Wednesday, 8 October 2008
Downing Street Heads for N Agreements
I'm well used to working through to the small hours. Darling went up to lie down at 01:30 and final statements for issuing publicly were spell-checked by 05:00 while I watched the US Presidential debate, noting how incredibly dumbed down the language and uncomfortable both candidates are on economic matters compared to our much more technically savvy leaders! I cat-napped for an hour or so until my mobile was fizzing with pre-breakfast calls, "was this what you wanted?" "are congratulations in order?" "is this it; will it work?" and "Comrade, you've really done it this time!" No, not quite I replied to all questions; this is not exactly what I advised; it may not work best this way up, except in one or two key aspects; problem being the mandarins have again been over-hesitant about timing, conditionalities, wanting more reflection for weeding out political hostages to fortune, so no precise technical details, trying to please everyone, all stakeholders, though not shareholders or bonus-earners. But, as I said to anyone who'd listen, "the action must be forthright, original, comprehensive and innovative, er... like the Irish". Some of this was reflected in PM Brown's use of these key words except the 'I' word, in this morning's No.10 press conference.
It should be noted that once the EU abandoned a collective response (the proposed €300bn emergency fund) and all countries were permitted to find their own solutions, then any EU objections to the UK's plan cannot be sustained. What's in the plan that will work or not?
1. Two tranches of £25bn standing by for banks to request capital from the government as 3yr loans vested in preference shares paying dividend and fees
2. Liquidity (SLS swaps and loans) from Bank of England increased from the £40bn (as was expected this week) to £200bn
3. Government guarantee covering £250bn of interbank lending (borrowing by UK banks). This is the part that will work best of all by reversing the risk downgrading of UK banks - and it should cost the Government nothing. Also, expect a coordinated rate cut of 50bp by US, EU, Switz, Can and UK.
4. No equivalent of TARP; no buying of toxic assets or a run-off fund into which banks can pool their low-grade RMBS and CMBS
5. Stricter and wider-ranging regulatory supervision (new rulebook from the FSA).
One signal from this is that government expects the crisis to play-out within 3 years, but will not say more than taking decisive action to protect taxpayers' interests by restructuring the banks's capital and doing so more boldly and comprehensively than most will have anticipated, but also leaving time, having anunciated the principles, for wide consultation including internationally. For example, given the global nature of the crisis a global G8-scale solution is needed.
The first measure is the Buffet-style solution with a difference that owes something to the weakness of TARP i.e. banks have to apply individually for this capital support and only then will details be determined on a case by case basis when some additional conditionalities can be imposed. It may be feared that these could seriously diminish the rights of shareholders and management board sub-committees of the applying banks re. their ALCO credit risk strategy settings, remuneration and dividends etc. But, actually not, as these aspects will be dictated in new rules from the FSA that will apply to all.
Banks will risk advertising their distress if they individually apply for capital infusion, and the government will have the right to order banks to act counter-cyclically; to maintain lending to small businesses and first-time mortgage borrowers. This may work if applied to all clearing banks uniformly, not on a case by case basis. Of course, at present, neither Bank Santander (Abbey, A&L and B&B) nor HSBC or Standard may feel that they need any help, though with EU and BRIC economies slowing and markets plummeting this may only be a matter of time - and all banks are exposed to the USA and UK recessions.
My solution would have been more shocking i.e. to take at least 25% shares in each of the UK clearing banks. This is not the Spanish flue-cleaning approach, which is itslef a good move. Madrid's Mr Zapatero, excluded from last weekend’s European summit in Paris, to keep liquidity flowing in the Spanish banking system, does not plan to take equity stakes in its banks, or dictate lending or remuneration, instead it will buy between €30-€50bn of bank assets (with funding of a similar magnitude to the US, at 5% ratio to GDP). But similarities between Mr Zapatero’s “tarpas” plan and Hank Tarpaulson’s solution end. Rather than buy “toxics”, Mr Zapatero's government will only buy “healthy” assets, i.e triple-A.
But, this would have not pleased Santander, no more than HSBC and Santander may be pleased with the UK plan, if not others. The UK plan may be very acceptable to a few like RBS and HBOS right now. Plenty of objections are available to head it off in later consultations e.g. the rights of shareholders to a vote, international codes and laws and why only the clearers and not all banks? Also, more time may be required for all of the main banks to come round and find a common front with some collective initiatives of their own?
I also advised a vehicle for stripping out banks' toxic assets. The objections to this are that most of those assets are either off-shore or in other countries, especially in the US where the local subsidiaries of UK banks can apply to TARP. The international spread of UK banks' militated against such a solution targeted on only one part of banks' balance sheets; better therefore to focus this time round only on the banks' capital restructuring needs. And, if confidence is restored, especially if shares recover, there is a possibility that the £50bn allocated will not need to be applied to, not all of it. Moreover, it was felt shares are unlikely to bounce up soon and therefore this plan announced today (following on as it does from a long series of liquidity measures, nationally and internationally) is longer term, a point repeated by PM Brown to the press.
This was quite realistic thinking, given that while the principles were finally agreed and written up for public release, Asian markets all fell by 3-4% overnight after the US markets had dropped 5% and so London was expected to follow suit today, falling across the board and down 4% before most bankers had even got to their offices. Among all FTSE100 stocks only, remarkably, HBOS was rising fast, by a spikey 22%!?