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If anyone had thought that credit crunch has faded in significance, had been replaced by a deepening – and now acknowledged – global recession, but that basically things were back to some sort of known territory where we’ve been before and know how to get out of it eventually, this morning we were reminded that this was not the case.

Clearly, we are very, very far from being out of the woods, with banks continuing to be on the brink of disaster and still struggling to quantify the extent of their losses.

The new £50bn plan: The new bailout plan, announced in the UK this morning, will allow the Bank of England to buy up to £50bn of risky assets directly from any company (not just financial institutions) that agrees to enter into a voluntary insurance scheme for its expected losses on specified toxic debts. In return, banks have to pay for this insurance – typically with cash, but possibly also their shares. The scheme aims to insure companies against 90% of their losses on specified debts which resulted from the collapse of the sub-prime market and the ensuing global meltdown.

Two bailouts, two stories: This scheme, of course, exists on top of the first bailout in October 2008 where several key financial firms received £37bn as a capital injection to top up their reserves. The second UK bailout, however, has very different features to the first one. Not only the recipients of “aid” are different, but the insurance scheme “twist” is a new one. It is closer, albeit not idential, to the earlier US’s bailout model of buying up bad assets from struggling firms. Read the rest of this entry »

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