Britannia Radio

The banking crisis grows apace and after the first 'bail-out' appears 
to have failed in its prime purpose to get lending going again,  this 
week will see the second in a yet-to-be-announced new arrangement.  
The front runners are set out below.  Robert Peston  (2nd piece) - in 
his usual disjointed phrasing! - always gets good leads, so much so 
that most assume that he is the conduit for deliberate government 
kite-flying  Mmmm ??? I wonder?

Things are beginning to get very dicey indeed.

XXXXXXXXXXXXX CS
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THE TIMES     17.1.09
    (online - in paper version of Sunday Times 18.1.09 ? )

Banks in crisis talks with Treasury after crippling market plunge

Treasury officials are preparing to work through the weekend on a 
fresh package of help for the banks following yesterday's dramatic 
stock market falls.

Barclays was the hardest hit, with its shares plummeting to a 10-year 
low, but Royal Bank of Scotland (RBS) and the newly merged Lloyds TSB 
and HBOS also suffered.

The falls - triggered by fears that the banks still had further 
losses to declare - prompted an intensification of efforts, which 
have been under way for some weeks, to agree a new bailout package.

Sources were today playing down suggestions that the banks were being 
summoned to the Treasury for crisis talks, as happened before the 
original bailout in October.

However, RBS today acknowledged that there were "ongoing meetings" 
with the Treasury, although they declined to give details. Barclays 
refused to comment.

A Treasury spokesman said: "We have been working with the banks for 
the past couple of weeks. We will be making an announcement on 
additional measures soon."

Earlier, Prime Minister Gordon Brown made clear that the banks would 
have to reveal the full extent of the "toxic assets" still on their 
books as a result of the collapse of the sub-prime mortgage market in 
the US.
"One of the necessary elements for the next stage is for people to 
have a clear understanding that bad assets have been written off," he 
told the Financial Times.
"We have got to be clear that where we have got clearly bad assets, I 
expect them to be dealt with."

The paper said that he refused to rule out a full-scale 
nationalisation of the banks or a further injection of taxpayer 
funding in order to restore lending to business.

Mr Brown and Chancellor Alistair Darling met yesterday with the 
Governor of the Bank of England, Mervyn King, and Financial Services 
Authority chairman Lord Turner of Ecchinswell to discuss the way 
forward.

Restoring confidence in the banks is seen as essential if they are to 
resume to flow of lending to business vital to the prospects for 
economic recovery.
Suggestions that the Government could use billions of pounds of 
public money to buy up "toxic" assets from banks were however being 
played down in Whitehall.

The plan would involve creating a so-called "bad bank" in order to 
cleanse the books of private institutions and free them to lend 
again, but that was said to be proving highly complicated in practice.

Another alternative said to be under discussion was the "ring-
fencing" of such assets within banks' balance sheets.

The latest moves come amid growing concern over the scale of banks' 
losses from bad debts, evidenced by a further plunge in their share 
prices yesterday.

Many are due to report figures to the markets imminently, with more 
massive write-offs anticipated.

The Government has already attempted to shore up the banks with a £37 
billion recapitalisation scheme, but the rescue has failed to kick-
start lending.

Mr Brown warned that unless the issue was dealt with, there was a 
danger of "financial isolationism" as banks retrenched into their 
domestic markets.
"The greatest risk after the events of the last few months is a 
retreat into what I would call financial isolationism," he said.
==========================
BBC NEWS  - Peston's Picks   17.1.09
A bank insurer, not a toxic bank
. Robert Peston

I don't know why the Government hasn't knocked on the head the idea 
that it's working on the creation of a bad or toxic bank that would 
buy our biggest banks' dodgy loans and investments. [Cos that's what 
they get you to do for them -cs]

What I expect it to announce on Monday (although the timetable could 
slip a day or so) is the creation of the mother-of-all bank insurance 
schemes.

By the way, the Treasury is also considering making an offer to 
Lloyds/HBOS and RBS to convert the expensive preference shares 
they've sold to the Government into ordinary shares.

If this happens, I would expect RBS to say yes and Lloyds to say no. 
And the conversion would see the state's holding in Royal Bank rising 
from 57.9 per cent to around 70 per cent, or a good step nearer full 
nationalisation (see below for more on this).

But back to this insurance scheme to give banks and their investors a 
bit more certainty about the losses they would face as the recession 
undermines the ability of many borrowers to repay their debts.

Our biggest banks would identify their bad loans and foolish 
investments. And they would then pay a fee to a new state-backed 
insurer to protect themselves from losses over a certain level on 
these stinky assets.

But the banks would retain these bad assets on their balance sheets. 
They would not be transferred to a new toxic bank. We as taxpayers 
wouldn't own the stinky loans - though we would be liable for losses 
on them over a certain level.

Why the urgency of doing this?
Well in just a few weeks we'll see results for 2008 from our biggest 
banks. As I've already pointed out, Royal Bank of Scotland and HBOS 
will announce unprecedented, horrible losses.

And the HBOS losses would represent a massive drain on its new owner, 
Lloyds TSB.

There's a fear that unless the Government has developed some kind of 
safety net for them by then, there could be an alarming loss of 
confidence in the banking system of the sort we witnessed in 
September and October.

So next week we'll get the announcement that just such a safety net, 
in the form of the insurance scheme for toxic loans, is in the 
process of being designed and built.

In a way, it can be seen as a way of getting capital into RBS and 
Lloyds/HBOS in particular without fully nationalising them.

That said, the scheme will be open to all our very biggest banks. So 
Barclays too could insure away future losses on certain of its loans 
and investments if that suited it - although on Friday night it 
insisted that it had made stonking profits of well over £5.3bn in 2008.

However I don't expect a long and detailed statement on the 
institutional mechanism by which we as taxpayers will pick up part of 
the bill for the longest banking blow-out in history.

Nor do I expect, as this stage, the Government to put a number on the 
likely cost to all of us as taxpayers of putting a floor under banks' 
losses - although the potential liability would run to tens of billions.

Of course it's entirely possible that if the new state insurer values 
the assets properly, taxpayers could end up over the years of the 
scheme with a profit.

But it seems unlikely that this will be a very popular policy. 
Readers of this blog have repeatedly asked why we as taxpayers should 
bail out the banks for the consequences of their greed and 
recklessness. The question I'm always asked is whatever happened to 
the old-fashioned idea that we should pay for our mistakes?

For those working around the clock this weekend at the Treasury, in 
Downing Street, at the Bank of England and at the Financial Services 
Authority, the priority is to restore the strength of the banking and 
financial systems, to stem the remorseless contraction of credit 
that's caused our awful recession.

In that context, the Treasury and UK Financial Investments (the 
institution created by the Treasury to manage its investments in 
banks) have been preparing to make an offer to Lloyds/HBOS and Royal 
Bank, to convert £9bn of their preference shares (owned by the 
Treasury) into ordinary shares.

The reason for doing this would be to remove from them the heavy 
financial burden of paying the 12 per cent dividend of the preference 
shares.

In the case of RBS for example, the dividend represents an annual 
cash outflow of £600m and for Lloyds/HBOS the outflow is £480m.

In theory, if the two banks didn't have to pay this dividend they 
could lend £27bn more every year (because under FSA guidelines, if 
the £1080m of dividends were retained by the banks as equity capital, 
the banks would be able to lend a multiple of that core Tier 1 capital).

My strong sense is that RBS would love to convert the prefs, which it 
regards as costly debt, into ordinary shares - even though that would 
see it owned 70 per cent or so by the state.

However Lloyds TSB is less keen, because it's 43.4 per cent owned by 
the public sector and doesn't want to see state-ownership rising 
above 50 per cent, which would be the result of converting the prefs.

It will be interesting to see whether Lloyds' shareholders would 
agree that its worth paying out £480m of cash each year to taxpayers 
to prevent that creeping nationalisation of the bank.

Anyway, as readers of this blog know, there'll be plenty of other 
initiatives announced next week by the Treasury, most of which can be 
seen as deploying taxpayers' resources to encourage lending.

One of these will be an extension of the timetable for Northern Rock, 
the fully nationalised mortgage bank, to repay what it's borrowed 
from the Bank of England and the Treasury. This would put less 
pressure on the Rock to shrink the amount that it is prepared to lend.

Which at a time when the problem for the economy is a shortage of 
credit sounds a bit like an outbreak of common sense at the Treasury.
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ECONOMIC SHORTS 16.1.09
TELEGRAPH
=Bank of England signals more needed to tackle the recession
Sir John Gieve, the Bank's deputy governor, warns that further 
interest rate cuts and fiscal measures will be required to tackle the 
recession.
=Anglo Irish Bank to be nationalised
Shares are suspended as Irish Government seizes control of the 
stricken lender.
=Bank of America gets $138bn lifeline from US
America's biggest bank by assets turns to the US Government for 
billions to digest its purchase of stricken Merrill Lynch.
=IEA cuts oil demand forecasts
The International Energy Agency on Friday cut its oil demand 
forecasts due to a much sharper-than-expected economic slowdown, with 
the market facing its first two-year contraction since 1982 and 1983

TIMES
=Anglo Irish investors demand High Court action
Government fails to calm fears over future of the bank as 
shareholders seek resignations over directors' loansele oil supplies
=Citi to split up group as Merrill loss hits $15bn
Citigroup to split in two and secures a $235bn Government bailout; 
BoA-owned Merrill Lynch loss grows amid $138bn rescue
=Honda to shut UK production for 35 days
Japanese carmaker extends plan to halt output at its Swindon plant 
but promises that no jobs will be lost at the factory
=Mortgage lifeline plan unworkable, say lenders
Council of Mortgage Lenders says that, statistically, each 
repossession put off leads to 80 new home loans being refused   [WOW! 
-cs]

FINANCIAL TIMES
=Gieve warns further action needed to aid recovery
Bank deputy governor says November forecasts too optimistic
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POLITICS HOME  Comments
17.1.09
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We Cannot Spend Our Way Out Of Recession
Iain Dale
I've just been watching STRAIGHT TALK in which Hazel Blears is given 
a half hour grilling by Andrew Neil. Right at the end of the 
interview she says...
"We cannot spend our way out of the recession."

Er, shome mishtake shurely. Isn't that exactly what her government is 
doing?