• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

Sausage time!

0
  • by John Clancy
  • in Blogs · Cllr John Clancy
  • — 25 Jun, 2012

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 3rd 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 3rd 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

Share

You may also like...

  • Details and implications of the new ECB rules of engagement in Euroland Details and implications of the new ECB rules of engagement in Euroland 9 Dec, 2011
  • Stephen Sheen: Who’s doing your audit? Stephen Sheen: Who’s doing your audit? 10 Nov, 2014
  • Taken to the cleaners Taken to the cleaners 8 Nov, 2012
  • Settlement date blues Settlement date blues 2 Nov, 2012

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 37 mins ago

    FDs’ Summit experts defend councils as MPs label property investment ‘risky’: As Room151’s FDs’ Summit conference explores local government’s investment in commercial property MPs once again lable it a “significant risk to government”. Once again MPs… dlvr.it/Rr7lZx pic.twitter.com/jPvcZjDAS4

    Room151 10 hours ago

    Global macro outlook: Virus versus vaccine: Sponsored article: Salman Ahmed argues monetary policy, a global vaccine rollout and fiscal stimulus are likely to put “upward pressure” on bond yields. Much like the latter half of 2020,[...] dlvr.it/Rr60nt pic.twitter.com/qsymBWmKmV

    Room151 1 day ago

    ‘Chasing yield’ not the best strategy as negative rates loom: Recent speculation that the UK may be heading toward negative interest rates prompts questions for treasury officers managing local authority funds at LATIF. Speculation is rife that the UK… dlvr.it/Rr3Mrj pic.twitter.com/wtxYAB20PO

    Room151 3 days ago

    Will new public procurement rules offer the best commercial results?: The government has issued a green paper on reforming procurement rules. Helen Randall and Rebecca Rees examine the proposals and argue they may not go far enough. The Cabinet… dlvr.it/Rqtw6T pic.twitter.com/9GiVTkL08U

    Room151 1 week ago

    The vaccine may help settle cash flows but inflation remains a risk: Sponsored article: Lauren Sewell examines the prospects for long-term borrowing as Brexit settles and vaccines are deployed against Covid-19. On the 9th October 2019 Whitehall sent… dlvr.it/RqZXCr pic.twitter.com/PzgOZOGQ0k

    Room151 1 week ago

    ESG in liquidity: Sponsored article: Gavin Haywood looks at the integration of ESG in Federated Hermes’ money market funds. Federated Hermes has over 300 public sector clients invested in our AAA rated money[...] dlvr.it/RqZX5f pic.twitter.com/E87sBXsay8

    Room151 1 week ago

    New realities of investing cash and liquidity: “What to do now?”: Sponsored article: Brian Buck looks at the “unique challenge” for cash management strategies. As investors assess the ongoing impact of the pandemic on their business, levels of cash and… dlvr.it/RqVbk9 pic.twitter.com/ZElVASmEUV

    Room151 1 week ago

    Extra finance promised by the government receives a broad welcome: Sponsored article: The financial pressures facing local authorities this year continue to pose challenges for council treasurers. While the launch of the UK’s Covid-19 vaccination… dlvr.it/RqTzTF pic.twitter.com/HCjH0pyHR5

    Room151 1 week ago

    A savvy approach to managing your cash: Sponsored article: Caroline Hedges examines the need for active cash management to achieve a higher than average return. Last year saw the already mountainous pile of negative-yielding debt around the[...] dlvr.it/RqTzMK pic.twitter.com/uP0RQYTJLt

    Room151 1 week ago

    Putting alternatives at the heart of multi-asset portfolios: Sponsored article: Nick Edwardson looks at the assets that provide the “most attractive opportunities”. We believe that asset allocation is the primary driver of investment returns and that the… dlvr.it/RqQ2Qt pic.twitter.com/WLBzvRRRUQ

    Room151 1 week ago

    Thriving in the pandemic: Avoiding the stragglers: Sponsored article: George Crowdy looks at the sectors providing opportunities for sustainable investment. Throughout much of 2020, we talked about why sustainable investing has thrived in the pandemic,… dlvr.it/RqQ2NQ pic.twitter.com/dxiPWKFsPl

    Room151 1 week ago

    The development of CCLA’s mental health benchmark: Sponsored article: Amy Browne examines the importance of investing in mental health in the workplace. We are living through a public health emergency in more ways than one. Physical health[...] dlvr.it/RqQ2Jx pic.twitter.com/o6yRSCX3oF

    Room151 2 weeks ago

    Brexit: What the EU trade deal means for the UK economy: Sponsored article: Hetal Mehta looks at the impact of Brexit on economic prospects. Four and a half years after voting to leave the EU, on Christmas Eve the UK finally[...] dlvr.it/RqLBDt pic.twitter.com/No62srfE8h

    Room151 2 weeks ago

    Cash dethroned: The quest for liquid yield: Sponsored article: Peter Hunt and George Carne ask how treasury departments can balance the need for yield and liquidity. The massive stimulus and waves of liquidity provided by central banks[...] dlvr.it/RqLBDj pic.twitter.com/05g6Zhu1kU

    Room151 2 weeks ago

    Richard Harbord: Delayed “capital determinations” make section 25 opinions a new crunch point: The severe pressure on local government budgets now means section 151 officers confront a tricky call on  whether they can make a judgement on the robustness… dlvr.it/RqLBDV pic.twitter.com/vTAbDKFzkI

    Room151 1 month ago

    PWLB Consultation: Analysis straight from Dickens: Helen Radall and Paul McDermott present a legal examination of the new PWLB borrowing rules as Charles Dickens might have imagined it. Free and easy PWLB (“Marley” to his friends)[...] dlvr.it/RnmwLq pic.twitter.com/yFxcPrQqEG

    Room151 1 month ago

    Room151’s top stories from a momentous year: 2020 was the year in which local government grappled with Covid-19, funding strains, controversy over borrowing rules and the threat of financial collapse. It has been an exhausting and historic[...] dlvr.it/RnlpZg pic.twitter.com/g3myNyox6J

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Four ways to boost growth
  • Next story The week ahead

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK