US-style banking bailout?

[Mark]

With the imminent demise of Bradford & Bingley, sell-off of HBOS, and of course Northern Rock, are we heading for a US-style bailout en masse, or more piecemeal bailouts, or are we done rescuing banks?

I don't claim to know or understand the background behind all this mess (I 'get' the US side of things, but not so much the UK), so please, fill me in. :)

[loki]

The mess has started with irresponsible lending from the banks and major institutions over the course of the last few years but this problem has started to manifest from the ground up. In a nutshell, the banks gave credit to people who couldn't afford it and when the chips were down, the number of defaults increased which meant the banks liquidity dried up. The knock on effect was that the other course of liquidity was to borrow from other banks and the cost of this increased significantly.

As the current banking system is based on credit, then this is why so many of the banks who were reliant on credit found it difficult to trade. Nortern Rock before it's demise used to lend off banks in the US on a daily basis but as things went rotten over there with a reluctance to lend then the outcome was the colapse as they had no money to operate daily despite a large number of assets.

[Mark]

Were HBOS guilty of that too or was that just a spreading contagion? I know Bradford & Bingley's portfolio was built on Rocky ground (pun intended).

[loki]

Were HBOS guilty of that too or was that just a spreading contagion? I know Bradford & Bingley's portfolio was built on Rocky ground (pun intended).

I'm not too sure about HBOS. My Wife works in banking and from what I understand HBOS were carrying a lot of debt from the merger. Under normal circumstances, they really should have rode this out and become a real top performer in terms of results published to the city.

I think as Joe Public, were not always privvy to what goes on and if you read between the lines there was a lot of short selling going on in regards to HBOS

[bam]

From what I understand of fractional reserve banking, the money *has* to flow to keep everything going, once banks stop lending to each other the crap hits the fan. It also doesn't help when the building societies become banks, sell huge numbers of bonds to raise capital then forget to manage them.
AIUI this is partly what happened with HBOS, they had £150bn in maturing bonds to pay by June next year, and then they'd have to try and sell them again to raise more operating capital, they screwed themselves by being greedy and poor financial planning (the irony :))

[bam]

I think as Joe Public, were not always privvy to what goes on and if you read between the lines there was a lot of short selling going on in regards to HBOS

You can only short sell if people are willing to lend you the shares to do it, so there is a limited pool of shortable short. I very much doubt that shorting had any significant effect on the price of HBOS shares, more likely people recognised reasons that the share price would fall (see my comment above re their bonds) and shorted them. Correlation does not equal causation :)

[PvtPyle]

The UK government has announced details of a rescue package for the banking system worth up to £50bn ($88bn).

It will initially make the extra capital available to eight of the UK's largest banks and building societies.

In return for the funding, the government will receive preferential shares in those institutions.

The money will be used to prop up the banking system that has seen share prices plunging in recent weeks as banks have struggled to access funding.

http://news.bbc.co.uk/1/hi/business/7658277.stm

[Matblack]

An interesting response from the markets this morning, I was expecting a 'dead cat bounce' like yesterday and its yet to materialise, so although the banks are happy and it should allow more business to take place and money to move investors aren't flying back in.

What we may find is that people are waiting for the statment from the BOE tomorrow before making a decision whether to re-enter the market and start pushing prices up so if interest rates drop tomorrow I suspect we'll see a slower surer increase in the market with investers buying again. The government move puts us in a better position than a lot of other countries with more money moving in the UK than other places. It annoys me that our banks have got involved in so much of the 'toxic debt' when our banks and building societies are in general much more careful about awarding mortgages and making sure people can pay for them but thy've bought into the toxicity.

As for the future, I really don't know, some people are saying we've reached the point of capitulation and everyone who is getting out of the market has got out, others are saying the market has further to fall, housing will probably start to move and although banks to continue to lose money as the toxic debt bleeds them it shouldn't make them so scared they stop trading (at least domestically).

Its looking messy but we're in recession anyway, so we have to see past the falling stock prices and concentrate on smaller indicators.

MB

[Mark]

Just spotted my own company shares have dived by around 25% this week. We'd escaped unscathed until Monday but no longer. Oh well, that's my SAYE gone slightly **** up then. :(

We're not even in the financial sector, and I think we're still cash-positive. Shows how desperate the market is getting.

Edit - seems to have been a bit of a bounce since the PM turned up. HBOS up 25%

[Mark]

50 point cut in bank base rates across several major banks (including the UK).

Share prices seem pretty much 'as you were' overall, though there's been some big gains and losses on specific shares.

[Matblack]

Now that's what you call a 'dead cat bounce', oh dear what a day!

MB

[Mark]

I think it's now a choice between a prolonged recession and depression. You can be sure we'll be paying for this mess for a decade or two.

PS - WTF is a 'dead cat bounce'?

[Matblack]

One of the most vivid, if a bit indelicate, word pictures painted by the bears on oil comes from Raymond F. DeVoe Jr. at the investment firm of Legg Mason Wood Walker. DeVoe suggests the printing of a bumper sticker reading: “Beware the Dead Cat Bounce.” “This applies to stocks or commodities that have gone into free-fall descent and then rallied briefly,” he says. “If you threw a dead cat off a 50-story building, it might bounce when it hit the sidewalk. But don’t confuse that bounce with renewed life. It is still a dead cat.”

The phrase gradually caught on during the 1990s but became particularly common — for obvious reasons — after 2000 Its heyday may be passing.

That last part was obviously wishful thinking!

MB

[Mark]

Thanks. They used the term on 'This Week' last night, and I knew what they were talking about. :)

I haven't heard significant use of the word 'crash' yet, but I don't think there's any other word that portrays the events accurately. FTSE 100 has lost 1000 points this week and counting.

Looking at the last two notable crashes, it took 20+ years to recover from 1929 and 2 to recover from 1987. Wonder how long it'll be this time.

[Tak]

What actually needs to happen for things to start recovering?
I admit I don't really understand everything that has been going on or why things have gone this way even though I have been trying to.

[Mark]

To start recovering, we first need to find the bottom. Right now we're still on the way down, and it could still be a long way down from here. I'd anticipate a minimum of 6-12 months before anyone even thinks about recovery.

There's going to be a retail bust-up after Christmas as a lot of retailers (big and small alike) are trading on the edge, and it's looking unlikely there will be much of a Christmas splurge. This could even include big names such as Woolworths, HMV and Currys. We also need the impact of all the recent collapses (and bail-outs) to work their way through the system.

[Garp]

Mark Shuttleworth (http://en.wikipedia.org/wiki/Mark_Shuttleworth) has an interesting view on this one:
http://www.markshuttleworth.com/archives/220

[Matblack]

If you have cash and you're reasonably secure in your job there will be a few bargains to be had over the next few months, if you are looking to make some ready cash then I'd be thinking about drip feeding cash into the markets sooner rather than later. It will go back up its just a matter of time.

MB

[Mark]

Them dead cats are back at it again.

8% down this morning, 5% a few hours ago, 7% now.