Current crisis proves that Tory plans to take banks into BoE administration wrongheaded

snowflake5 Mon Oct 06, 2008 at 03:24:05 PM GMT Print-friendly version Facebook

As recently as his Newsnight interview at his party conference, Osborne was saying that banks should not be recapitalised, but instead they should be taken into administration by the BoE.

The problem with that option is that anyone with over £50k in deposits loses all their money straight away, as do all other creditors. in B&B for instance, a third of the deposits were held by people with more than £50k there. 



Fortunately Alistair Darling took a different approach, and all B&B depositors kept their money.

Conservatives have been desperately backtracking. I was searching for a speech Osborne gave in February about his plans for adminstration - but it has been removed from the Conservative website. Fortunately Google caches pages, and they say their last cache was done on 15th Sept 2008. Here's what he had to say:

"Instead of nationalising a high street bank, with all the negative signals and risk to the taxpayer that entails, we have argued that Northern Rock should have been subject to a Bank of England led reconstruction.

This would have been a form of administration that would have ensured that taxpayers were at the front of the queue to get their money back, not at the back of the queue under nationalisation."




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Current crisis proves that Tory plans to take banks into BoE administration wrongheaded | 30 comments (30 topical)

Tory novice! (#1)

by LabourMatters on Mon Oct 06, 2008 at 07:27:58 PM GMT

To coin a phrase: this is no time for a novice!


Re: Tory novice! (#2)

by adwilliams134 on Mon Oct 06, 2008 at 09:05:16 PM GMT

Actually I think the tory idea is probably the best one.  It certainly looks like the US Government is going to go down that road along with other euro-zone EU countries so it better be right or we're stuffed anyway.

Also,  what if one if the Big $ here in the UK fails?  There's only the BoE that could possibly do anything and they would only do what's necessary as opposed to what's politically expedient which, at a time like this, would be a pathetic and destructive thing to do.


[ Parent ]

Re: Tory novice! (#3)

by snowflake5 on Mon Oct 06, 2008 at 09:34:15 PM GMT

You are kidding right? Administration is very different from nationalisation. Nationalising means the bank stays intact, and still functions and can be sold off at a later date for a profit for the taxpayer in exchange for the taxpayer putting up money to bail it out. Administration means that the bank is wound up. Everyone who has more than £50k in deposits is wiped out, as is everyone who has made loans to the bank. And those creditors will then face difficulties themselves if money owed to them is not paid, which puts their own organisations at risk of collapsing...

Given the situation now, do you really believe that we should wind up one bank after another, till they are all gone and there is just the building societies left plus HSBC?


[ Parent ]

Re: Tory novice! (#4)

by adwilliams134 on Mon Oct 06, 2008 at 10:15:46 PM GMT

You avoided the 2 main points (you usually avoid the point anyway which is why I'm pretty convinced you're an MP or close to one). 

As for people with more than 50K in deposits - my heart pumps purple piss.  You are not going to win the working class worrying about people with 50K stashed in the bank, but you will lose more of them.  In any case,  they aren't wiped out as you falsely claim.  They keep the first 50K.  Unless Alistair Darling is lying.

Thing is,  the banks failing is no big deal to 'normal' people.  It's meaningless.  So what if a few bankers lose their jobs, they deserve to.   So what if mortgages are hard to come by, houses are too expensive anyway.  So what if buy-to-let landlords get wiped out, those greedy bastards caused part of this.  So what if pension schemes fail,  we can't afford them anyway and the MPs have no moral authority over pensions anyway - they're just as corrupt as the bankers.

Everyday normal working people couldn't care less and in fact,  just like American workers,  are starting to get more than a bit pissed off with politicians who for the last decade have gone on and on about prudence bloody this and prudence bloody that,  havee said there's no money for council houses, no money for pensions, no money for decent wage rises but all of a sudden some capitalist shite in the City wobbles and we offer to write off billions.  Where exactly have these billions come from?  It better not be our taxes.  Why are we not publicly humiliating these idiot bankers on TV like the Yanks have with Lehman's CEO today?  We are we not investigating with a view to prosecutions for fraud and theft?  How come 6 months ago Gordon Brown was fawning all over these thieves in Champagne receptions?   How come he was making speeches to them telling them how honoured he was to be addressing them?  He knew what they were doing,  he is a complicit willing accomplice. That or as incompetent as they are.

Nearly everybody I work with wants a big bank to crash because they want to see where the money comes from because no-one believes Labour have got any money left.  Down here at the bottom believe me,  we might think the bankers are scum and deserve what's happening,  but the most important thing we want to know wis exactly who in government was supposed to be supervising these charlatans and why are they still an MP.

People - normal everyday people - aren;t scared, they are furious with you and they expact heads on plates and if you don't want it to be yours in May 2010,  you better deliver the bankers heads before then.


[ Parent ]

Re: Tory novice! (#5)

by LabourMatters on Mon Oct 06, 2008 at 10:29:18 PM GMT

//Nearly everybody I work with wants a big bank to crash because they want to see where the money comes from because no-one believes Labour have got any money left.//

BNP HQ is it?

Not only are you talking BS, but demonstrably so. Normal people were very worried about Northern Rock failing, that's why they lined up for days to make sure that they didn't lose everything they had other than the (then) £35,000 limit. 

And of course should the government permit a bank to fail, or go into administration, then you'll see capital flight like we've never seen before. You'll see lines of people outside every bank too, and they'll all fail.

Now of course you might not give a toss about people with more than £50,000 on deposit, and as people who my heart might bleed for they're not top of the list, I really don't wish them any ill. Nor do I particularly want the economy to fall into a depression because the wrong government policies were pursued (arguably the only way we could fall into a depression, rather than a recession). 

Ask yourself one question: the person who owns your workplace (assuming you don't work for the BNP or similar), do you think he/she might have more than £50,000 on deposit? Should he/she lose everything but £50,000 how safe is your job?

That's enough time wasted on you. 


[ Parent ]

Re: Tory novice! (#8)

by adwilliams134 on Tue Oct 07, 2008 at 08:41:06 AM GMT

BNP?  ha,  joke you are.  For starters I have been physically attacked by the far right on 2 occasions because of my very public stance against them where I live and where they are making inroads.  In fact it's a bit piss-poor by the local Labour party that there are certain areas where they won't go to to leaflet  'because they're scared'.

And I can assure you,  most of the people where I work blame the government for thsi.  They want to know who exactly in government was responsible for supervising the banks and why they didn't.  And they do not want their tax money paying to keep banks going.

Pop down a pub on an estate on your way home tonight and have a chat with the people in there.  You might well be in for a bit of a shock.


[ Parent ]

Re: Tory novice! (#20)

by LabourMatters on Tue Oct 07, 2008 at 08:21:21 PM GMT

Most of your workmates might blame the government but, according to this new poll, that's not indicataive if the wider population:

Just 12 per cent believe the British Government deserves most blame for the banking crisis, against 15 per cent blaming people who took out loans and mortgages they couldn’t really afford and 26 per cent American mortgage lenders. Some 12 per cent blame the American Government, 11 per cent British banks, 11 per cent the Financial Services Authority, and 4 per cent the Bank of England.

 Where did you say you worked again? ;-)


[ Parent ]

Re: Tory novice! (#23)

by adwilliams134 on Tue Oct 07, 2008 at 08:54:28 PM GMT

So you believe the polls then?  You trust them not to ask weighted questions?   You have faith in them not loading the answers?  You believe that the poll sample accurately represents the make-up of society across the UK?   In that case you believe that come the next election you will only got 31% of the vote.

As I said,  go to a local estate pub and speak to real people.  See what they have to say.  You might suddenly realise why you are losing your core vote.

 I would be very interested to see the socio-economic groups of the poll sample because I'm fairly confident that they are above the mean average whereas the majority of the country is on or below it. 

Once the crisis settles down,  people are going to be asking some very probing questions such as who in Government was supposed to be supervising the banks and why did they obviously not bother.  Why the people in the banks who presided over this are still in jobs,  and how is all of this going to be paid for because they don't think it should be them and they don't see why any of this rescue money should come from their schools, wage rises, hospital spending, pensions etc etc.  All you've got to do is make sure it doesn't.

Start paying attention to what the ordianry working person thinks.  You never know,  you might even manage a hung parliament come 2010.


[ Parent ]

Re: Tory novice! (#6)

by Floating voter on Tue Oct 07, 2008 at 07:49:27 AM GMT

"As for people with more than 50K in deposits - my heart pumps purple piss. You are not going to win the working class worrying about people with 50K stashed in the bank,"

Maybe not, but worry anyway. As was pointed out on Newsnight last night, those £50K and above deposits may only be 2% of the population, but they have 50% of all savings in them.


[ Parent ]

Re: Tory novice! (#7)

by adwilliams134 on Tue Oct 07, 2008 at 08:36:52 AM GMT

Neither they nor their savings will be missed


[ Parent ]

Re: Tory novice! (#10)

by Floating voter on Tue Oct 07, 2008 at 11:01:05 AM GMT

Don't be so quick to write them off.

If the banks are going to be forced back to a more "traditional" model then they need deposits to fund loans. That 2% of the population have 50% of the deposits and they almost certainly will move them elsewhere taking away the very money we need for the banks.

Right now we need every £ we can get, no matter who owns it. 


[ Parent ]

Re: Tory novice! (#11)

by adwilliams134 on Tue Oct 07, 2008 at 11:16:31 AM GMT

The problem is not in the retail sector.  The problem is in inter-bank lending.   Even if the BoE lowered intrest rates tomorrow, it would make no difference.  The rates at which the banks lend to each other is so high that they are not willing to take the risk because they only thing they've got as securities are CDO/CDS.  Each bank thinks it knows how little it's own CDO/CDS are worth (but it's not quite sure) and therefore assumes the other banks' are just as worthless.  The Credit Crunch and sub-prime are a bit of a smokescreen,  it's the fear of just how worthless their CDO/CDS are that's brought them to a halt.   On 10th Oct,  Lehman's CDO/CDSs will be 'opened up' for true valuation (right before a weekend again.  Notice a pattern?  banks seem to get into a problem at wekends while the markets are closed).  That is when the true scale will start to hit home.  That will affect the value of the next big batch for the wholesale money markets at the end of October.   UK banks are though to have liabilities running into hundreds of billions that will have to be settled.


[ Parent ]

Re: Tory novice! (#13)

by adwilliams134 on Tue Oct 07, 2008 at 12:04:46 PM GMT

And as a footnote to this,  with effect from yesterday,  RBS (the owners of NatWest)  have had their credit rating reduced by Standard & Poors (the world's foremost provider of independent credit ratings not just for banks but governments and even entire countries).  They are going to face even bigger problems funding themselves.


[ Parent ]

Re: Tory novice! (#14)

by Floating voter on Tue Oct 07, 2008 at 12:27:19 PM GMT

"The problem is not in the retail sector."

I know that, but if we dry up the money supply by moving deposit accounts abroad then we cannot shift the banking model. We need as much liquidity as we can get and it would be foolish to pretend otherwise.

The whole problem is confidence. The CDOs have destroyed confidence and we will not do ourselves any favours by destroying confidence elsewhere in the system. We have enough problems as it is.

 

"On 10th Oct,  Lehman's CDO/CDSs will be 'opened up' for true valuation"

It will be an "interesting" weekend - for all the wrong reasons! 


[ Parent ]

Re: tory novice (#9)

by tinycrossland on Tue Oct 07, 2008 at 10:06:19 AM GMT

My understanding of Osborne's proposals is very vague and like snowflake I've found it hard to find any detail in the press ( to be fair - some of this is that as opp spokesman he is only getting one or two lines as a response to what we are doing).

He seems to veer between viewing the BoE as taxpayers money and as something else.

How does the BoE reconsrtuction work without using tax payers money ?

How does it administrate B+B without using taxpayers money or needing capital for the mortgage loans etc ? wouldnt he just be turning the BoE into an under- capitalised bank ?

 


Re: tory novice (#12)

by geekparent on Tue Oct 07, 2008 at 11:44:41 AM GMT

From the quote in the original post, he means taking equity in exchange for taxpayer's cash being used to recapitalise failing institutions. Preference equity at that, one would hope. It would be a good idea.

As for vagueness, there's a lot of it about at the moment...


[ Parent ]

Re: tory novice (#15)

by snowflake5 on Tue Oct 07, 2008 at 03:07:56 PM GMT

From the quote in the original post, he means taking equity in exchange for taxpayer's cash being used to recapitalise failing institutions. Preference equity at that, one would hope. It would be a good idea.

Er no. You are taling about nationalisation or part-nationalisation, which involves keeping the bank intact, injecting funds into it, honouring all creditors and taking a preference share in the bank to safeguard taxpayers interests. This can only be done by the Treasury as the Treasury is the only one with the funds to do this. Osborne criticised the government for taking this action! 

Osborne was talking about puting banks into administration with the BoE supervising the winding up. Administration is when the bank is wound up, and all it's assets sold and the creditors are paid in order of hierarchy. The very top of the hierarchy are the depositors with less than £50k. Everyone else is below them. Given the state of the banking system with no one with the cash to buy any of the assets this would have meant that anyone with more than £50k would have been wiped out, any banks that had lent money to the bank put into administration would not have got their money back and all shareholders wiped out too.

Administration is a very stupid course of action - it will make banks are even more reluctant to lend to each other in case the lendee is put into administration and they lose their money.
 
Osborne is very lucky that many members of the public are confused about the difference between nationalisation (good) and administration (bad).


[ Parent ]

Re: tory novice (#16)

by adwilliams134 on Tue Oct 07, 2008 at 03:58:41 PM GMT

Administration does not necessarily mean bankruptcy.

You can elect to go bankrupt straight away,  you can elect to go intio Administration and see what happens,  or any of your main creditors can petition for your immediate bankruptcy.

And as a said before,  anyone with more than £50K would not be wiped out.  That is a bald-faced lie.  Teir first £50K is safe. 


[ Parent ]

Re: tory novice (#17)

by snowflake5 on Tue Oct 07, 2008 at 04:12:21 PM GMT

Perhaps I phrased it badly - under administration you would only get back up to £50k. Better?

But in most banks, a third of the deposits belong to people with more than £50k. They would lose out. Plus any other banks who had lent the bank in administration would have lost money. Given that this whole crisis is down to banks refusing to lend to each other for far that the counterparty would go bust taking their money with them, then administration is not a good idea, is it?


[ Parent ]

Re: tory novice (#18)

by adwilliams134 on Tue Oct 07, 2008 at 05:01:07 PM GMT

There is nothing really that the government can do other than slow down the inevitable.  There is also nothing the BoE can do. Intervention on the scale that is going to be needed over the next 5 years will lead to a big rise in inflation and as a result pay demands and a devaluing pound.  We had no international inter-bank debt in 2001 but we now have obligations of  £625BN due for repyament withinin the next 4 years.  About half of this is represented by Securitisation Issues.  In current market conditions new Issues will not be possible (in the main because no-one in their right mind would buy them).  This means that over the next 3-4 years we (the tax-payer) need both to maintain/underwrite inter-bank lending of about £300BN and, in addition, provide an annual injection of another £100BN or so each year to meet maturing (and not refinancable) Securitisation transactions.  The UK banks are effectively insolvent – they cannot meet their liabilities - not even come close.  We awill be lucky if we ever see any of this money ever again.
 
The size of the UK’s ‘Big 4’ is such that combined they dwarf the UK GDP. There is no way the UK can re-capitalise these banks and acquire their dodgy assets at the same time. – one or the other but not both.   We simply do not have the money on that scale so we are going to have to decide what's worth saving and what should be left to go to the wall.   If we attempt to do both we as a country will go to the wall.

People talk about the Japan in the nineties but it is worth remembering the overseas holdings of Japan at that time and despite that wealth the bail-out of their banking sector has left their economy effectively dead for 20 years. The drag of our current & immediate future bad debt will bear down on our banking system for at least a decade. The only way out of that is print money in either real terms or Government backed IOUs and that leads to inflation.

When you add into the mix the toxic assets (which no-one actually knows the true value of,  only that they are way over-valued) and banks holding large quantities of other banks near-worthless debt obligations as collateral,  then you have a tale of gross incompetence by the banks, greed by the traders and neglect by Government.

The reason Lehmans, Wachovia, B+B and NR went down was because they had no idea what their total liability was in real terms,  only in the imaginary valuation they had given to dubious assets. NR had an apparently healthy balance sheet on paper right up to the last minute. It's the same sort of 'creative accounting' that has allowed property investors to talk about x million pound portfolios. The truth is that they never had anything - x million pound of debt is all they have built up over the last 5 years, securitised against equally worthless debt obligations. 


[ Parent ]

Tory plans irrelevant (#19)

by madasafish on Tue Oct 07, 2008 at 05:29:13 PM GMT

The Tories can say they will launch a new bank on the moon for all I care. They are 100% irrelevant as they are NOT the Government.

Since we are ehading for the biggest stock market crash of all time: and a wroldwide recession, you should be worrying about what to be done to mitigate it.

I hope that for all your sakes in the short term you keep at least one week's spending needs in cash and at lleast 1 week's food in the house.

This has the potential to get MUCH worse very quickly..

I expect to see a Government panic bailout of RBS and others - very soon and far too late.. As for the shorting ban... RBS shares fell 39% today. the market thinks it is going under..

And I can assure you if it is not bailed out soon, it will as no-one will lend to it..

The current events are once in a lifetime and probably much worse than 1929.


[ Parent ]

Re: Tory plans irrelevant (#21)

by LabourMatters on Tue Oct 07, 2008 at 08:33:18 PM GMT

No, the markets (rightly) thought the shares would be devalued by nationalisation. They did not think RBS and the like were "going under". That much we should have established certainty for at least because of our previous nationalisations (which you opposed). <rolls eyes>

I'll grant you that this is very bad, but "much worse than 1929"? Nope - if for no other reason than we have the history of 1929 to look back on and can say with certainty that the Tory way (as advocated by Cameron at conference) is the opposite of what one should do. 


[ Parent ]

Re: Tory plans irrelevant (#24)

by madasafish on Tue Oct 07, 2008 at 09:05:45 PM GMT

No-one will lend to RBS as its current share price and lousy cappital ratios make it a bad bet. I agree it may not go under   directly but if it cannot obtain finance it is dead..

The key issue is: why was the news leaked and who dunnit?

It's a shambles and if a plc had done it, it would rightly be pilloried...  Peston has a lot to answer for  -? or is it the Treasury trying to force the dithering Government to act...

Another market bloodbath tomorrow I suspect.


[ Parent ]

Re: Tory plans irrelevant (#25)

by adwilliams134 on Tue Oct 07, 2008 at 09:17:00 PM GMT

For RBS I think the game was up on Monday afternoon when S&P lowered it's credit rating.  That rating is available to every subscribing lending house,  news organisation, or any other interested party.  Peston reported what was publicly available regarding RBS and reported about the meeting last night between the £ and the Chancellor - again public information.  The contents of that meeting have obviously been leaked,  probably by a treasury official,  but as the old saying goes,  only one person knows a secret, 2 know a story, 3 know common knowledge.

What's interesting is RBS sent out a communication to the stock exchange mid-morning denying they had been asking for cash.  Their share price collapsed after that so obviously the stock exchange has got more sense than to trust in anything they say.

Tomorrow should be fun.


[ Parent ]

Re: Tory plans irrelevant (#27)

by snowflake5 on Wed Oct 08, 2008 at 02:20:57 AM GMT

Peston has a lot to answer for  -?

Robert Peston is a plonker - as I was saying some weeks ago when we were discussing Northern Rock. Treasury is adamant that the leak didn't come from them, and I believe them - they are in the firefight of their lives and wouldn't want to make it worse and reduce the time they had to prepare for a pretty big and detailed rescue. I understand they started the preparation for this bazooka option last Sept, but even so, this is bigger than preparing budgets (and more fraught).


[ Parent ]

Re: Tory plans irrelevant (#29)

by adwilliams134 on Wed Oct 08, 2008 at 08:05:28 AM GMT

Robert Peston is a journalist and it is both his job and his duty to report news.  He would be a 'plonker' if he didn't.

If the leak didn't come from the Treasury (which it almost certainly did- politicians and civil servants are notorious for being unable to keep their mouths shut),  then it must have come from a NR executive.  Either way, if Peston knows, his duty is to report.  The fact that apparently you want a controlled press speaks volumes in it's own right.  Did he publish a lie?  NR don't think so or they would have sued.

Apart from which,  it wasn't Peston - as you continually suggest - that brought NR down,  it was their appalling business model which was supposedly supervised by the FSA which in turn were supposedly supervised by the Government. .


[ Parent ]

Re: Bank Administration (#22)

by NB on Tue Oct 07, 2008 at 08:47:02 PM GMT

Hi Snowflake. I can't find details of the Tory plans either but  you musn't confuse Administration with Liquidation.  I think the Tory idea is that under the Special Administration regime the Bank goes into Administration, the Depositors are paid off, and then the other creditors are paid off as the bank is run off.  So the losses are borne by the shareholders and bondholders.  Under Nationalisation, the bondhodlers (who by that stage are often Hedge Funds who have bought the bonds cheap) get paid in full, a transfer of billions from the taxpayer to the Hedgies.


Re: Bank Administration (#26)

by snowflake5 on Wed Oct 08, 2008 at 02:11:53 AM GMT

I think you can't find the Osborne speeches because any with reference to the financial crisis have been removed from the Conservative website! Try the Wayback machine, or Google cache. The one I quoted above came from Google cache (the Conservatives removed it from their website on 15/9)

The problem with administration is that a) due to difficulty in selling assets in the current climate, it would have been difficult to raise enough to compensate anyone with more than £50k on deposit and b) not all bondholders are bogey-man hedge funds, many are pension funds and insurance companies. Plus a lot of other short-term loans from other banks.

Make no mistake, putting banks in administration would have accelerated the panic and collapse of banks - indeed the Americans made a mistake letting Lehmans go bust, it added rocket fuel to the panic, and all the market hysteria dates from that decision.


[ Parent ]

Re: Bank Administration (#28)

by NB on Wed Oct 08, 2008 at 06:40:41 AM GMT

But in administration the company continues to trade, and does not have a firesale of the assets. It's a bit like Chapter 11 in the US.

I entirely agree that having the bondholders lose money creates problems, but so does bailing out every hedge fund that bought the bonds at a discount.  Having the option to do this would have helped considerably. If so much time, money and effort hadn't been wasted on Northern Rock (which was not systemically important) we wouldn't be in this appalling mess with HBOS and RBS, which undoubtedly are.


[ Parent ]

Re: Current crisis proves (#30)

by aneurin on Fri Oct 10, 2008 at 01:15:09 PM GMT

A fantastically inaccurate post since of course the Bradford and Bingley has been "taken into administration by the BoE".


Current crisis proves that Tory plans to take banks into BoE administration wrongheaded | 30 comments (30 topical)