Government mulls 'bad bank' - What example to African Union

The government is considering a controversial 'bad bank' to buy up toxic assets that are at the root of the credit crisis.

In a strong hint to the media after meeting German chancellor Angela Merkel in Berlin, Gordon Brown said action must be taken on the risky assets that are preventing banks from lending to each other.

Mr Brown said: "We must secure the widest possible transparency and the necessary renewal of trust in the banking system. That is an essential element of rebuilding the global financial system.

"It will also require us to take action on impaired assets in the banking system. It will mean that we will have to have new standards of surveillance and supervision for global financial institutions."

Ministers are thought to be meeting with senior banking executives over the weekend to hammer out a plan.

The scheme would see a new state-owned bank set up, funded by the taxpayer, that would take on billions of risky assets from banks in a bid to unfreeze the money markets.

There have been suggestions Northern Rock could be used for the purpose.

City experts believe the action is necessary as banks are still reluctant to lend to businesses and individuals, despite a substantial rescue package from the government.

While banks are unable to unload the bad debts, the credit crisis is likely to continue as they cannot take on new business.

The problem has become more urgent recently as high street banks prepare to release their financial results for 2008, sending shares in the sector plunging.

In the US last night, the government pumped $20 billion into Bank of America, with $118bn worth of guarantees against bad assets, as the US Treasury took a stake in the bank.

The cash call was deemed necessary after the losses Bank of America faced after it took on Merrill Lynch at the height of the credit crisis last year.

In Ireland last night, the Irish government nationalised Anglo Irish Bank to secure its position after a recapitalisation plan was deemed insufficient.



Note: The Leading Western government have got all their sums wrong. There exist other approach to solve this mega mess - nobody will listen.

The question we ask what example is this for small nation like Seychelles and the African Union debts.

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Forum greeting,

With the snow bringing London to slow down. We have searched all three Foruns for the thread we had put toghtger on the issues of the proposed "Bad Bank concept" which the leading nations due to meet in USA will adopt. The question we had raised what example for Seychelles - the Small Nations and African Union we cannot find this thread. In case it is the snow messing us up we requested to be excused by Forum Admin for restarting this thread, There was a very heated debate at Davos - WEF by Asian Leaders and participants - why and how come the IMF and World Bank adviced/recommanded to these nation the best way forward is to cut public spending and maintain, interest ratesand cut borrowing. Yet the USA and many Western Governments and countries - to overcome this situation they are calling for public stimulus spending -heavy borrowing , cut of interest rates - most important the government heavy involvement in the Banking Sector and the very hot topic to create "Bad Banks" to absorbe bad risk and toxic assets. This/these mechanism when put in place will further drive the world apart. The producing Asian nations and indeed African Union with mountain of debts -,what about Small nations like Seychelles and the Indian Ocean. They will find themself in very great disadvantage/

How much rope does Gordon Brown need?

The way things are going, we shall soon be faced with a choice between panic and rage, and I am in no doubt that the second of those is the better option. And as we recall the Prime Minister's outrageous and pathetic performance over the past couple of days, as our banking system and currency have tottered, and he has proved unequal to the task of stabilising (let alone clearing up) a mess of his own making, I think we can agree where that rage should be directed.

A colleague observed the other day, with some veracity, that governments have fallen for less than this. To bring this one down requires a mixture of two factors, neither of which is present. The first is a sense of honour among Mr Brown and his henchmen, which would be a bit like finding a contraceptive in the Vatican. The second is a feasible opposition with a plan. That should be more readily available, but is not. The Conservative Party chose to spend a pivotal day in this increasingly shocking financial and economic crisis rearranging their deck chairs, redividing their party over Europe, keeping as shadow chancellor a man who gives every impression of needing a map to help tie his shoelaces, and failing to bring into the shadow government either of the two men on their benches – John Redwood and Michael Fallon – who has the slightest idea what is going on. The Tories remain completely unserious, and the less said about them the better.

Yet their turn to let loose their incompetence and shiftiness on an already benighted country may well come. Despite the collusion between the Conservatives and the Labour Party to keep Mr Brown in office, things are getting desperate for him. The wheels came off long ago: the chassis is now fragmenting. Even a public that has shown, by massive abstention at recent general elections, that it wishes to disengage from politics cannot fail to have seen the enormity and the enormousness of the blunders over which Mr Brown has just presided. He threw £37 billion at some banks in an attempt to get them lending. This is a sum larger than our defence budget. It disappeared into a black hole. So on Monday Mr Brown offered yet more incentives to useless banks to stay in business. We are assured these are just guarantees, not handouts, and in the end a sound banking system will repay generously the support given to it by the taxpayer. If you'll believe that, you'll believe anything. The markets certainly didn't, for banking shares went south. Nationalisation, according to a depressing and unreliable political consensus, starts to seem the only option.

The Government now owns 70 per cent of Royal Bank of Scotland. I should have thought the way forward for this abortion was pretty obvious. The majority shareholder should close it down forthwith. It will lose its – our – money, but that may be a cheaper option at a time when firms such as Unilever and BP are regarded as better investments than gilts. Under existing laws, most depositors will get all their money back. The assets of the bank, such as they are, could then be sold, and other creditors could get their penny in the pound. There is no point keeping it in business. It should be put out of its misery for its own sake and to encourage the others. We now have too many banks. One fewer would be a blessing. The vultures of Lombard Street would feed on its corpse and seek to prove the late Professor Hayek right yet again: that bankruptcies are good, because they drive inefficiencies out of an economy. That is sorely needed, and would serve RBS right. I am aware it would upset the Scots, but they have only themselves to blame: and the wellbeing of the Scottish banking community should be regarded by the rest of us as a poisonous political consideration that Mr Brown will just have to ignore. He has bigger problems than that.

Let us return to the question of his viability. He refuses to admit it, but in his emulation of Alan Greenspan in the early part of this decade, when he deliberately pumped money into circulation to create an illusion of wealth, he invented our end of this problem. The Americans are to blame only in that they set us an example. It was the policies of the then chancellor – Mr Brown – that brought this debacle about. Having so much money in circulation (and for about five years its supply grew by 14 per cent or so per annum, way above the rates of inflation plus growth) enabled the banks to borrow vast sums cheaply and to do stupid things with it. I do not exculpate the banks: those responsible deserve penury. But it was Mr Brown who made their idiocy possible. If you give a child of five a loaded revolver and send him into the street with it, someone will get killed.

Also on the charge sheet against Mr Brown was the inadequate regulatory system he invented after 1997, when those who knew about banking were no longer watching how the banks did their business. So his record is shocking: regulatory failures, policy failures, practical failures. How much more rope does he need?

There has been much talk in the last few days about Britain going bankrupt. It is, I hope, an exaggeration. The International Monetary Fund would come in before then, as in 1976. But there is a rumour that Standard and Poor's is about to downgrade our debt, meaning this respected credit agency fears our ability to repay it. The possibility of default becomes more likely. It is a shame the IMF cannot come in now, and end the insanity of Mr Brown and his puppet Mr Darling trying to fit the quart of reckless spending into the pint pot of sustainability. This mess is worse than it need be because the Government is grotesquely overborrowed and is grotesquely overspending. The IMF would doubtless apply the principles of 1976: real cuts in public spending and serious cuts in indebtedness. Mr Brown remembers that Labour lost the ensuing election; but it was only what it deserved, as a defeat next time would be for him.

The price the public is paying for Labour's probably fruitless campaign to cling on to power is so high as to be lethal. We are also being robbed of our democratic accountability. The scale of the crisis should dictate a general election now, so the public can be consulted on the stewardship of the economy. There are plenty of precedents: Heath's election in February 1974 is the most recent, but also (and closer as a parallel) that of October 1931, which led to the formation of the National Government. Mr Brown prefers to follow the disgusting example of John Major, whose key policy was torpedoed just five months after the 1992 election, and who preferred to destroy his party by limping on for another four-and-a-half years.

The public has rumbled Mr Brown, and he is the focus of their anger. As worse horrors occur in the months ahead voters will have more yet to remember him by. He can, in his dishonourable way, avoid accountability for another 16 months if he wishes. Yet the longer he waits to take his punishment, the worse it will be. If he doubts that, let him ask John Major.

Source Telegraph

MADRID, Feb 2 (Reuters) - European leaders will discuss their ideas for "bad banks" to absorb toxic assets and take their proposals to the G20, which meets next in London during April, European Union economic chief Joaquin Almunia said on Monday.

"After the European heads of state and government meet, it will be discussed at the next G20 summit," Almunia told a business conference in Madrid.

Interbank lending has ground to a halt due to distrust over toxic assets and confidence will only return once the illiquid debt is removed from bank balance sheets, Almunia said.

"The English, the Dutch, the Germans are discussing this, probably all of us will end up discussing it, definitely at the level of the European Commission, so that there are no distortions," Almunia said at an earlier seminar in Madrid.

The European Central Bank on Monday said it was working with the European Commission on guidelines covering government help to banks stuck with problem loans, including splitting off troubled property debts. [ID:nL2413].

Governments are debating whether to use taxpayer funds to buy up such assets or let banks set up their own vehicles.

The biggest obstacle is how to price funds that have no value in financial markets, Almunia said.

Germany may let individual lenders establish their own "bad banks" without shifting the burden to taxpayers.

Shares in German financial firms and banks, including Deutsche Postbank (DPBGn.DE), fell on Monday after German Chancellor Angela Merkel voiced her opposition over the weekend to a central "bad bank". [ID:nLV231731]

Almunia did not oppose use of public funds to create state-backed "bad banks", but said they had to be well-run.

"Taxpayers have already put too much money on the table to keep on adding more without transparency and strict conditions on prices and management," Almunia told Spain's La Ser radio station in an earlier interview.

Britain last month offered banks the chance to insure their riskiest assets with the government, while Switzerland used a "bad bank" approach last year in attempting to stabilise its biggest bank UBS (UBSN.VX)(USB.N).

The United States is expected to adopt some form of bad bank approach in coming weeks after previous plans stumbled over how toxic assets should be priced.

Spain should do the same, given real estate and construction debt accounts for half of corporate credit issued by its banking system, said economist Emilio Ontiveros.

ECB drawing up 'bad bank' guidelines


The European Central Bank is drawing up guidelines regarding 'bad banks' - financial vehicles that would ring-fence risky assets held by European banks.

The concept, currently being considered by a number of EU governments, would allow banks to offload their risky assets into a separate company.

The ECB has taken on a greater role during the current financial crisis. (Photo: European Central Bank)


It is hoped this would enable banks to start operating normally again and in particular restart lending.

The central bank is also working on guidelines for governments such as the UK who have opted for an alternative asset insurance scheme.

This latest ECB initiative for a more co-ordinated EU response to the financial crisis is designed to prevent bank support schemes in one member state from creating negative effects in other member states.

Last year, a unilateral move by the Irish government to guarantee deposit accounts in Irish banks caused many British savers to move their savings across the Irish Sea.

There have also been calls for the ECB to take on a larger supervisory role of the financial sector by those who feel national regulators are ill equipped to deal with today's cross-border financial transactions.

The German government is currently fleshing out proposals under which German banks would set up their own individual 'bad banks' to carry assets such as loans to struggling investors.

The measure, which appears to have support from both the conservative and social democrat parties in the governing coalition, would prevent the government from being saddled with this further debt.

The maintenance of solid public finances is of great concern to many politicians in Germany, already alarmed by the increased debt caused by the €50bn stimulus plan announced by Chancellor Angela Merkel last month.

A European bond?


Italy, meanwhile, currently has a debt-to-GDP ratio of over 100 per cent.

Concern over a possible Italian default has pushed money-lenders to demand higher returns on Italian bonds, thus increasing the cost of government borrowing for stimulus projects.

Italian finance minister Giulio Tremonti has responded by saying he is in favour of a European bond.

"Now my feeling - I am speaking of a political issue not an economic issue - is ... now we need a union bond," Tremonti said at last week's World Economic Forum in Davos.

However, a number of eurozone member states, in particular Germany, are not in favour of the idea, insisting that member states should adhere to the Stability and Growth Pact rules that underpin the eurozone.

"Personal responsibility for financial policy and the commitment to solid public finances of every member state are a constituent element of the European currency union," German Bundesbank president Axel Weber told the Handelsblatt newspaper on Sunday (1 February).

"This has always been a German concern and one of the prerequisites for the acceptance of the common currency over here," he said.

Europe "Bad Bank" Idea Off To Slow Start

LONDON -(Dow Jones)- European governments have been slow to consider removing toxic assets from bank balance sheets and depositing them in a government controlled holding facility.

The idea was among the most radical suggestions of U.S. Treasury Secretary Hank Paulson's TARP financial relief plan, which foresaw ringfencing illiquid assets in the U.S. banking system to restore confidence in the credit market.

The so-called "bad bank" plan is essentially a special-purpose vehicle set up by a government or central bank to absorb illiquid assets from troubled banks.

No major European government, with the exception of Switzerland, has such a program in place. Nor is it clear that more such facilities will emerge to absorb bad debt.

But London financial markets now speculate that U.K. Prime Minister Gordon Brown is considering a bad bank, although the government isn't committing to the idea.

"The government continues to consider a wide range of options," Brown's spokesman said Friday.

Brown sparked speculation about the 'bad bank' option on Thursday when he told a press conference in Berlin that the next stage in support for the financial sector should be action to deal with "impaired assets" held by the banks.

But the example of the U.S. TARP program showed this option may take more time to be effective than other measures, say European policy-watchers.

The U.K. government is also considering extending guarantees for bank lending while reports suggest the possibility of fresh capital injections into the banks are being considered.

U.K. bank shares on Friday were getting support from growing speculation that the UK government may set up a some kind of facility to absorb bad debt out of the banking system to prop up the economy.

"Off-loading embedded toxic assets sits at the heart of our preferred structural solution for the UK banking crisis," said Royal Bank of Scotland in a research note.

JP Morgan bank analyst Cala Antunes da Silva said one solution could be to require banks to first write down the value on assets to market rates. Banks might also be required to raise new equity.

U.K. Banks that have already received government capital - Royal Bank of Scotland Group PLC (RBS), HBOS PLC (HBOS.LN) and Lloyds TSB Group PLC (LYG) - might be expected to participate if the government does push ahead.

Elsewhere in Europe, one working single-bank model already is in operation in Switzerland, where the Swiss central bank last year set up a StabFund special-purpose vehicle to absorb up to $60 billion in toxic debt from UBS AG by March 2009.

UBS is in the process of transferring its toxic securities, mostly dollar-denominated U.S. and European residential and commercial mortgage-backed paper into the facility.

Italian Economy Minister Giulio Tremonti, speaking with journalists late Thursday, said he plans to raise the "bad bank" idea at the meeting of finance ministers from the Group of Seven leading industrial nations in Rome next month. Tremonti thinks the toxic assets should be "frozen" in a so-called "bad bank" for 50 years. But he did not specify whether this could be done at a national level, as part of a coordinated G7 action, or simply for individual banks in dire need of relief.

In Germany, the banking lobby and some leading government politicians have called for an extension of its SoFFin bank bailout fund to allow for the more expansive purchase of toxic assets held by German banks.

But Finance Minister Peer Steinbrueck said he is skeptical about such a bad bank as this would cost taxpayers EUR150 billion to EUR200 billion.