Toxic Spin

SUNDAY, JANUARY 18, 2009

Toxic Spin

Our insurance plan goes up to 11

When is a bad bank not a bad bank?

When it's called a "pay as you go" insurance deal, of course.

The precise details of Brown's latest bank bail-out scheme are somewhat sketchy - what's new? But according to the Sunday Telegraph's report:

"The Prime Minister is understood to have favoured the new "pay as you go" insurance deal over a single toxic bank because of the potential shock to taxpayers if they faced an immediate multi-billion pound hit so soon after last October's £37 billion bank rescue package. However, the impact of the two schemes is intended to be broadly similar."

"Broadly similar" is putting it charitably. Identically similar is closer to the mark.

Because contrary to the Treasury spin (faithfully relayed by the BBC yesterday), it doesn't make any difference whether we taxpayers take physical delivery of these toxic assets into a taxpayer-owned Bad Bank, or whether we simply give the banks a guarantee of their value - either way, we're bearing the risk that they turn out to be as worthless as everyone fears.

Whatever the label says, the key question is what is the price at which we're on risk?

Let's just remind ourselves of some facts.

As a result of their own reckless lending, our banks have a load of very dubious loans/investments on their books. Nobody knows what these so-called toxic assets are worth - it may well be zilch. But one thing everyone does know is that banks have been very slow to recognise the losses on them, and their current stated value is almost certainly way too high (hence the panic on bank shares last week).

By forcing taxpayers to take on the risk - even if it is in exchange for a face-saving insurance premium - Brown is doing another big favour to bank shareholders. They not only avoid the need to take another big write-down hit to their capital, but they also retain the possible upside in the (admittedly unlikely) event that these things turn out to be worth something after all.

Indeed, this could actually turn out even worse for taxpayers that a straight Bad Bank. Because with the insurance deal, we still take all the downside risk, but now we don't get any of the possible upside - that all goes to the banks.

So how much are we in for? A figure of £200bn is floating around, but precisely what that refers to is unclear - it may be the original value of the debt, or a partially written-down value.

What we can be sure about is that the Simple Shopper will not negotiate anything like a fair price for us. We will be gifting bank shareholders many more tens of billions.

Remember that when the spin-machine spews forth tomorrow.