Wednesday, December 19, 2007
The Crock has already bolted, but there are plenty of other nervy colts standing up to their fetlocks in ordure in the same fetid financial stable. And if the government wasn't frozen to the spot, they wouldn't even be thinking about their Christmas hols until they'd got the door nailed firmly shut.
OK, enough tortured horse whispering metaphors. Let's just summarise a few key points from the last 36 hours of statements and leaks:
1. The Crock has definitely had it as an independent going concern- without the taxpayer loans and 100% guarantees, the shareholder stake is worthless- at the current 91p per share, this is an entirely false market
2. Taxpayers are at considerable risk of losing money- quite possibly a lot of money
3. The shareholders are getting in the way of extricating taxpayers- despite the fact that their stake now only has value because of our support, they are pursuing solutions that maximise value for them, not for us
4. In the (appalling) circs, nationalisation looks like the least worst option for us, but...
5. Hedge funds have increased their stake in recent days, reflecting legal advice that nationalisation will require taxpayers buying out shareholders at around £4 per share (NR's supposed book value); but that would cost us getting on for £2bn, and no way should taxpayers be forced to fold to such an outrageous demand- repeat: without taxpayer support, the shareholder stake is worthless
6. The alternative is to put the Crock into administration first (ie follow the normal insolvency process), and then for HMT to buy it from the administrators for a nominal £1 (the Kaletsky plan- eg see this blog); this may be the only realistic solution, but the problem is that administration can be very messy and protracted- legal action could continue for years
7. The authorities' hands are tied because unlike every other G7 country we have no "special resolution regime" for busted banks; such arrangements allow the authorities to call time on a bank without buying out shareholders, to pay out depositors immediately, and then sell off the bank's assets in an orderly manner over a period; we don't have any of that, making the whole situation much more difficult... and costly.
Of course, everyone can now see what needs to be done- we need to legislate those "industry standard" arrangements pdq. And hopefully before too many more painful months have passed, Darling might even get round to doing it, along with that uprated guarantee scheme for retail deposits.
But we should not be distracted from a key point- when Brown and Balls instituted their much vaunted plan for Bank of England independence, and split responsibility for bank regulation (FSA) away from responsibility for financial stability (BoE), they somehow ignored some essential elements of international standard practice.
Of course, there is another way- the old way. Back in the old days, pre-Brown, problems like this could often be headed off behind closed doors at Threadneedle Street. Things could be stitched up well away from the media spotlight before they got out of hand.
For example, we know from King's testimony before the Treasury Committee yesterday, that long before this August, the Bank was concerned about go-go operations like the Crock over-reaching themselves and running into possible funding problems.
In the old days, the Rock's Chairman would have been summoned to lunch and cards would have been clearly marked. Regulations might have been quietly tightened.
In Brown/Balls world, that wasn't possible. All the Bank could do was to attend a Tripartite meeting with the Treasury (Balls) and the FSA (Callum McCarthy) late last year and suggest that the Treasury do some work on changing some of the rules. Surprise, surprise, nothing happened.
Tinkering and meddling is the very hallmark of Brown-style socialism. And as we see every day, most of it is half-baked and ill-informed. Often, it just creates more layers of useless bureaucracy. But here it's produced a disaster.
Which could get a lot worse.
PS We've never been very confident about the quality of the Crock's mortgage book: are they really all "prime" as claimed? For a brilliant and scary insight into how sub-prime mortgages work in the US, see here (HTP A Reader).