UK News

Too big to fail? Guerrilla central banking and the last resort

Deciding it was safe to come clean because banks are now on a more even keel and the worst of the credit crisis is behind us, the Bank of England has told the nation that at the height of the turmoil it secretly lent Royal Bank of Scotland and HBOS a colossal £62 billion, which is more than the entire British defence budget.

Both banks faced the imminent closure of high street cash machines and the curtailment of normal banking operations across the country.

The Bank said “this was a dire emergency” and Downing Street called the secret lending of taxpayers’ money in the Autumn of 2008 “a powerful reminder of how close the banking system came to near collapse.”

In Westminster, some MPs were flabbergasted, even though the loans have now been repaid.

“It is astonishing that this was kept secret for over a year,” said Vince Cable, finance spokesman for the Liberal Democrats. “The government has treated taxpayers like children while expecting them to foot the bill.”

John McFall, Treasury Committe chairman, said the sum caused “a little bit of an intake of breath thinking how many universities, how many colleges, how many jobs you could support with this.”

“It’s Enought to Make Anyone Feel Queasy,” was Ian King’s headline in The Times. “Any More £62 bn Loans You Haven’t mentioned, Merv?” asked the Daily Mirror, addressing itself to Bank of England Governor Mervyn King.

Should banks sponsor sports stars?

A bit like asking turkeys to vote for Christmas, parliamentarian John Mann has called on the likes of tennis player Andy Murray, equestrian star Zara Phillips and motor racing great Sir Jackie Stewart to scrap their sponsorship contracts with the Royal Bank of Scotland.

Bleeding red all over its accounts and shedding thousands of jobs, the struggling Scottish bank has been heavily criticised for doling out bonus payments to staff despite receiving billions of pounds of state aid.

So the relevation RBS has splashed out 200 million pounds on sports sponsorship – the bank also has a promotion deal with the rugby union Six Nations tournament – has come at the worst possible time.

“That level of excess clearly can’t be justified,” said Mann. “Not one ambassador, but loads, not short-term contracts, but long-term contracts, not small amounts of money, but large amounts of money.”

“I think it would go down very well with the British public if some of them were to cancel their contracts. Some of them would become real heroes if they did. I think they need to consider that this is borrowers’ money we are talking about.”

Should Murray, Phillips and Stewart scrap their contracts and should banks be sponsoring sports stars in the new frugal economic climate?

The “shotgun wedding” of Lloyds and HBOS

“If you think you want to advance on this, we will deal with the competition issues” — so said Gordon Brown to Lloyds Chairman Sir Victor Blank last September, sweeping away the one big problem to a merger between Lloyds and HBOS.

At the time, Brown said the government had acted quickly and decisively in removing competition concerns and prodding the merger forward, despite concerns about the risk that Lloyds was taking.

Now the full scale of HBOS’ losses — 10 billion pounds in 2008 – has become known and the share price of the merged bank has taken a dive. Fears are growing that increasing fears that the government will have to pour in more money on top of the 17 billion pounds it has already spent to acquire 43 percent stake — or even nationalise it altogether.

Opposition parties have been quick to claim that Brown pushed through the “shotgun wedding” of a healthy, prudent Lloyds with the toxic HBOS to avoid the embarrassment of having to nationalise the Edinburgh bank.

But several analysts have noted that the two banks had long been talking to each other about a merger and that all Brown did was facilitate it.

How much blame do you think rests with the government in the Lloyds affair?

Brown’s Scotland likely to be hit worst in recession

The Labour Party may have won the Glenrothes by-election this week, partly on the back of the Prime Minister’s handling of the financial crisis, but Gordon Brown’s Scotland is predicted to suffer more than the rest of Britain during the economic downturn.

Scotland was named European Region of the Future for the second time in four years by the Financial Times’ fDi (foreign direct investment) magazine this year.

But figures show its growth is likely to lag behind the rest of the UK during the oncoming recession.

According to the Scottish Item Club’s 2008 Economic Prospects report, the Scottish economy is estimated to have grown 1.8 percent in 2008, 0.3 percent less than the UK’s rate. By 2009, this gap will have worsened to 0.6 percent. 

The main reason is the Scottish economy’s vulnerability to a weakening financial services sector.

This sector has been the driving force behind the country’s growth during the past decade, providing tens of thousands of jobs. Since 1998, its output has represented more than 8 percent of total Scottish GDP, and it has grown at an average annual rate of 7.3 percent.

But the result of a more cautious banking sector is likely to be a drop in financial services growth to only 2.9 percent in 2008. 

Turbulence or meltdown?

*** For full coverage of the financial crisis click here***

The events of the last five days have been traumatic for the world of high finance and banking — and may yet become so for the man in the street if confidence in banks fails to hold.

Venerable finance houses are falling like cards, all manner of exotic and unsound practices are being revealed and many of the old rules — like the competition reugulations that stopped Lloyds buying Abbey National in 2001 — have gone out of the window.

Money markets have all but dried up. “I’m not lending money to you — you might not be here next week,” seems to be predominant mood.

Some commentators say this is the financial world’s Particle Collider moment and we’re all doomed, others that this is merely a painful but long overdue shake-out: a reality check that in the end will bring about a greater degree of prudence and sanity.

What do you think we are seeing here? And what do you think the result will be?