It’s the banks, stupid

It’s not the economy, it’s the banks, stupid.

The US and the UK economies are not going to function properly again until the problems of their bloated banks are solved. The US and the UK authorities from time to time announce new packages of huge sums of money to help the banks, in between their preferred choice of planning to spend huge sums of borrowed money on public works and projects in the hope these will reflate them out of trouble. They will not, unless they also mend the banks.

There are several alleged solutions being investigated to tackle the banks:

1. Establish a bad bank, to take away all the toxic debts from the current banks. The slimmed down banks can then resume lending.
2. Nationalise the existing major banks, pumping in enough money so they can start lending again.
3. Create a state sector good bank which starts lending
4. Offer state guarantees to the commercial banks for new lending to encourage them to start it up again
5. Relax regulatory constraints to allow more lending from stretched balance sheets
6. Print more money and inject it into the banks to encourage them to lend more

Proposals One and Two would be very expensive and unlikely to work. Transferring the bad debts from private to public sector doers not cure the malaise. It merely shifts the losses from shareholders and bankers to taxpayers for no obviously good reason. There is no evidence that a state owned bank would be better run than a private owned bank, despite the poor performance of several private sector banks. Governments themselves anyway say they do not want to run the banks they nationalise.

If more lending is the aim then establishing a new state owned competitor to existing banks and giving it capital so it can lend would be a less expensive way of creating new lending, pound for pound, than subsiding and propping up an existing bank. It could not realistically be large enough quickly enough to make a lot of difference. If it lent too much too quickly it would soon itself have lots of toxic debts, whilst its capital requirements would impose a substantial strain on public finances. Lending in these conditions is not easy, as many companies will struggle to repay the borrowings. Toxic debt is not a large pool of bad loans from a past era of excess that can be identified and tackled. The toxic loan pool is growing and changing all the time as the economy deteriorates.

Offering guarantees to stimulate lending, relaxing regulatory restraints on capital and injecting more cash into the banks are all helpful measures. If done in moderation they could help solve the problem.

None of this , however, tackles the underlying problems of overstretched balance sheets, too much dangerous business on banks books, past large errors by banks and a new climate of fear engendered by market movements and government hostility. There are a couple of proposals in the debate which do tackle this which need to be dealt with:

1. Make the banks declare the full extent of their losses – the full transparency approach
2. Bankrupt selected banks that have performed especially badly to force out their losses and get them behind us

The first idea has some merit, but is not of itself a solution. If the losses are too large markets will be spooked and then there will be even larger losses as the market value of banks assets falls further. To some extent this is happening anyway, as auditors and Directors consider what to put in accurate accounts at the 2008 year end. RBS is going to declare around £28 billion of losses as a result.

The second proposal was tried when the US authorities allowed Lehmans to go under. It led to further falls in asset values, destabilised other banks and made most in authority think they should not do that again.

So what should the authorities do? One day they might conclude that my proposal of the “intelligent bank manager” is worth a try, so here’s another effort to explain it.

The regulators and the commercial bankers have to work together where a bank is in trouble, to find a way of getting from overlent, overstretched and sitting on too many losses to a position where the bank’s balance sheet is strong enough to resume normal banking.

This requires case by case analysis, and agreement between regulator, central Bank and commercial bank about the timetable for remedial work. All the time the commercial bank is making the agreed adjustments it should receive lender of last resort support, and continue to receive regulatory approval.

Actions bad banks need to take include:

1. Cutting costs sharply. They need fewer highly paid people. There must be no bonuses. In some cases higher paid people will need to take a pay cut. These banks need to make more profit to pay the past losses.
2. Going through all loan books and having a plan to maximise the repayments on each loan – as many of them are doing to an extent already. Tough judgements have to made – will continuing the loan and keeping the customer going result in a better outcome, or is it better to demand repayment now because the customer losses and asset values are going to get worse? There was a lot of wishful thinking about property values and the like in the early phases of the downturn.
3. Closing down the investment banking and trading activities that put too much bank capital at risk. The world market has been oversupplied with derivatives, futures, options, collateralised debts and the like. Big book positions should be closed out wherever possible by banks at risk, and losses taken where too many bad bets have been placed.
4. The large banks created by expensive and over rapid acquisitions should be broken down into their old components, re-establishing the separate brands . Individual businesses should be sold off to reduce risk and raise cash.
5. Adding selective new business where risks and margins look attractive, but resisting efforts to make these banks lend to whoever at whatever, recreating past errors of optimistic lending.
6. Raising new priovate capital when becomes possible thanks to the recovery work.

This is just a sketch of what needs doing. Call it if you like the Intelligent bank manager approach. The central Bank in most countries is both the banks’ banker and their regulator. In Brown’s Britain of course we need to have two public bodies doing this job, so we need to involve both the Bank and the FSA. It is so obvious, it never gets examined on the BBC and therefore does not rate as an option for this media oriented government. Perhaps, however, one day they will give it a try, having tried everything else with such a lack of positive results. It is not a quick fix, but it is a reliable one. This is a big problem, so it requires hard work and patience to get ourselves out of it.


  1. Simon D
    February 3, 2009

    I have just changed banks. I came to hate the bank I have used for the last 50 years. As the remuneration of the top management rose into the stratosphere, the branch network was massively de-skilled. This meant (1) open plan (2) nobody over 30 meeting the public (3) poor staff training and (4) an inability by the staff to understand the multiplicity of products and rules. The last straw was being lectured by a teller when I asked to change a £20 note into smaller denominations. Banks have lost the ethos of customer service at street level. God knows what the business customers have to go through to get the attention of someone mature and sensible.

    I also encounter, occasionally, one of the top honchos of another (now nationalised) bank. I meet him in a semi-social context, but with great reluctance. He is ignorant, arrogant and boastful. For him it is business as usual. He has learnt nothing from the crisis that has engulfed his bank and drones on and on about his expensive top of the range car, his bonus (more than £500,000), his daily tipple of wine (nothing under £100 a bottle is good enough) and his uber-fashionable Central London flat (bought for a fortune with a preferential mortgage).

    The virus which has engulfed the banks has made the system rotten at every level. The canteen and street cultures in all parts of the banking hierarchy is badly broken and will take years to mend.

  2. Michael Taylor
    February 3, 2009

    The problem is step 3: ‘closing down the investment banking and trading activities. . . ‘ If this could be done, then there wouldn’t be a problem in the first place, since you’d just be able to sell off all those illiquid and unpriceable CDSs. As it is, those contingent liabilities dwarf the rest of the bank balance sheet, and consequently disable not only the banking system currently, but also this proposal about how to deal with the problem. Until this is fully grasped, even someone with your intelligence and integrity will find struggle to find solutions that will actually work.

    As for banks’ normal business, we’ll have three rounds of bad assets to deal with: i) the bad assets that got them into the mess in the first place (mainly derivatives) ; ii) the new bad loans they’ll create as they suck liquidity out of the economy in order to respond to that problem; and iii) the bad loans that’ll emerge as we (eventually) exit recession, and lending rates finally go up.

    At the moment, we’re in phase ii), and very damaging it is. What’s more, since the derivatives black hole is actually bigger than what one might call the real bank lending by a factor of nearly two times, there is no possiblity that banks really will be able to fill that black hole by transferring resources and liquidity from the real economy. Squeezing the real economy won’t solve the inter-bank derivatives problem. There’s a size mismatch which, if ignored, will result in genuine and unnecessary real economic hardship for people who simply don’t deserve it.

    Ultimately what will happen is that we the people will get fed up of sacrificing our first-born to the savage god of Illiquid Derivatives, and we’ll discover that bankrupting these banks for the sake of their largely off balance-sheet liabilities is what we want to do, what we can do, what we ought to do, and what we’re jolly well going to do.

    If we were to grasp that nettle now, cutting free the off balance-sheet stuff to fend for itself, whilst protecting depositors in the short term, and in the medium term encouraging a new financial ecology of unbankruptable money market mutual funds we’d not only maintain lending to the real economy in the short term, but plant the seeds of the new Western post-bank financial system. I’d have thought we all had a substantial interest in becoming the first kid on the block with this kind of system.

    The lesson we learned from the 1930s was that we could never allow banks to go bust. The lesson we’ve learned from the 1990s onwards is that if we apply the lesson of the 1930s, banks will feel free to take ill-understood and massive risks on the understanding that when push comes to shove, governments will find them too big to fail. And boy, did they do it, and boy, are we being asked to pay for it! The lesson of the 2000s should be that any commercial structure in which the profit is privatized and the risk foisted onto the public purse is not just ethically wrong, it’s financial ruinous. In other words, commercial banks, as a form of economic structure, are irreducibly and unacceptably dangerous. Thank god we live in an age in which information distribution costs have fallen virtually to nothing, making even the initial 17th century raison d’etre for commercial banks redundant.

    Free the markets, free the taxpayer, reward savers and risk takers! Bankrupt the banks.

    Reply: What I am advocating is systematic working through the derivatives and other fancy portfolios, netting off and closing out where possible. This reduces risk, makes clearer the scale of the problems and reduces capital tied up in these activities. Not all the trading instruments are illiquid or bust.

    1. Michael Taylor
      February 3, 2009

      In the week to January 23rd, the Deposit Trust and Clearing Corp recorded a reduction of US$1.138 trillion of the credit default swaps in its system, leaving a further US$28.147 trillion to go. Bear in mind DTCC doesn’t claim to log all the CDSs out there by any means. Of that US$28.147 trillion, 91.8% are deals done between dealers – ie, very largely, these are interbank liabilities. Since we are talking ‘notional value’ these are also contingent and off balance-sheet liabilities.

      Very clearly, the taxpayer neither can nor should be on the hook for these private inter-bank games.

      Also very clearly, the numbers involved are so collosal that a ‘systematic working through’ will take a very very long time (since at the moment we can assume they’re netting off only the easy stuff). And it will be disastrously expensive for the real economy, because banks will need to suck out liquidity from the real economy to shore up the capital that’s depleted in the process of realizing their contingent losses on the derivatives position.

      In the long-run a full work-out / netting out of these positions will probably prove impossible anyway. In the short and medium term, the process stands every chance of bleeding the real economy to death.

      Stiglitz is right – these banks have to go, and we have to start rebuilding a new financial system, remembering that what we need is simply a market based system for discovering and pricing savers’ appetite for risk. That’s not a difficult task conceptually, but it won’t happen if we’re shackled to a multi-trillion dollar corpse.

      1. APL
        February 3, 2009

        Michael Taylor: “these banks have to go, ”

        Yes they do. The obligations of the banks are, to coin a phrase, to big to bail.

        Take Northern Rock for instance since it has already been nationalized. It is becoming clearer by the month that the government obligations are simply spiraling upward on this one institution alone.

        Better to have allowed it to go bankrupt, protected the domestic depositors under the government scheme. The infrastructure of the bankrupt bank could have been taken over lock stock and barrel top management fired, (it went bankrupt after all). Refinanced with government capital and the new North British Bank could have been operating again the beginning of the following week.

        Bad debts, Toxic securities (which is to say worthless, only toxic to those who owned them) would have been sorted. The governments obligations capped. The example set to the other banks to get their house in order OR ELSE.

        It is still a good model, the only thing that cannot be done now is to set a good example to the other banks. They should just be forced to expose their balance sheet and any off balance sheet liabilities and if appropriate declared bankrupt.

        Down the road, the new bank of North Brittan might be in a position to be floated on the stock market. This is the only way the government or the UK population can cap their liabilities with a slight prospect to see a return on the investment.

        1. Michael Taylor
          February 4, 2009

          Yes, but the Northern Rock debacle was an example of our new institutional incompetence on several levels. First, what on earth did the FSA think they were doing allowing a deposit-taking institution run a loan/deposit ratio of 300%+ in the first place? I mean, really? Second, why did Bank of England / FSA act with such extraordinary incompetence one the run was started? I’ve seen numerous bank runs in Asia during my time, including ones in Hong Kong when the regulators in charge were British. There is a standard and repeatedly successfull playbook for bank runs: i) if the bank is illiquid you shut it down; ii) if its liquidity has been guaranteed by the authorities (as it had in this case), then metaphorically, you pile the cash up in the window, and invite everyone who wants to cash out to form an orderly line; iii) the bank ceo floods the airways with the message: ‘we’re safe, but if you want to cash out, the bank will stay open all night if necessary; iv) the bank does indeed stay open all night to help depositors cash out. What happens is that sometime between 11pm and 3am, people get fed up waiting, since every minutes delivers a further demonstration that people are indeed coming out with their money. It gets cold, and, effectively, the transaction costs to the queuer rises. They go home, get some sleep, and the bank run subsides.

          The regulators surely must have had someone who knows the drill, so why not follow it?

          Finally, and I suppose inevitably, the situation was gleefully inflamed by our tax-funded State Broadcaster, one of who’s reporters spent the weekend speculating as to whether the BOE loans would really be sufficient to allow depositors to cash out. This was poor stuff on the State Broadcaster’s part, but as I’m sure you know, its subsequent financial reporting was so utterly disgraceful that JR would be forced to moderate me if I went into details.

          In short, the Northern Rock crisis exemplified our new and comprehensive institutional incompetence, and we’re paying for it. If we allow the persiflage of ‘global crisis’ to
          distract us, we’ll forget just how absolutely useless and clueless our Establishment proved to be, how we discovered to our cost the reckless stupidity with which they acted. Don’t forget, and don’t forgive.

          And now they think nationalization might be a good idea!

  3. Hugh
    February 3, 2009

    The Intelligent Bank Manager.

    John, excellent summation of what is needed. Nonetheless, this is largely what would have happened when the buck stopped with the Governor and before the Board of Banking Supervision was abolished.
    A degree of robust internal receivership is also needed in these circumstances, and you provide for that.
    Thanks for giving us so much informed common sense.

  4. chris southern
    February 3, 2009

    With the banks taking tax payers money and then giving themselves pay rises (not technicly bonuses!) it’s made a mockery of the whole thing.

    Let them sink or swim, no more money.
    The peoples money is insured so let them get themselves out of the mess.
    Create a new bank that can lend to business and the public funded by tax payers money to begin with.
    Don’t charge anybody that wishes to transfer their accounts to it from other banks.

    Keep mortages limited to building societies and ensure banks and building socities are not allowed onto the stock market, both with floating themselves and investing.

    it’s the stock market which is screwing everything up due to companies chasing short term profits for their investors at the loss of the long term longevity of the company.
    combine that with ever increasing costs for business from the goverment (at above inflation rates in many cases) and the customers aren’t the ones being thought about.

    look at every single economic problem since and including the 30’s, the stock market has directly been involved.
    it should only be used for physical assets and not actual business, after all, it’s a casino.

  5. Kit
    February 3, 2009

    For US perspective I would recommend It has been running a series of podcasts on the subject.

  6. Nick
    February 3, 2009

    1. Make the banks declare the full extent of their losses – the full transparency approach
    2. Bankrupt selected banks that have performed especially badly to force out their losses and get them behind us


    So which losses haven’t been reported?

    It’s a myth. The losses are reported fully. It is in the accounts.

    What I think you mean is that banks must declare the full extent of the FUTURE losses.

    Can’t be done. People are basically asking how much the total losses will be in the future. Past losses are known and reported. Mark to Market values appear in the P&L.

    What exactly do you want reported?

    1. Acorn
      February 3, 2009

      Nick and Michael T. I agree that JR’s point three is the crux of the matter. Banks report known losses in the income statement under accounting rules; primarily for tax reduction purposes.

      But, do they do the same with off balance sheet gains. As far as I can tell, these are held in various subsidiaries / special vehicles, in which they declare they do not have a controlling interest; hence, do not appear in the consolidated accounts. They “appear” when there is need for a tax reduction event.

      As long as international accounting rules allow this tax dodging to happen; that is, the off-balance-sheet losses get counted, the off-balance-sheet gains don’t, we will not only not know what the future losses are but the current ones neither.

      Rob Kirby puts it better than I, more in terms of false GDP / CPI reporting.

      1. Nick
        February 3, 2009

        It’s not the case.

        If the banks are liable for the SPV’s debts, they have to be reported as liabilities. If they aren’t liable they cannot report the assets of the SPV on their book either.

        The OBS instruments, derivatives, appear on the books as mark-to-market or mark-to-model items.

        SPV’s will be reported as cash if they have made cash payments, as will the payments to the SPV.

        The mark to market value of the SPV if owned will be reported like any other share’s value.

        However, if the SPV is guaranteed, then the assets and liabilities of the SPV will appear on the books.

        1. Acorn
          February 4, 2009

          Thanks Nick, good info for my current studies. When you say “if the SPV is guaranteed”, how is that done? Does this use some form of market traded derivative?

          Can I also tap your knowledge on this one. Gold. Is it feasible that governments are conspiring to keep the price of gold down so that we all buy government IOUs instead? See following.

        2. Nick
          February 4, 2009

          A bank can agree to guarantee the debts of a subsiduary, just like you can guarantee the payments of a child for rent, as an example.

          Nothing needs to be traded.

          As for gold, Personally I own it but its a play on the fx rate. Sterling going down the toilet


  7. Waramess
    February 3, 2009

    All well and good John but it does not seem to address two of the pivotal issues behind the banking crisis.

    A reduction in the velocity of the circulation of money by 20% is a very big hole to fill for any government. 20% taken out of the money supply is too big for this governments finances, certainly.

    The other big hole to be plugged is the balance sheet capacity that the foreign banks have taken home with them.
    No point whatever talking about a bad bank into which we can transfer toxic assets for account of the taxpayer until something has been done about the above.

    The problem is far too big to fix even if it were possible to fix, and you are right to look at letting some banks go bankrupt. Stiglitz is the first economist to come out of the woodwork on this issue, albeit rather timidly, but more will surely follow.

    We must reconcile ourselves to a smaller economy for the time being; allow those whose businesses are sound continue and those whose businesses are unsound fail, and that includes the banks.

    We will have a lot of unemployment initially but no more in aggregate than if we carry on as we are, and the bottom will come sooner, as will the recovery.

    Tough love is always the best

  8. Tom Knott
    February 3, 2009

    Alas, you are trying to apply knowledge, rationality, and order, in a sector where ignorance, impulse, and chaos has been the rule for up to a decade. The banks did not know what they were doing, do not know what their real liabilities are, and are not organised or equipped to deal with the collapse. The Government is no wiser, more impulsive staggering from one sound bite to the next, and utterly disordered in its thinking and approach. If, and it is a big if, the Conservative Party can come up with a team and support group to begin to sort out the consequences for the real economy and the taxpayer, then there is a little hope. At the moment some of us are not optimistic, and fear that the UK will dissolve into a set of satellite regions run from Brussels and Frankfurt, and the offices of the IMF.

  9. Adrian Peirson
    February 3, 2009

    What exactly do these Money Lenders do, do they work the fields, build cars and ships, surely banks should be working for the good of society, not themselves, how come then most of the wealth of this nation appears to be being accumulated into the vaults of fewer and fewer elites.
    A bank lends out fractional reserve thin air, an individual spends years and tens on thousands of pounds worth of his labour on paying off this thin air credit.
    If he defaults, the Bank gets to own the Property.
    Well who put most into that house, the Bank which simply carrried out a bookeeping entry on a computer or the homeowner.

    Banks lend out Nothing, it is all a fraud, so how come they have most of the wealth, and this with a supposed Socialist Government.
    Look at the Pensions Scam we have all fallen for.

    Our entire Economy is a thin air credit, fractional reserve fraud whose real purpose is to enslave the populace and concentrate wealth into the hands of a few Elites.

  10. Lola
    February 3, 2009

    ” Going through all loan books and having a plan to maximise the repayments on each loan – as many of them are doing to an extent already. Tough judgements have to made – will continuing the loan and keeping the customer going result in a better outcome, or is it better to demand repayment now because the customer losses and asset values are going to get worse? There was a lot of wishful thinking about property values and the like in the early phases of the downturn.” – In other words giving the banks licence to denude other – sound – businesses balance sheets to rebuild the banks balance sheet.”

    No. I am not playing that game again. In my whole trading life I have met possibly 4 or 5 bank ‘managers’ that had any clue at all about business and banking. Letting the current crop of children and halfwits masquerading as bankers decide on the future for my business, which is very viable and other like businesses, based on their judgement, the judgement that got us into this mess in the first place, is just not on.

    Let the banks go bust. The market response to Lehmans spooked the politicos, but I reckon once it was known that the State was not going to support any more of these failed and insolvent outfits the markets would think a bit more clearly. Moral hazard does exist. It is a problem.

    But I will not again sanction banks rebuilding their balance sheets at the expense of mine. The business, the shareholders, the bond holders and yes, the employees, can take their fair share of the costs, that is most of it. I am NOT paying any more money over to these, well I will not use the appropriate word on here.

  11. Hugh
    February 3, 2009

    91.8% of $ 28 tn CDS are interbank. Contingent Losses.

    Is each transaction not a zero sum game before tax?

    If yes, the gain/loss balances out and the net effect is small, before tax. This has the effect of nullifying the overall exposure of the Central Bank to these transactions.

    For the other 8.2% are we talking insurance of non-bank corporate (credit default) risk, which represents a real potential burden to the Central bank?

    I have long felt that a damping mechanism is needed, e.g. A small and renewable pro rata stamp duty , which would be paid to make a deal enforceable beyond say six months (including rollovers). This would allow short term deals without limit, but ensure the following:

    A. The volume of long exposure deals can be monitored by the Central Bank. The Central bank will then be in a better position to judge whether the capital ratios require tightening or loosening.

    B. By varying the Duty Rate the instruments can be forcibly, but commercially, retired over a reasonable period if required by the Authorities.

    C.Allowing parties to extend by paying the duty when a risk starts to crystallise would allow the market to promote real risk situations to prominence, for more detailed examination by the Authorities and also act as flag for problems.

    D.A fund can be built up against the possibility of the Central Bank having to intervene again.

    E. After six months the deals would require to be grossed up on the balance sheet to flag up such transactions to a bank’s managers.

    1. Michael Taylor
      February 4, 2009

      That 91.8% of the CDSs being drawn between large financial institutions ought, indeed, to be a source of great hope. In theory, they could be massively netted off. The devil is in the detail: first, and overwhelmingly, these investment banks can and do afford to employ the world’s most rapacious and dogged lawyers. No-one’s going to settle before everyone settles. Second, these things were traded wildly among derivatives desk, so there’ll never be any agreement about where the buck really stops. Third, if you look at the detail, there’s been a shocking lack of collateral in the trades: BIS suggests,I think, collateral levels of 2.5% (might be wrong here – the numbers are on the ISDA website), but what’s clear is that what collateral has been used has been used multiple times – essentially, it just follows the CDS wherever it goes. Consequently, when you try to unravel everythying, there’s a huge great hole where the collateral should be. After all, these things were never meant to be.

      For these reasons, these derivatives aren’t going to be unwound or netted out any time soon, so will continue to represent a level of contingent write-off which could land anywhere in the global financial system, and is potentially big enough to wipe out any size of institution (or government, for that matter).

      I suspect that the only way you’ll get this stuff netted out is to put all the relevant institutions in a single room, with lawyers if necessary, and allow them no food, drink, or (certainly) access to central bank or taxpayer funds until they’ve done it. Or, more simply, they’ve got to absolutely know they’re going to be bankrupted – all of them – if they really can’t sort it out.

      1. APL
        February 4, 2009

        Michael Taylor: “Or, more simply, they’ve got to absolutely know they’re going to be bankrupted ..”

        This being an extraordinary situation, it might help concentrate the minds of these folk if we suspend limited liability too in the event they can’t reach a solution.

  12. figurewizard
    February 3, 2009

    Confidence in the long term is the key however and to that end something like the Glass – Steagall act should be considered. This provided over sixty years of unprecedented banking stability in the US from 1935 to its repeal in 1999. Broadly there was a strict division between what business commercial banks could and could not undertake and that of the investment banks. Commercial banks would be forbidden to engage in securities trading and these alone would have the option to seek help from the Bank of England as lender of last resort. This would go a very long way to assure the markets that any current measures to re-establish liquidity would be underpinned by the probability that what we have witnessed over the last year really should be a thing of the past. This would apply to such as RBS and HBOS. The risks associated with the investment banks would remain of course but at least they would be where they should always have belonged; on the back of their investors and lenders as in Lehman Bros and not on that of the long suffering taxpayer as now.

  13. Adam
    February 3, 2009

    “Not a quick fix…hard work…patience…” – could almost be guaranteed not to appeal to this (or any other) government!

    Two more things they could do (but these are also things that would never appeal to any government): cut government spending and borrowing (thus releasing more funds for the private sector to borrow) and raise interest rates (thus making bank lending more profitable, and encouraging individuals to make bank deposits).

    These suggestions would of course make any normal recession worse. But this recession is different, because it has been caused by a shortage of credit (or an excess of borrowing). Previous recessions happened when people were reluctant to borrow and spend, not when banks were reluctant to lend.

  14. Bill
    February 3, 2009

    Banks seem to be in chaos my bank sold me a libor rate swap two years ago, now it obviously is costing money – fair enough that’s the risk, I did some financial modelling at the time and it seemed to stack up- the thought of them selling me this then pulling the facility didn’t occur to me.

    At least there is the “Offset” I thought – I pay less on the loan. (I thought) My cost of capital is a bit high, but I can live with that, just when I thought that I must have shot an albatross or something)

    They’ve withdrawn the facility that it’s set against!

    They were full of apologies; they said “It’s down to the credit committee taking a different view of things, not because of any breach of covenant on your side.” (There was no breach) but when I ask about the swap contract – they go quiet, no one knows much about it. I think the guy who makes the decisions is hiding with Bin Laden.

    Now I could put cash in to trade , by selling shares at a loss,(FTSE 4100) but I resent this – to pay their rate fix.

    I think that they just hope that it goes away, but what a state of affairs, this is probably going on all over the country.

    Still I am consoled by the fact that the fault for turmoil is began in America and because Mr Brown is getting on with the job.

    1. chris southern
      February 3, 2009

      The tsb tried to get me to change from a current account to a “new” account that gave me nothing i want yet at a cost to me o £6.95 a month.
      I don’t think they liked the reply (i was polite though)

  15. Worried Al
    February 3, 2009

    Dear John

    I have analysed your intelligent banker and I have noticed that if the banks were put into administration or receivership, a competent adminstrator would be the “intelligent banker” that you wish for. A receiver/administrator would go through all the steps you identified: the administrator would collect some debts, keep other valuable debts, sell off the good bits to cover his/her fee and if there is anything left – pass it onto the shareholders. This is called BUSINESS RECOVERY. Rolls Royce went bust in the 1980s and came out so much stronger. A bank is a business and when businesses are not profitable you liquidate/wind-up and start afresh – with the stronger element.

    So let the banks fall …. The biggest mistake was propping up Northern Rock … it should have fallen. Cruel I know- but efficient and fair to all. I have a large mortgage and I have been made redundant … so I know the terror of repossession.

    ITs HARDLY AS IF THIS GENERATION is facing the battle of the somme knowing that tomorrow is certain death – let’s get a grip (our Grand Parent’s generation far outshines this lily-livered bunch of baby-boomers). Politicians should trust the free-market and let banks fall and other banks hoover up the good stuff. Our pensions would suffer but so what …. they’re going to suffer anyhow. Someone has to pay for the losses you can’t hide them with public money – its the thermodynamic law of money – losses cannot be destroyed.


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