Friday, January 16, 2009

Can you store this toxic waste for me please?

Treasury plans 'bad bank' to buy toxic assets

Gordon Brown is preparing a new multi-billion pound rescue package for the banks which is expected to be announced next week. In his strongest hint yet that a "bad bank" is a serious option, the Prime Minister said that "action" on toxic debts, which are blamed for the failure of high-street banks to resume normal lending, is now essential. Ministers will spend this weekend locked in talks with senior bank executives, who are thought to be resistant to the "bad bank" proposal. However, Mr Brown has been warned by City experts that the scheme may have to be quickly introduced to prevent the economic and financial crisis worsening. [so don't ask too many questions]

Posted by mountain goat @ 12:53 PM (1846 views)
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28 thoughts on “Can you store this toxic waste for me please?

  • “Homebuyers and businesses have complained they are unable to obtain credit.”

    No, no, no.

    Home sellers and the agents working for them have complained that buyers can’t obtain credit. Buyers don’t want credit to buy property, but sellers want it to be available to stop the bloodletting in the property industry.

    I haven’t heard ANY commentators representing buyers interests complaining that there isn’t enough credit.

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  • How can it legal to split a business in two and stuffing all your bad assets or debts in one business and walk away with a healthy business?

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  • mountain goat says:

    No worries about theft then from this Septic Bank.

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  • mark wadsworth says:

    I covered this on my ‘blog an hour ago. This cannot possibly work – what they need to do is to create a few new banks and wind down the old ones.

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  • New bank, old banks, bad banks it’s all about shifting the bad debts away from the banksters and on to the taxpayer, the taxpayer will then end up so poor he will have no use for a bank anyway.

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  • ‘nother bailout only spins better……they think!

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  • mark wadsworth says:

    @ MrMickey, the cunning New Bank plan that I envisage involves all the losses remaining with existing bank bondholders and shareholders, there’s not a penny of taxpayers’ finest involved. Which is why it won’t happen, of course.

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  • Isn’t this exactly what happened in Japan?

    I keep hearing reasons why Japan’s crisis and solution don’t apply now, yet all I see is more parallels and copycat measures as time goes on.

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  • Ah, NatWaste here we come…

    @Paul (1)
    Firstly it doesn’t matter if you are right, since if potential creditors are not demanding credit, then it’s increased availability has no consequence.
    Secondly I think there were a few companies which may well be asking for more available credit – or at least not to have their current credit lines cut!
    @Paul(8)
    I don’t think so, no – it’s what happened in Sweden, Denmark & Norway in around 1990 and worked quite well (their crisis started in 1986)

    @mark wadsworth
    The closer to a free-market (or even more so, a market anarchy) solution the better in my opinion – but the government would still have to set up the new banks of which you speak, because no private bank has yet sprung up to fill this space (personally I think now would be a great time to start a new bank – marketing would not only be cheaper than normal, but also easier – “We have no toxic debts” would get quite a few deposits, eh?! Surely there must be some big investors somewhere thinking this through? I mean in 06 / 07 the Middle Eastern states & other cash rich investors were buying up shares in banks like they were going out of fashion, surely there were a few who were wise enough to stand back and wait?

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  • Actually the New Good Bank solution seems to make a lot of sense. Why hasn’t it been put on the table before? Can I speculate the reasons?

    1. It will basically liquidate the existing shareholders investments – many of which are the same people reporting on possible solutions to the bank credit.
    2. Number one.

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  • Ah I see this is the opposite of what happened in Japan.

    In fact, the UK government is proposing exactly what Japan did, and failed.

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  • @Paul
    I think you have hit the nail on it’s head there, all those bank shares in the politician’s retirement funds. Maybe investors have applied for permission to create a bank, but have been rejected? (Cutting the red tape to start a bank is usually a lengthy process anyway, but if the state are thinking of starting a bad bank, then they should be encouraging new applicants to the market too.)

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  • mark wadsworth says:

    @ 5ick, as you say, it doesn’t really matter who sets up the new bank, and it is surprising that one of the smaller building societies hasn’t already adopted the tactic that you suggest. I’d be happy to invest in one, provided its Memorandum stated clearly “We will only lend up to 60% of property values and where the loan is less than 2.5 times joint salary. We will not securitise our loans and neither shall we invest in other banks’ securities. Nor any other funny business.”

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  • @mark wadsworth
    Actually I think the reason that it has not happened in the free market is probably that the expected returns are just not good enough – when it comes down to it even a well run retail bank is just long future earnings, and with the current outlook for defaults the prospects are not great. However, my previous conspiracy theory could still have some merit.

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  • By creating a toxic asset bank, the government would put the UK banks under Chapter 11, allowing them to operate albeit with large restrictions, and selling the toxic assets when capital markets recover. At the end of the day, none of these so called toxic assets are toxic per se. They are now because of the credit crisis. MBS,CDS and CDOs are not new products. They have been around for a long time and MBS collapsed back in 1988, threating the existence of the then large brokers such as Merrill lynch for eg. CDs are re-insurance instruments. Lloyds of London collapsed back in the early 90s when the re-insurance market went pear shape.
    These toxic assets will be bought again in the future, no doubt about that.
    the reason the government is not urging for a super toxic asset bank is it would have to account for it and the bank would have to disclose the extent of their exposure. at the moment it is all under the carpet at banks marking to marking them themselves. the goverment if it has guts should push to create such a super bank. Only when the whole exposure is known will capital markets recover IMHO.

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  • mw @ 2.38pm

    To pick up on thbe clause of not securitizing mortgages in the ‘new bank’. If they were written at no more than 60% LTV and 2.5 times salary, there’d be no problem securitizing them as they’d all be good loans.

    What would have to be got ovedr to the consumer would be the benefit of supporting this kind of lending and that if everyone did support it they would actually all be wealthier as they’d all have more disposable income due to the lower cost of housing caused by the stricter lending criteria.

    Trouble is someone would always want to break the ‘pact’ and get one up on everyone else by taking out a 70% LTV mortgage and so get a better house than perhaps they were due.

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  • Talking of bad banks, I take it as of today that HBOS no longer exists. With an estimated £3 billion to £5 billion deficit in the HBOS pension scheme I wonder if my Halifax pension will still get paid when due.

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  • mark wadsworth says:

    @ str 2007, this whole ‘securitising’ thing was a way of getting stuff off balance sheet and enabling banks to run very very low (and possible negative) capital ratios. Fractional reserve banking is all well and good provided banks have an own capital ratio of at least a tenth or an eighth.

    And to whom should the loans be securitised? If somebody wants to buy loans, why doesn’t he just buy shares in the bank?

    You can refine the plan by having ‘Good Bank’ (that lends up to 70% LTV), ‘Excellent Bank’ (that only lends up to 60%) and Hypercautious Bank (that only lends up to 50%) so that investors can decide their own risk/reward preferences.

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  • sold 2 rent 1 says:

    str 2007,

    Cheers for the lift home last night.
    It was good to put more faces to names in the HPC meetup.

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  • stillthinking says:

    What HPC meetup? Is there some secret society going on? Perhaps, just perhaps, I would like to meet up with you losers myself, just to see how bad personalities can get.

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  • sold 2 rent 1 says:

    stillthinking,

    “Is there some secret society going on?”

    No conspiracy theories please. This is an HPC blog!!!

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  • @mark wadsworth:
    “If somebody wants to buy loans, why doesn’t he just buy shares in the bank?”
    Because a loan is a more senior instrument. Equity holders are the last in line.

    @STR1 – where was this HPC meetup? When is the next one?

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  • Thanks Paul

    I assumed all you guys new about it, the plan was to meet up again towards the end of March, but if you want to meet up before that you can always get on Pauls link and arrange something.

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  • No problem S2R1 @4.27pm

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  • When we are told that the free market is best, it is 100% sold on the concept of socialisation of the benefits (in other words we all share the benefit when times are good, though not equally) and the privatisation of losses (those who take the risks take the hits).
    As we know, this situation is the opposite. We have been mis-sold, defrauded.

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