Sausage time!

The Big Bank Bailout, Round 2 has begun!

Last week, Wednesday, the Bank of England swung into operation its ‘Extended Collateral Term Repo Facility’ (ECTRF). To you and me that simply means a monthly regular bailout of all of the UK’s banks and building societies.  Again. In bits, so we don’t notice it as much; and so it doesn’t look so much like there’s a major panic on – which there is.

The Bank Of England will now, every month for the foreseeable future, offer at least £5billion direct to banks to assist in their liquidity; every 3^rd Wednesday of the month, in fact.The Bank of England is only allowed under the rules to operate the ECTRF where ‘actual or prospective market-wide stress of an exceptional nature’ is happening.

Essentially we were about this week to enter a severe credit crunch for our banks on the international markets (regardless of the Greek election result, by the way). The Treasury and the Bank of England has had to step in to prevent banking collapses in this country this summer, due to liquidity completely drying up.

Make no mistake, this intervention, by definition, means that we are in a real crisis. We should not be confused by the other, separate, but equally telling, intervention into the banks this week: the “funding for lending” scheme.

This is designed jointly by the Treasury and Bank of England for lending (effectively by taxpayers) of between £80billion and £140billion to the UK banks at below market rates; but trying to tie these to actual subsequent lending of those kinds of amounts into the real economy. Good luck with that!

This Funding for Lending scheme is above and beyond this new ECTRF monthly bailout. The UK banks are getting a double intervention from you and from me.

Repayments under effectively the same scheme (the SLS) were eventually repaid to taxpayers in January 2012. So, in terms of liquidity measures, how long did the UK banks last without the Nanny State having to step in and save their sorry souls yet again? Four months!

Last time round, the National Audit Office tells us, we gave £1.2trillion of loans and guarantees to the UK banks. The latest NAO figures available show that we still have £500billion of these loans and guarantees outstanding.

Of the actual physical taxpayers’ cash provided, the NAO tells us that less than 7% has come back to us from the banks. 93% is still lying there, doing pretty much nothing for the economy; in Zombie banks. So we are now planning below-market-rate loans of possibly £140billion, added to at least £60billion in monthly bailouts over the next 12 months. These are government and taxpayer subsidies to the financial industry.

Again, funny how we can find £200billion from down the back of the sofa for bank bailouts? So what will actually happen every 3^rd Wednesday for the foreseeable? There will be an auction of at least £5billion of Bank of England ready cash.

How do you get your hands on that lovely lolly? You have to bid. With what shall I bid? Er….dodgy debt.

The nasty stuff on your books at the bank which has been lying there unpaid and probably unpayable, and doing damage to your bank’s balance sheet can be offered for valuation and deposit at the bank in return for hard cash.

So the still festering credit card, sub-prime debt and commercial property and dodgy business investments from last time round (and the new stuff arrived since recession hit) can be offered up to the Bank of England in return for straight cash. If you and I make a bad call on an investment we’re stuck with it, and, once bitten, are less likely to do it again.

If you’re a bank, you can just keep going back for more  and (presumably) be as free, and as inclined, to issue the same kinds of dodgy debt again. They must be laughing all the way to the….Oh, they’re already there.

If in 6 months they’ve not given the cash back, the Bank of England gets stuck with the toxic ex-bank debt, plus a haircut fee which the bank has already factored into its books. But in the meantime the banks haven’t gone bust.  Who needs the free market when we can rely on good old State Capitalism that would make the Chinese proud? Moral Hazard can go take a jump in the lake.

To paraphrase Professor David Bailey (the originator of the giant international financial sausage machine analogy), when you put in your bid to the Bank of England you have to mince it all together in one large sausage of different, dodgy loan meats. According to the rules, no more than 10% from any one dodgy bit of debt can make up your total sausage bid.

The Bank of England sticks the sausages in the freezer for six months; and in default of payment in full, will sell them on or balance them against assets which hopefully flow in from the positive results of the scheme. So the Bank of England is becoming the buyer of last resort of the dodgiest securitised sausage meat in the land. Sir Mervyn King is the Demon Butcher of Threadneedle street.

Of course, like last time, HSBC and Barclays, the so-called non-bailed-out banks, will be free to become state-supported again for 12 months or so. I dare them not to participate to show their strength and independence!

They will, of course, queue up with the bowl of dodgy sausage meat for ready cash, like all of the others. Had bailing out the banks last time clearly worked, I would have supported further assistance this time – but it didn’t. The last lot of money and guarantees is still very much lying there. Had bailing out the banks last time led to investment in business and industry, I would support it this time – it didn’t.

Had the bailout last time come with real teeth to radically reform the entire industry and radically reform all of the finance business paraphernalia (including ratings agencies, casino banking , hedge funds, and destructive derivatives trading) I would support it this time – it didn’t.

Instead we were left with the Status Quo – and it’s been “Down, Down, Deeper and Down” since. So, to repeat, this money should have been lent direct to business and industry  – via new, regional business investment banks, outside the current system.

The idea of trickle-down lending to, and investment in, industry via a bust UK banking system is an idea whose time has gone.

Written by Councillor John Clancy of Birmingham City Council, courtesy of The Birmingham Post