by dave the box @ 09:09 AM (1512 views)
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29 thoughts on “Secret! – nothing new hear then

  • tyrellcorporation says:

    Brilliant, the protection racket is complete. Secretly we are underwriting the risk for dodgy practices at UK banks. Moral hazard? there is no hazard whatsoever for these bunch of bankers.

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  • I thought the role the regulators was to ensure that UK Banks did not run wreckless business plans with reckless lending etc… in an effort to avoid the Northern Rock situation.

    The latest move IMO sends out a clear message that bail outs will be widely available in the future and offered covertly – what a shambles – Bankrupt Britain here we come.

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  • But looking at the small print… “such secrecy would only apply where such emergency lending is temporary and limited in nature” and “the Treasury believes the Rock probably needed too much money for too long for the BoE to be able to keep the operation out of the public domain” I.E. this facility would only be available if it weren’t actually needed. Because until banks get in real doo doo they are going to try and wing it, and by then it will be too late. As usual…

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  • No different from the ECB, then

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  • “They [the Tories] have also proposed extending the term of office for the governor of the Bank of England from four years to a non-renewable eight years and urged the government to confirm the re-appointment of the current governor, Mervyn King.”

    Mervyn King has just been re-appointed for a further 5 year term.

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  • tyrellcorporation says:

    Hopefully this will give Merv the authority to concentrate on inflation. hopefully he won’t be looking over his shoulder so much at Darling and Brown holding his employment contract with a lit match beneath it.

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  • This seems incredible – and from a so-called Labour government.

    How on earth can it be democratic to stack the odds in favour of a particular sector of business? Any other company can crash and burn but not a bank and as other comments have pointed out this will presumably add to their recklessness.

    I think this highlights the reality of life in the UK in the 21st Century, the further up the banking ladder you climb the more gilded your life is to the point where tax payers money will be used to ensure you remain safe, everyone else lives with the sword of economic reality hanging over them.

    We are rapidly losing touch with reality in this country.

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  • Sorry, I’ve just thought about this further and this idea seems utterly mad. The UK taxpayer is multi-billions in the hole over Northern Rock, we’re heading into probably the stormiest economic waters ever, there could be another half dozen Northern Rocks in the next couple of years and the Government chooses now to offer any underperforming bank a golden parachute. Does anyone know if Paragon will be eligible?

    As Jack C said “Bankrupt Britain here we come”.

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  • I assume this legislation is going to be applied retrospectively? Seeing as this is clearly happening in any case. Isn’t this communism ?

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  • george monsoon says:

    Well this government will definitely not get my vote in any future elections on the strength of this abomination alone!

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  • Tyrell

    “bunch of bankers”

    Now there’s a good expression!

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  • i-cld-murder-a-blt says:

    If this is a pubic bank, then it should be fully accountablr to the public.

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  • Basically what this proposal does is to allow all the other Northern Rocks out there to be bailed out behind closed doors. This prevents the public panicking and prevents similar runs happening and prevents further crises in confidence in the financial system and economies. the public are kept in the dark ever-more. This is truly lamtentable.

    Ironically, ex-President Suharto of Indonesia died on Sunday. Besides being the fourth most genocidal maniac in history, Transparency International rated him the most corrupt world leader ever, having pilfered an estimated $66bn from the Indonesian people. Suharto’s legacy can best be described as opaque.

    Thus, with last night’s announcements, it seems the Suharto’s spirit lives on. Now the scope for corruption has been widened beyond belief.

    Yesterday was truly a sad day for truth, justice and all that jazz.

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  • @wiltshire – Paragon is in a much more vulnerable position than Northern Rock as it relies 100% on the wholesale money markets to fund it’s mortgage business. It does not have any savers deposits and therefore will NOT have the luxury of the BOE coming to the rescue if the agreed emergency rights issue fails. Paragon recently announced they will be closed to new business from end Feb 2008.

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  • I really cant believe this is news. You mustnt get confused between a company and a bank. A company can be allowed to go under – the customers lose as goods and services cant be delivered while the company is in liquidation. Creditors form a queue with HMRC first in the line, whats left gets divi’d up. No probs. BUT when we are talking about a bank then thats a different story. You cant just let a bank go under, it has a domino effect depending on who it is, and how much deposits and debts it has. The question isnt about letting a bank go under or not (generally and basically you can’t, at least not a retail bank). No the question is how do you control a bank and its loan book / assets etc in the first place. When you embark on massive de/self regulation then THATS when the problem starts. When and where it manifests itself is anybody’s guess but them chickens….. OF course they wont it to be a secret because otherwise its a self fullfilling prophecy – no bank can afford a run by its depositors.

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  • Presumably this would allow the BoE to spend tax payers money without the tax payer having the faintest clue what is going on?

    As tax payers we do not share in the profits of banks when times are good so why the hell should we bail them out when it turns sour?
    Why not extend this scheme to other businesses?

    This stinks, and in addition will extend the irresponsible behaviour of the banks when realising they can borrow money without people finding
    out about it.

    I’m really surprised this story has not got more coverage in the media.

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  • techieman > Why can’t you allow a bank to go under? Sure, a bank has depositors as well as shareholders, but so what? Depositors are just another type of creditor. When other companies go under, their creditors do not have their assets guaranteed. Why should a bank be any different?

    You seem to just keep making the point “well, you just *can’t* let a bank go under” without supplying any reasoning.

    This is capatilism. If you give your money to someone else to hold on to or invest, there are *no* guarantees that you’ll get it back. Investments may go up as well as down. Yes, we have banking regulations and codes of practice, and these are in place to give investors/depositors the security that the bank does is not overly reckless with its funds, but that’s about it.

    If you want a nationalised, 100% guaranteed by the BoE, totally secure place to put your money then it exists, and is called National Savings and Investments. No, it doesn’t offer the best interest rates around, but that’s because it is actually risk-free. (Unless the BoE goes under, but then you’ve got bigger things to worry about.) If you want more interest, you have to accept more risk, and you get both by putting your money in a bank.

    Banks have failed before. Many times. Some, such as Barings, have failed in recent memory. This should not be news to anyone. Why should the government start bailing them out now?

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  • @denzil

    “I’m really surprised this story has not got more coverage in the media.”

    I’m surprised that the BBC weren’t told to bury this story.

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  • Notaneconomicsguru says:

    But… I thought that Merv’s view was that the run on NR might have been avoided, if NR had been able to have talks in private about the option of emergency funding from lender of last resort. I guess that could have averted the catastrophic crash in share values and possibly left NR able to continue to raise money from the markets. As I understand it that’s not possible under the current rules. Might this not be a step forward and not a backwards step. If not – then what would alternative would the critics on here propose?

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  • @techieman – you have previously posted that you thought there would be another run on a Bank – presumably not anymore as Mr D and his merry men (robbing from the poor to give to the rich) will secretly prop up any failing bank?

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  • I would vote for a one legged axe weilding taliban supporting BMP madman with a communist streak before I vote for these criminals.

    It makes me so angry that there is F**k all we can do about this, Its not a democracy really is it?

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  • hey Jack C – yes i think there will be. But i would be very surprised if the news wouldnt leak. I must say i have no inside knowledge – really honest guv! Its just a feeling and IMO this “news” story makes no difference. When you think about the people that would be involved – they might keep it quiet for a while but its really unlikely they could keep it quiet for any length of time. And of course if its a really high profile bank the other parties to the transactions they are undertaking would just rachet up the prices, so i think it would be found out anyway. Incidentially although i think this I REALLY REALLY hope im wrong!!!!! My interest is the Guarantees – i.e. would people still run on a bank even if their funds were guaranteed by the Gov? Well again i have to say yes – the Guarantees wont make much difference overall.

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  • btw I think FOMC decides on rates today so stand by your beds!

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  • Mark Wadsworth says:

    Denzil says “As tax payers we do not share in the profits of banks when times are good” to be absolutely fair, we do, all those profits they’ve made are liable to corporation tax and all those bonuses are liable to income tax and national insurance and AFAIAA, the banking sector pays a significant chunk of all UK tax revenues.

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  • Mark Wadsworth said:
    >>Denzil says “As tax payers we do not share in the profits of banks when times are good” to be absolutely fair, we do, all those profits they’ve made are liable to corporation tax and all those bonuses are liable to income tax and national insurance and AFAIAA, the banking sector pays a significant chunk of all UK tax revenues.

    Point accepted Mark. I understand the significance of the stability within the banking sector and the thinking behind secret deals but many corporations pay high taxes during good times but are not afforded the luxury of being bailed out, when as in the case of Northern Rock their business model is shown to be flawed. NR were playing Russian roulette and lost. Many people no doubt earned very large bonuses at NR, off the back of very risky dealing and some risky lending, that risky dealing is potentially underwritten by the BoE.

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  • I’m pretty certain this attempt to keep the waters calm will probably only make things worse because shrouding something like this in secrecy will just lead to further paranoia on the High Street.

    With Northern Rock, although a lot of people took their money out at least those with accounts were able to make a judgement call on the basis of all the relevant news being in the public domain. Next time a rumour starts (and I’m sure it’ll happen because employees of Bank X are bound to advise their family and friends that maybe their savings would be better elsewhere) and queues begin to form at Bank X, the whole issue is going to have a great big smokescreen covering it which will say “Well something is going on but we (the Treasury/BOE) cannot possibly comment”. Now I would think this would give the average punter even more reason to get their money out and pronto.

    I could be wrong of course and we’ll have to wait and see but I think Northern Rock proved the general public are a) pretty jumpy where their savings are concerned and b) not likely to take the word of a Bank CEO or Chancellor at face value.

    Bring it on!!!

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  • it_is_going_with_a_bang says:

    This is the stuff of dictatorships not a free world.

    If it’s public money the Public have a right to know. Full stop. Whats the point in having all these rules about where politicans get there money from etc on one hand and then on the other saying it’s ok to loan ( and we all know what New Labourt loans imply ) billions of pounds to Private company’s without anyone publically knowing.

    Absolute nonsense. If Banks lend responsibily they won’t have ‘this problem’.
    Just because Labour and Gordon are getting a bashing about Northern Rock they now want to change the rule so we won’t know.
    It’s nothing short of criminal behaviour and deception.

    They don’t want us to know the truth is basically what they are saying. Vote accordingly next time an election comes along.

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  • Karellen – I only saw your post this am. There are a few points (i dont intend to make this sound sacastic) :

    1. The BoE is “the lender of the last resort”.
    2. Read some history about the lifeboat and the secondary banking crises in the UK.
    3. Its not really my job to explain these things – just think it through.
    4. A clue – someones deposit is another mans loan. If that wasnt the case then i would agree with you, but its a domino.
    5. My posts are generally long enough!:-)

    Its not about “greedy bankers” bonuses / profits being underwritten by the government. Dont get me wrong the shareholders will suffer, the bailout is for the depositors and the banking system (whats the alternative). Why else do you think the FDIC in the states (fully) insures deposits of $100k and we (proposing) £50k. Although we may disagree i think we can both say that this whole topic deserves a complete discussion

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  • ….also Barings was not a retail bank. I did make the distinction. I think its naive to think that when these schemes are put in place the parties providing teh bailout dont look at the loans and investments / and deposits involved.

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