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Over the last couple of days, we really have hit a new low as far as UK government’s incompetence in face of flagrant demonstration of corporate greed goes. I am, of course, talking about the scandalous pension due to be paid to Sir Fred Goodwin, previously the CEO of RBS, and the way the government has been handling this debacle.

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A few weeks back I found this fantastic January 09 article by Norman Lamont. Despite my delay in commenting on it, this type of material is unfortunately set to have a rather long shelf life, unfortunately for us Britons; Gordon Brown is set to wreak further havoc in the economy before the fat lady sings eventually.

Lord Lamont argues that Brown is “like an arsonist posing as a firefighter”. What does he mean by that?

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Yesterday, four former bosses of UK’s RBS and HBOS (former HBOS chief executive Andy Hornby, former HBOS chairman Lord Stevenson, former RBS CEO Sir Fred Goodwin and former RBS chairman Sir Tom McKillop) faced the Treasury Select Committee for a questioning session about their role in the financial meltdown and the disasters that came to befall their banks.

The key snippets of this session, which has been dubbed “the show trial” for all the public apologies it started off with, can be found here.

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It’s fascinating to see how much everyone around the globe is presently applauding Gordon Brown, the UK’s PM, for coming up with “the plan” to rescue us from the economic meltdown. Features of this plan are now being adopted by other governments in need of a magic wand to get them out of the financial abyss.

UK plans: The plan amounts to the UK Government formally taking a stake in UK’s banks whilst giving them money (£37bn to three named banks – RBS, Lloyds and HBOS) to recapitalise and hence become more resistant to the current market volatility and the ongoing liquidity crisis.

This was received exceptionally well by the world’s markets. FTSE 100 is positively rocketing upwards – on Friday it closed below 3,900, it now stands at 4,400, up well over 12% in just 2 nerve-wracking days. European and Asian indices are also up very strongly.

US adjust the approach: US’s bailout package of $700bn, which was originally intended just to buy off bad debts off failed banks, was badly received by the markets earlier in October and failed to stem the fall of american indices which dragged the world’s markets down with it. Now the US government is turning towards the UK-style idea and is planning to recapitalise 9 banks (amongst them Goldmans and Morgan Stanley) using $250bn of the bailout pack for this.

This will be deeply humiliating to Goldmans and Morgan Stanley which until now have been the last 2 “pure” investment banks left on Wall Street. Goldmans, in particular, was initially trying to raise its own capital to ensure its survival, whilst Morgan Stanley was looking for a merger. I wrote about that earlier in Sept.

US markets strongly welcomed US’s change in thinking on the rescue plan and Dow Jones is finally on the up.

Knight in shining armour? Gordon Brown is getting credited for coming up with the plan that is going to work, where all else failed to date. Paul Krugman who got awarded the Nobel prize for economics, has been praizing Mr Brown as the one who might have saved the world’s financial system: more details here.

But we must not forget, before we get carried away on the sudden euphoric wave, that:

  • Gordon Brown failed to prevent UK entering the credit spending spree in the first place, creating conditions for a very sharp comedown to earth which are only starting to bite now
  • He failed to get the regulators involved when alarm bells have been ringing for months as banks were increasingly entrenched in runaway activities which were hardly regulated

And thus we must consider Gordon Brown’s achievements and undoubted strong leadership skills in the last few days in light of the fact that really, we should not have been here in the first place.

What is always impressive is the well-oiled Labour spin machine which helps Mr Brown deliver his recent “save the banking world” speeches so very well. UK is newly rebranded as “rock of stability and fairness”. The stuff that would normally make one cringe was swallowed by this week’s hungry for reassurance markets, hook line and sinker.

A very bitter pill: As for the bailout itself –  no-one likes the sound of it. In fact we all loathe the sound of it. And I for one thought in the last month, just let these banks fail, as “damned if you do, damned if you don’t” – bailout or not bailout – it will hurt in both cases. But economic tools and alternatives being rather thin on the ground, I agree with some of my recent commentators, I have come round to semi-accepting the inevitability of this bailout. This is mainly because everything else I have seen suggested would have implied an HUGE social and economic upheaval. Like write off everyone’s debt and assets, for instance.

What this means is that as the world’s order is shifting towards quasi-socialist principles and a very strong government hand in regulation, we are not trying to shake the foundations of the existing society. Call me a coward but I don’t feel there is a call for that at this stage.

Yet from the UK’s point of view, it is extremely disappointing to see Gordon Brown take so much credit for an event that he did not manage to prevent.

 

Copyright 2008 by CuriouslyInspired

The UK Government has now unveiled the plans for a £37bn bailout for key British banks, as the BBC reports today.

Terms of the UK Bailout: The key features is that the Royal Bank of Scotland (RBS), Lloyds and HBOS will get cash injections of £20bn for RBS and £17bn between the two latter banks. This money will be used to recapitalise these banks, ie strengthen their reserves in order to withstand financial turmoil and market volatility we are facing at present. However in return the Government is effectively part-nationalising these three banks by taking a large or controlling share in them as these banks sell its shares to the Government in exchange for money.

The objective of part-nationalisation, apart from taking more control in the banks’s affairs now, is to also get income back to the Government and the UK taxpayer once the banking system does recover and shares go up in value.

Banks management changing: On the strength of this effective humiliation, the heads of RBS (Fred Goodwin and Tom McKillop) and HBOS (Andy Hornby and Lord Dennis Stevenson) are resigning, stepping down, or retiring. The UK Government is keen to see proven people with strong and relevant industry experience step into their shoes.

Banking bonuses curbed: One of the conditions of the UK Bailout is that there will be no bonuses to senior executives this year, and a move towards paying bonuses in shares not in cash in future years. However these restrictions do not impact those banks that are not part of today’s headline £37bn bailout proposal.

Barclays route: Barclays has opted to raise the money it needs without Government’s help. It needs £6.5bn. It seems that one of the reasons Barclays is trying to make it on its own, apart from avoiding the humiliation of the bailout, is that it will remain free to set banking bonuses as it sees fit.

US v UK Bailout compared: There are some distinctions between the US and the UK Bailout proposals. Some are driven by the fact the two banking systems have different features – for instance, in the US there are many more banks in existence making individual targeted action possibly more difficult to achieve. Read the rest of this entry »

Yesterday was a very, very bad day on European stock exchanges, with key indices sliding down massively. To give some examples – UK’s FTSE 100 down 7.8% (the largest fall since 1987’s crisis), France’s CAC 40 down 9%, Germany’s DAX down over 7%, Russia’s RTS down over 19% resulting in Russian stock markets being shut down today again. Asian markets were also sharply down. There are more market casualties – Fortis (a Dutch-Belgian bank) and Hypo Real Estate (a German bank) – and seeking urgent rescue either through cash injections or a quick merger.

Iceland continues to struggle under the weight of its massive banking crisis, trying to avoid national bankruptcy, with the second largest bank Landsbanki now being nationalised – this is in addition to Glitnir about which I wrote recently. Thus, this week the US economic calamities have been demonstrated to well and truly impact global markets – not that we have doubted this earlier.

Cause of the panic: The European stock market slide is attributed to the lack of a coordinated economic front amongst EU’s governments which does nothing to restore confidence in the system at the time when emerging economic data is implying that US is entering a recession. US’s recession will impact the world’s economy due to its global nature. European governments are pursuing their goals in isolation and cannot have seen the depth of the crisis we are about to enter. According to this article, we are staring into the abyss of a systemic collapse, with markets at risk of closure. One recommendation is for the European central bank to lower its interest rate immediately and start acting like the lender of last resort to companies in trouble. Lowering the rate of interest should kick off inflation, one side effect of which will be to reduce the real value of outstanding debt, making debt obligations easier to bear.

UK is also showing deteriorating economic figures, prompting statements that it too is now technically in recession. Meanwhile, European countries are introducing their own measures to address the credit crisis and resulting stock market plunges, but there is no overall agreed policy. This must be reflective of a panic that set in amongst governments, each trying to protect their own skin in the eyes of the very concerned electorate by introducing quick measures. Divided, they stand. Read the rest of this entry »

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