In These New Times

City gang pulls off £500 billion heist.

Cailean Bochanan

10th October, 2008

After Wednesday’s dramatic events I dreamt that that was the headline in the Sun  newspaper. But it was a dream; just that.

I awoke to the nightmare: The Sun, of course, had joined the rest in the great chorus of approval for Champagne Gordon, toast of the city. And an impressive chorus it was, including some onetime mavericks and black sheep who had returned to the fold just in time and were now singing with even greater gusto than more longstanding stalwarts such as the chairman of the Bank of England or the leader of the Tory party. There, was former  scourge of anglo-saxon finance, Will Hutton; there, George Galloway purring with admiration now former colleague Alisdair Darling has finally decided to deliver (or, rather, stand and deliver) even if it was “too little, too late.” There too were the brand new party leaders, like Nick Clegg with his freshly-tamed financial spokesman, Vince Cable. All were there of the great and the good and they were singing off the same hymn sheet that great puritan hymn, “To be a Pilgrim”. These were the words, which in a transport of bitterness I imagined  them to  intone to that august melody.

‘The vocation I would choose-

To be a liar

Good favour never to lose

All I require.

Telling lies my master to please

I tell them with such ease

It is my particular expertise

to be a liar”

I endeavour every day

to be a liar.

After all, la verite

couldn’t be more dire

To make people think all is well

there’s no lie I wouldn’t tell

I’d descend unto the gates of hell,

to be a liar.

Then one prominent BBC economist took a stanza to himself

“This is the ideal land

to be a liar

This little lying band

To which we aspire”

“A gesture of the hand

to make them understand

Is all that it demands

to be a liar”

As the strains of melody receded, I returned to myself and somewhat distressed by the vividness of my own imaginings sought in the sobre-suited commentators of the Financial Times, 9th October, some more clues as to the reality of what had befallen us. For here, away from the euphoria one would surely find a  viewpoint shorn of sentiment from those who customarily view government intrusions into city business “with the eye of a Toulouse-Lautrec sizing up some obscene old toe-rag.”

For a start, surely it’s clear the government having abandoned its non-interventionist dogma, is to take shares in these banks and insist they mend their ways. They are to be partially nationalised with a 50 billion stake.

“Capital injection could be in he form of preference shares”

Could be? Yes, everyone was talking this up but always look to the small print.

Darling’s statement said:

“The government …will make available Tier 1 capital in appropriate form (expected to be preference shares or PIBS)’

So the government expects. Don’t they know? Well, it depends on the banks. They may not wish this particular facility. After all, mere rumours of this set their shares into freefall on Tuesday. Perhaps another form of payment would be more “appropriate”.

“the state may also help banks that want to raise share capital by underwriting issues of ordinary shares”

In other words, the government will end up buying up shares that the banks can’t sell. But surely with their experiences over the summer the banks wouldn’t humiliate themselves with another attempt at a share issue. Perhaps the bailout might just restore “confidence” so that

“the banks may not even need to use the government scheme to raise more capital- particularly as the government involvement has strings attached.”

Perhaps a different £50 billion could be used to recapitalize the banks. After all

“officials … stress that the £400 billion … put in place yesterday should by no means be seen as a finite pot of money”

An infinite pot of money should do very nicely for recapitalisation without government involvement. Never mind the shares, we’ll just take the money.

So there could be a government stake in the banks if the banks want one, but they don’t.

One analyst said: “ By the end of the year I suspect that the number of banks which are part nationalised will be relatively small.”

A very typically English bit of understatement

Not only do the banks not want to be nationalised, the government doesn’t want to nationalise them. That’s because the

“treasury also has strong fiscal reasons to keep intervention at one remove. If the state is deemed to be dictating any bank’s “general corporate policy”, the lender’s liabilities cannot be kept off the public debt.”

If the Office of National Statistics decides the government is taking control of the banks it will ‘reclassify the banks as public financial corporations”. But the government “was confident the ONS would not go down this route”. That’s  because the government is not going to take any control. No, not even of bonuses.

“Mr Darling admitted it would be “frankly ridiculous” for the government to set bonus levels”

Indeed. What an absurd notion! The government is to give them an infinite sum of money, and has the sheer temerity to dictate bonus levels. It’s just not going to happen!

Darling is like a sugar-daddy who gives millions to his young secretary and yet resolutely insists on never laying hand on her. He only wants to set the money off against tax as gifts.

Okay. So the government don’t really expect to buy any shares and they certainly won’t be taking any control of the banks in question. But at least they have commitments from the banks to improve their practice. But this

“sounds like political window dressing…… forging new rules in this area would be dangerous and potentially counter-productive”

In addition

“it was far from clear last night how the government plans to enforce these promises.”

Especially since the government has already publicly pledged to deliver on the money. They are unlikely to go back on that, especially since they insist the salvation of the economy, even the world economy, depends on it. In other words, they haven’t driven a very hard bargain. Here’s £500 billion, make sure you don’t blow it all on the commodities market or deposit it in gold and euros in a Swiss bank account!

Still, surely it will free up money for small businesses?

“Ministers are also unlikely to be able to require the banks to help individuals or businesses in difficulty. Northern Rock has seen a rise in repossessions since it came under state ownership.”

Or, at least, free up credit for home owners?

“Struggling home owners should not expect mortgage lenders to pass on the full cut in interest rates, brokers said yesterday.”

And bring reassurance to retail depositors?

Q.“Are my savings in UK banks now safer?

A. “Yes, they appear to be.”

It looks like a grand deal.