Wednesday, April 09, 2008

A Terminal Event On The Crock


Some events are more terminal than others

I've been working my way through the IMF economic and financial outlook papers that have caused such excitement this week (they're here and here). I've been trying to discover exactly what they say about taxpayer support for failing banks, because some of the reports have been concerning. Can the hard-assed IMF really be proposing taxpayer funded bank bailouts?

Now, the trouble with IMF papers is that the really interesting bits tend to be written in IMFspeak. Thus they talk about busted banks being struck down by "liquidity events" (although they don't say whether such events necessarily take place on the commode). And when they get on to taxpayer bailouts they say:

"Public plans for impaired assets.

National authorities may wish to prepare contingency plans for dealing with large stocks of impaired assets if writedowns lead to disruptive dynamics and significant negative effects on the real economy. The modalities of doing so will differ across countries and sectors, but successful instances in which fire sales of impaired assets have been prevented could usefully be emulated."

Uhhh... huh huh... could you maybe repeat that? In English.

Right, here's how the IMF spells it out:

1. Public policy should seek to safeguard financial stability and market functioning. Agreed

2. However, care should be taken to avoid creating adverse incentives or moral hazard that undermines discipline imposed on private players by such events. Agreed.

3. The public resources should be kept as small as possible. Agreed.

4. In a case of depleted capital, the preferred approach would be to take remedial measures and resolve [ie place in special publically managed liquidation] the institution if it is no longer viable. Shareholders should bear the brunt of the adjustment. Agreed.

5. When the failure of the institution poses a systemic threat, the case for public assistance may need to be considered, but only after shareholders have borne the full brunt, with clear mechanisms in place to ensure that operations continue on a commercial basis, and with an unambiguous plan for exit by the public sector. Agreed.

So the short version is busted banks should be liquidated (ie shareholders lose everything) and reconstructed/sold/run-off over a period of time by the authorities. Taxpayers should be last in the queue for contributions. With which we agree 100%.

So how does that stack up against how Brown handled the Crock? Let's run through the IMF's guidelines.

Did he safeguard financial stability and market functioning? 6 months of nervous faffing around and the first High Street bank run in 150 years- hardly.

Has he created adverse incentives and moral hazard? Well, eventually, he did pull the plug, which is good. But against that, he spinelessly distanced himself from the tough stance taken by his own Bank Governor, undermining King's authority in the process, which is very bad. The bigger banks will certainly guess they could win any future game of chicken with such a wuss.

Has he kept the public resources small? Hardly- we taxpayers are on the hook for £100bn secured only against the increasingly uncertain Crock loan book.

Have Crock shareholders born the full brunt? Sure, most of them have taken a loss, but Brown left the door open to compensation by undertaking to appoint an independent valuer (see this blog). And taxpayers are also at risk from that EU human rights shareholder compensation suit.

Does he have an unambigous exit plan? Don't make me laugh- as we blogged here, it's highly unlikely the Crock will ever be able to survive without its taxpayer guarantee. There is no exit plan, just a vague hope that something will turn up.

So that's... let me see... nought out of five.

Not very good.

PS Recent research among Tyler's City acquaintances reveals that everyone who's managed to salvage cash from the smoking wreckage strewn all around has put it into the Crock's excellent range of instant access accounts. Sadly, the previously recommended Silver Saver Online has now been withdrawn to new customers, and its rate has been slashed to 5.75%, but that's still 0.5% higher than base. Or why not try their online Tracker, at 6% (albeit including a 1.24% intro bonus)? Or would you prefer FIRSTSAVE First Bank of Nigeria PLC on 6.5%? Hmm. Thought so. As always, punters should note that Tyler Investments is in no way qualified to offer financial advice.

PPS The IMF papers include this rather jolly chart showing that on their calcs, the UK has the third most overvalued housing market in the world (the "house price gap" measures how much prices are above the level suggested by underlying fundamentals such as affordability):

Sleep well.

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