In These New Times

Oct. 16, 2008 (LPAC)–The trillion dollar bail-out of British banks just implemented by Prime Minister Gordon Brown is already unravelling on the derivatives issue, which are now being questioned in the British House of Commons.

The London Times reports that House of Commons Treasury Select Committee Chairman, John McFall (Labor), said that the 37 billion pound bail-out of RBS, HBOS and Lloyds banks may not be enough, as the banks “provide more detail of their exposure to derivatives and other complex assets.” McFall, drawing attention to the derivatives problem said: “It’s a minefield we are tiptoeing through…. We are seeing a process of de-leveraging. We don’t know what problems that might throw up.”

For example, the Royal Bank of Scotland, which just got 20 billion pounds from the government, has 480 billion pounds worth of outstanding derivatives trades on each side of its balance sheet. The fear is not only how much the banks are liable for and their ability to pay, but also whether the counterparties can pay as well.

RBS shares, as of yesterday, were trading at 65 pence, down from the 65.5 pence level at which the government bought its “preferred” shares. Because the government bail-out terms require that the banks suspend dividend payments until the government shares are paid off, many disgruntled stockholders are saying why hold stock that pays no dividends. This is cited as a reason for the sell-off of shares, but it is likely that there are broader systemic reasons as well.

On top of all this, the Daily Mail reports that within a year the Bank of England could cut interest rates from 4.5% to 2%, starting with a 0.5% cut next month for starters. This is despite the fact that British inflation is running at 5.2%, more than double last year’s rate.