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Wednesday, 25 November 2009

61.6 Billion, no shock, no horror, just secrets

Government is said to have loaned £61bn. No, it swapped c.£125bn assets of loanbook collateral, for £61.6bn of 3 month Treasury Bills probably. The deal was a Bank of England SLS type repo swap, not simply a loan as portrayed by the media and political comment. At no time was government or taxpayers money at risk because there was more than ample collateral. The value to the two banks was that they shored up their balance sheet balance by three times the treasury bill value i.e. c.£125bn came off balance sheet temporarily and c.£62bn liability came on, total £167bn, which may be approximately the funding gap that otherwise could not be filled. This redresses both banks end of year report of accounts. On capital reserves side, for example, Lloyds and HBoS announced in the same month (Oct.'08) £17bn capital raising of which £34bn would be government-owned preference shares, but ended up becoming much more. Their joint share value at the end of that month was only £18bn. RBS at same announced £20bn capital raising.
The Bank of England announced extending its SLS assets swap scheme for another 3 months. HBOS, I discovered had raised £45bn in securitisations, but without announcing the fact, keeping its identity secret in the regulatory news announcement to the Stock exchange. The Times discovered it had also received a secret £10bn loan from Lloyds TSB. It total therefore HBOS that quarter raised £80b in interbank wholesale liabilites and gotat least £100bn assets off balance sheet before year-end. It also had £35bn short-term liquidity drawing rights at the Bank of England for very temporary cash-flow smoothing.
It follows therefore that the interesting questions are:
1. why was this £61.6bn needed by RBS and HBOS? Answer: to fill the gap in 'funding gap' financing on liabilities side of the balance sheet. I surmise the banks were seeking to roll-over their maturing MTN programmes, but found their usual financing sources refusing to roll-over, many having been wiped out in the crisis themselves, and wanting their money back, that or at much higher rates e.g. LIBOR + 8%, a guess? The government (HMT & Bank of England) was simply providing paper (at a hefty fee) so RBS & HBOS continued to have balanced books. This was not I suggest about capital reserves or compensating the banks for credit risk losses and asset writedowns.
2. Bank of England say the RBS facility was repaid by 16 December 2008, and the HBOS facility by 16 January 2009 - how? Answer: simply the treasury bills run out, swap is reversed, banks take their assets back, not what people think 'repaying a loan' means.
3. Were the asset swaps rolled over or not? LBG and RBS announced in early '09 participation in Bank of England's APS, this time for c.£570bn assets in total as collateral, for which they might have received.
When treasury bills matured either the Bank of England could roll-over the swap and issue replacement treasury bills (and again without announcing the fact). There was revenue to pay from the assets to the Bank of England less interest on the treasury bills plus a fee, perhaps a total of £5bn? And HBOS it needed to find £25bn liability funding, and needed £3bn capital to take the assets back onto the books plus any other negative change in its liabilities to be funded. So, in HBOS case, instead of treasury bill roll-over, £15bn was converted into preference shares on 16th and became part of the newly merged LBG by 19th January (merger approved in Edinburgh Court of Session 12th January) and then LBG on behalf of HBOS had to only find £10bn, which neatly coincides with the figure claimed for both the cost and loss of buying HBOS.
In RBS case, it had to replace £36.6bn liabilities on 16 December. It also had a £28bn loss for the year. Government owned £11bn of RBS Ord. shares when bought at 49p, and it bought £5bn Pref shares. Note that by 19th january RBS shares had fallen to their lowest at 10p, re to 60p end of August and are today only 35p. On 8th January, RBS announced participation in the new Bank of England APS to replace SLS for £325bn (reducing RWA by £144bn and saving capital reserves about £13bn). This swap may have been executed or held in some holding form in exchange for Bank of England unencashable cheques until EU Commission approval - we don't know how precisely these assets are currently matched to liabilities? This is a murky area of enquiry.
Meanwhile the private financing of funding gaps is recovering with renewed appetite for Covered Bonds (like Germany's Pfandbriefe) backed by mortgages in place of RMBS e.g. LBG's £4bn CB issue sold in September. This confidence is why it seems ok to the bank of England and Government to provide more details now about the full extent of their support for UK banks.
I wrote the following to the FT letters: Sir, disclosure by Bank of England to Treasury Select Committee of £61.6bn loaned or swapped for assets wth RBS and HBOS (FT, Bank of England bailed out RBS and HBOS, 24 Nov.) should be no surprise since the sums involved were within the banks' respective liquidity window drawings rights with the Bank of England at the time, and fit with information I provided to Edinburgh Court of Session to approve the takeover of HBOS by Lloyds TSB. I stated then that asset securitisation sales of over £40 billions by HBOS without public announcement and questioned whether important information was witheld that was arguably critical to informing HBOS shareholders' before the takeover vote? Important information was witheld. Details and argument about the issues were entered into the court record. How much shareholders must be told about Liquidity problems and funding gap financing, a central problem of the credit crunch, is not sufficiently clear in FSA regulation and The Companies Act. Bank of England assets swaps with the banks under the liquidity window, SLS or APS schemes may be kept secret. This is allowed by the 2009 Banking Act. "...Treasury shall as soon as is reasonably practicable lay a report before Parliament specifying the amount paid (but not the identity of the institution to or in respect of which it is paid). If the Treasury think it necessary on public interest grounds, they may delay or dispense with a report under subsection (6)." Parliament discussed this. There were objections, but the Act passed. Liquidity assistance to the banks was expected to be reported in October. Therefore, there should be no political surprise when it is reported in November.