Now that Brown and Darling has decided to underwrite every single customers' money that is in Northern Rock with taxpayers money, I find myself wondering, would he have done the same for Barings? Something tells me that he wouldn't. After all, Barings was a bank for rich people who didn't live in marginal seats and would never have voted for Labour anyway.
Let's not be under any illussion here, the decision to underwrite every customers money with a cheque from the taxpayer has bugger all to do with trying to calm everyone down and stop panic withdrawals. It's about shoring up Labour votes in the event that Northern Rock goes under.
32 comments:
Is Brun & Darling allowed to do this under EU rules?
I seem to remember that the German government got their knuckles rapped over the same sort of thing recently.
So Baring that in mind, how legally enforceable is Darling's guarantee?
Surely Brown and Darling are also desperately trying to avoid a downturn in house prices as well?
This latest move is to prevent consumer confidence from falling any further, regardless of the economic rational behind it, because once confidence goes it will take everything else down with it.
Brilliant and spot on. The banking industry has in effect been re-nationalised.
Will the Northern Rock now reduce the interest rate paid to savers since there is less risk involved?
They can't prevent either a downturn generally or a slide in house prices. Whereas the like of NR have been offering 100% and 6 x salary, now you would probably be lucky to get 85% and 4 times . That in itself will drop the market. The economic incompetence and complete lack of understanding of markets Brown has truly staggering. And Darling has even less - not that he'll actually be allowed to take any decisions anyway
wot about lloyds names?
In the US, most customers have their money protected up to a certain amount (100 000 dollars, I think, guaranteed by the FDIC).
As for the government underwriting with taxpayer's dough, it's not like Barings, because Barings was insolvent (in fact, it was worth nothing at all) and Northern Rock isn't (and, thus, underwriting it looks pretty safe). Additionally, I am not sure how many customers had money with Barings on deposit, as it was a merchant bank; whilst Northern Rock don't have that much deposit (their big business is lending*), they are more of a High Street bank than Barings ever were.
The business of underwriting banks is interesting; if the government doesn't do it, of course, a few bad banks could take the whole system down (even though absolute money involved won't be gigantic, confidence is key). One would obviously insist that, to reduce the government's risk, the banks were regulated; well, they are heavily regulated. The last part of it, though, would be that, even though customers were protected, the bank and its decision-makers would have to face consequences. I am not entirely convinced that is the case in the UK (unlike the US, to some extent, where CEOs and the like can do big prison time and the laws on what is a crime can be pretty draconian; this has been much more the case since ENRON and Worldcom, of course). It seems logical to me that legal responsibility for the decision-makers inside banks might be a necessary requirement for the government in underwriting the risks to the customer.
If the government doesn't underwrite banks, one bank going down could take a lot of others down, as customers could start to withdraw from all banks (and then all banks are subject to the credit problem that hit Northern Rock, except it will be worse because lenders will be a lot more nervous).
*This relative lack of funds loaned from depositors is apparently the main reason that they are first to hit trouble with the credit crunch; wheras most banks are loaned significant amounts of money by their deposit customers, Northern Rock has to go to lenders to achieve liquidity and when credit hit the rocks because of the US subprime farrago, Northern Rock had immediate trouble.
...and if Mr Darling's commitment is, as reported by some, 100% and ceiling-free, ALL money from ALL other deposit-takers should IMMEDIATELY be transferred to Northern Rock.
The FSA guarantee for depositors only stretches to holdings up to £35,000, and only 90% of most of that. But now... Darling, you shouldn't have! Naughty but nice!
"it's not like Barings, because Barings was insolvent (in fact, it was worth nothing at all) and Northern Rock isn't (and, thus, underwriting it looks pretty safe)."
You seem very confident of their solvency, why is that? What evidence have you seen to this end?
Zorro
Robert Peston made the point about the lack of a ceiling being a mistake. He reports (I blogged about it a bit, too) that the Bank of England favours something like the FDIC, where there is a ceiling, per customer per bank, of $100 000 guaranteed and the FDIC gets a premium from every bank and and can also step in if the bank is veering towards insolvency.
Peston's right, though, that the complexity of financial markets precludes the average depositor being able to know enough about what is going on to exercise control over the bank; the big investors and shareholders, however, should most certainly not be protected.
anonymous: I am basing it on the Bank of England's statement. What other evidence would I be able to get?
The big difference, though, is that Barings was a merchant bank which put (thanks to Nick Leeson and some lamentable oversight) all of its money in the futures markets and lost it. Northern Rock is primarily a mortgage lender. The run on Northern Rock is not based on fear that it's insolvent based on making bad loans (as has turned out to be the case with at least one major US lender, American Home Mortgage) but that it asked the Bank of England for support based on liquidity problems arising from the so-called 'credit crunch'.
Now, of course, maybe it is insolvent. Neither of us can possibly know that at this stage (unless you work high-up in Northern Rock). My point is that the fears are based on Northern Rock's liquidity problems; Northern Rock is certainly to blame for them, because they should have had a business plan that could cope with the cost of credit rising.
If further information comes out that Northern Rock are, in fact, insolvent, then the more reason for the government to come up with something like the FDIC pretty damn quickly, before one of the bigger banks goes down because at least Northern Rock doesn't have that many depositors lending it money anyhow (unlike most banks) because its big business is mortgages. The value of those mortgages, based on what the Bank of England sees, is pretty sound so long as they can be held onto for a little while -- if there is a bankruptcy sale, given the economic situation, they'd be worth rather less, of course -- so it's worth keeping Northern Rock afloat.
That's all aside from the lemming effect; a run on banks could make healthy banks go down (again, because of liquidity problems) and that would be a catastrophe, one that would hit some of the most sensible people that have been putting money aside (rather than living in debt). Seeing as so much of this is based on confidence, something like the FDIC seems like a decent idea to me.
Oh, and according to Peston who had interviewed the chairman of the FSA, the protection is being offered to all banks:
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/09/saving_the_banks_1.html
Even more need for a cap a la FDIC.
Not entirely fair I think Dizzy. A run on the banks would have very serious consequences for for everybody, rich and poor alike. I would have thought that any government would be irresponsible not to act if a run on the banks looked a possibility.
Also my guess is that a significant proportion of the Northern Rock savers are 'Widows and Orphans' who may well have been under the misapprehension that it was a 'safe as houses' mutual building society. I had a few bob myself in the Bradford and Bingley up until a couple of months ago when I moved it to the Coventry which had a better rate. I consider myself reasonably financially sophisticated and had no idea that the B&B was as risky as it apparently is. Carelessness on my part but real Widows and Orphans (I'm only technically an orphan) do need a bit of protection.
There was no risk that the Barings debacle would have led to a run on the banks and there can't have been many widows or orphans at risk so it doesn't seem a fair comparison.
For once I'm defending Gordon's actions even though without doubt his disgraceful off balance sheet shenanigans have contributed to the general over stretched position the country finds itself in.
"You seem very confident of their solvency, why is that? What evidence have you seen to this end?"
So far as we know, losses in the bank are not yet sufficiently large to mean they have to write down enough capital to impair their solvency.
We know this because they revised earnings guidance down to £400m from £650m (i.e. do not anticipate making a loss / having to write down capital). This was corroborated by the Bank of England and the FSA.
Of course, they could all be lying and you can believe that if you want to (many seem to).
On the broader post: I'm afraid I don't buy the conspiracy theory. After the papers were reporting the fall in Alliance and Leicester's share price yesterday evening, there would have been queues forming outside their branches next.
It remains to be seen whether or not this action is successful, sure, but something had to be done before the panic spread. No government could possibly stand by and watch the banking system collapse: it would take the economy with it.
Just a few questions...
How much has the taxpayer lost to date during this 'crisis'? Nothing
How much have Northern Rock customers lost to date during this 'crisis'? Nothing
Who have lost anything to date during this 'crisis'? The only people are Northern Rock shareholders who've seen the values of their shares decrease. i.e. the owners of a company that made bad decisions (that's what is meant to happen in a free market economy)
All this howling and wailing from people who have no understanding of economics and simply assume that their hatred of Labour is evidence enough of a Labour-driven 'crisis' is laughable.
If HSBC do takeover Northern Rock, raising the share price, will you cover that as a Labour achievement? Of course not! Its the free market.
Just a few questions.
What does question number one have to do with whether the guarantee is right or not? Nothing.
What does question number two have to do with whether the guarantee is right or not? Nothing.
If you think hatred of Labour drives me to believe that it is wrong for the Government to effcetively underwrite the money in a private bank with taxpayers money and thus effectively nationalise the bank then that is what is laughable.
As I've just written on the other thread, I don't agree with the government offer to bail-out NR. I simply disagree with your political take on the wider 'crisis'
Political take being what? That we have an economy based on debt, and that the rapid growth in debt encouraged through our economy in political terms for the last decade has left us exposed in a greater way than others?
Will Northern Rock customers who open accounts after the hancellor's announcement last night will also be guaranteed their funds in the unlikely event that the bank fails?
The reason I ask is that if the guarantee does not apply to new
customers, then there is little incentive for new savers to risk their money at the bank and in turn that means that the bank is nlikely to recover from its current position.
However if the reverse is true then there is no point in holding
accounts with any other bank (because only the 90% recovery rule
applies) and people should transfer all their savings to the Northern
Rock (whose deposits are safeguarded). In which case, how does the government propose to prevent a consequential run on every other UK bank?
The UK does, indeed, have too high a fraction of debt (exceeding GDP from what I heard yesterday).
Of course, it'll all be irrelevant if the US tumbles; the US has the same sort of problem (but arguably worse in some ways, because of the subprime mortgages that were being handed out) and could go down hard enough that it won't matter much what the UK does. Not that that's an argument in favour of the debt that many UK residents are in, which boggles my mind.
Northern Rock's problems, however, are primarily about its need to borrow from large lenders because of its relatively small business from deposits. The 'credit crunch' was bound to hit them harder because being able to borrow for liquidity is more important to them than to many other lenders just by the nature of their business model. A collapse of the debt balloon, which seems eminently possible, will obviously also screw them hard, but that's not what's happened here.
On the political issue, I don't think that the government are just about buying votes; they could do that more efficiently in other ways, I would say. Moving to prevent a possible collapse in confidence in banking, however, makes sense for all sorts of reasons. I don't think that there should have been unlimited liability (particularly now that I remember that they've promised this security for all banks) and something like the American FDIC needs to be implemented pdq, but there are plenty of other, fairly sensible, motives for the government action other than the immediate political benefit (which of course was included in their calculations; they are not complete morons, after all).
My understanding on your political take is that:
1. Cameron is not an opportunist for trying to blame the government for this 'crisis'.
2. That it IS the government's fault because they (or more precisely, the BoE - although I take your point about guidance from the Treasury) have presided over low interest rates.
My views on those things would be that
1. Cameron is being opportunistic because he has never suggested, and still is not suggesting, regulations to limit borrowing or enforcing higher interest rates.
2. That the government is right to keep interest rates low (as far as is compatible with keeping inflation down) and let the market decide who lends and borrows what.
So, to be explicit, when Dizzy says:
"Let's not be under any illussion here, the decision to underwrite every customers money with a cheque from the taxpayer has bugger all to do with trying to calm everyone down and stop panic withdrawals. It's about shoring up Labour votes in the event that Northern Rock goes under."
I completely disagree. I think that the political implications are there (governments are, after all, political; everything they do has political implications) but the decision is also very defensibly about maintaining confidence, in Northern Rock in particular and in other banks in general.
The panic withdrawals are a clear and present danger to Northern Rock and, potentially, for any other bank about which suspicion (justified or not) emerges. A run of depositors trying to get their money back could screw a healthy bank, let alone one with some short-term problems.
The FDIC isn't ideal, but it's better than what the UK has had, both the former situation (you can wait months to get some of your money back) and the current situation (you'll get all your money, no matter how much, back pretty much straight away courtesy of the taxpayer); the FDIC sits in between those two cases and does act to sustain confidence.
Several things amaze me about the way the debate about Northern Rock is conducted in the Press. One is that the word 'debt' in relation to the economy is somehow expected to have the same rhetorical force as 'heroin' might in relation to play-school.
Debt, on the whole, is good. It is a good thing that debt was invented, is now so widely available, is so flexibly offered. This is something that Tories clearly understood in the 1980's. Britain got ahead in the 19th century partly because it understood and could use debt. IF you want an economy that is not based on debt, try something autarchic like North Korea.
The difference between illiquidity and insolvency is utterly critical. Supporting illiquid entities in order to stop it spiralling into a wider crisis that might then produce insolvency is entirely correct, and exactly what the central banking system was invented to allow. The Depression occurred partly because this was not realised.
Underwriting deposits is not the same as nationalization, clearly. This is an arrangement, explicit or implicit, that exists in major economies worldwide (Fannie Mae, say?) Calling it nationalization is a bit shrill.
Northern Rock going bust would on the whole damage people who have saved more than the FSA-guaranteed amount i.e. £35k or more. Not Labour's usual constituency, I would have thought.
I don't even think the bailout has implications of moral hazard. Bank managers are incentivized by the share price, and their careers. No NRK manager right now is thinking life is cushy or expecting a huge bonus next year. Letting equity holders suffer, but underwriting savers against an irrational bank run, is entirely correct.
That's a bit left wing of you Adam :)
JM: Interest rates have not be kept low in line with inflation though. If you remeber we shifted from RPI to CPI. Had we been following RPI, which I beleive topped 4% today interest rates would have risen earlier, less people would have been taking mortgage, and housing markte would not have boomed in quite the way it did.
This is not about regulating borrowing, it;s about honesty in assessing the impact. And my take in interest rates relates very specifcally to the political driving of being able to tub thump about them being low whilst maintaing the "no more 15%" line. The Government has created a millstone around it's own neck with that one.
Well, I'm with Greenspan and others on this sort of issue, I guess. As I said in my post at the Pond, I don't like the idea at all, but I like it more than I like the alternatives. Average people have to at least be able to safely deposit money in the bank and have it not lose against inflation, in part (although not mostly) to address the very concerns you have about people instead taking on excessive debt.
In an ideal world, the markets wouldn't be dominated by speculation and people wouldn't take out too much debt. In addition, customers would understand enough of their bank's dealings to apply pressure to them to remain solvent through prudent decision-making. There's no way we're getting to that world (and even trying would require Big Government of epic proportions) so I think that government-mandated insurance on bank deposits up to some limit is a least worst case of the ideas that I've seen.
So you agree with his assesment that "Britain is more exposed" which is the same thing Cameron cited when he said "the increases in debt in the UK economy personal, corporate, and Governmental have added a new risk to economic stability"
Britain is certainly exposed to debt. However, I don't blame the government, in particular, not interest rates; after all, low interest rates in the eurozone (generally lower than those in the UK) haven't driven the inhabitants of eurozone countries into the same amount of debt. There are cultural issues at play, I think, issues which have been developing in the UK since at least the 1980s.
In the US, the norm is the fixed-rate mortgage (30 years is standard). They used to be more common in the UK -- I know that my grandparents bought their house with one -- but they aren't so popular now. The very mortgage products under suspicion in the US at the moment are the very sort that are pretty much normal in the UK (adjustable rate mortgages), although some of the subprime varieties are pretty brutal in terms of the adjustments after the initial period and are causing the most problems.
Personally, the weirdest thing I found about the UK mortgage market, when I was in the UK, is the idea that they look at a multiplier of your gross salary. That's just crazy -- they should be looking at your net and your expenses. A 5x mortgage can look insane for some people and less insane for others, based on their outgoings, but the base rule of multiplying gross salaries doesn't really take that into account.
The government has a role to play in regulating the lending industry, but I am not sure that it's their fault that British (and Americans) take on so much personal debt, particularly unsecured debt. It's not as if the people taking out that debt are having hidden from them the risks and costs -- they're just acting like morons. Who the hell borrows money on a credit card, for example? Desperate people, sure, and morons. Government policies to stop people acting like morons will take a long time to work, if they ever do.
I am against government spending that is in deficit over an economic cycle (my biggest bone of contention with Bush and the former Republican Congress), I think that the level of personal debt in the US and the UK will eventually screw the economy because self-discipline seems remarkably absent from the financial lives of many people.
As for corporate debt, it's a mix, I think; some take out way too much debt (one irony of the Marconi disaster was that Weinstock was castigated for being safe and having a cashpile, wheras his formerly-lauded successors drove the company off a cliff) and I would guess (from a position of low knowledge) that that could currently be too many corporations for comfort. Corporate debt isn't bad per se, but it certainly can be. At the level of individual corporations, it's not so bad; if they go too far into debt, they'll go to hell, the shareholders get screwed (but that's the risk of owning shares) and the employees are also in trouble (but can hopefully find new jobs). Too many corporations in that situation, however, is obviously an economic issue. I don't know enough about the corporate indebtedness in the UK to say whether that's the situation they're in (wheras I know a bit about the personal and government debt situation, both of which worry me).
I think the credit market is somewhat different in the eurozone so it's a bit like comparing apples and oranges.
Sure, but there's clearly more to it than just low interest rates, I would say. You can live in the UK without large credit card balances (in fact, you'll be better off because you'll avoid the interest charges). I am not sure exactly why people take on so much personal debt.
Perhaps it might be more pertinent to ask if Darling would have done this for say, Cheltenham&Gloucester, rather than Barkings.
Hmmmmm, think not.
I can't see them letting any highstreet bank go down when it's relatively easy to try and stop it and they believe the bank to be solvent. It would hurt them and if it spread, it could plunge them into electoral oblivion. So, personally, I think they'd try to do the same sort of thing in similar situations (if the bank was suspected to be insolvent, though, it could be different).
However, of course, it appears from what the head of the FSA said that they have done the same for every bank, at least so far as the current crises are concerned.
I bet people who took out fixed rate mortgages in the 1980s have been really pleased with the results.
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