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Bank of England Bailout Plan - $100B USD - Same as TSLF but with 1-year terms!

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April 20, 2008 – Comments (4)

Bank of England to unveil mortgage bailoutMore details on subprime-related losses expectedBy William L. Watts, MarketWatchLast update: 10:37 a.m. EDT April 20, 2008

LONDON (MarketWatch) -- Faced with rising mortgage rates that threaten to worsen a housing downturn, the Bank of England will unveil a plan Monday to allow banks to swap billions of pounds worth of mortgage-backed securities for British government bonds in a bid to thaw frozen credit markets, Chancellor of the Exchequer Alistair Darling said Sunday.

"The Bank of England will be making an announcement" on Monday, Darling said in a BBC television interview. "What it will do is effectively lend banks money to unfreeze the situation we have got at the moment." Shares of Britain's biggest lenders rose late last week in anticipation of the plan. Darling also said he expects more banks to unveil details of subprime-related losses, the size of their mortgage-backed securities holdings and plans to raise capital. U.K. mortgage rates have risen and lenders have increasingly tightened lending conditions and have pulled some mortgage products off the market as banks have become increasingly reluctant to lend money to each other. Banks have hoarded cash as they've sought to rebuild their own balance sheets in the wake of the subprime mortgage meltdown, analysts say. Also, uncertainty over the condition of rival banks saddled with mortgage-related securities has made banks reluctant to make loans to each other.

The plan to be unveiled by the central bank is expected to see the Bank of England offer to swap as much as 50 billion pounds worth of government bonds, or gilts, for certain types of mortgage-backed securities for a period of up to a year or more, according to analysts and news reports. Banks would then be able to use the government bonds as collateral for loans from other banks. Darling said the plan would help open up the U.K. mortgage market. "We are doing our bit and I would like to see the banks pass on the benefit of the three interest rate cuts" by the Bank of England since December, Darling said. Rising mortgage rates threaten to exacerbate a downturn in the British housing market, which could also accelerate a slump in consumer spending and worsen an expected economic slowdown, economists say.

Darling denied that the plan, which bears similarities to the expanded lending facility announced by the U.S. Federal Reserve last month, is a bailout. Banks will borrow the gilts, pledging the mortgage-backed securities as collateral. The plan is expected to see banks forced to take a "haircut" on the value of the mortgage-backed securities in a bid to protect taxpayers should a bank be unable to repay and the Bank of England is stuck with the mortgage-backed security. Strictly as an example, banks could be allowed to post 100 pounds worth of securities in return for 80 pounds worth of bonds, economists said. Meanwhile, Darling and Prime Minister Gordon Brown in recent days have pressured banks to fully reveal the extent of subprime-related losses and to explain plans to rebuild capital.

The Royal Bank of Scotland, the U.K.'s second-largest bank (UK:RBS: news, chart, profile) , is reportedly planning to seek as much as 12 billion pounds from shareholders to shore up its capital base. The move would make it the first major British bank to seek more cash from shareholders since the start of the credit crisis and could pave the way for other U.K. banks to take similar steps. See full story. RBS on Friday acknowledged speculation about potential capital-raising plans and said its interim management statement on trading performance and capital would be published in the coming week. The bank holds its annual meeting on Wednesday. Darling said banks are likely to unveil details of mortgage-related securities woes soon. "If you look at what's been happening in the last few days, I think the pressure on banks to declare the extent of any losses they've made, to declare the extent of the mortgage-backed securities they hold and how they're going to deal with it and how they're going to raise money from their shareholders -- I think you're going to see much more of that," Darling said. William L. Watts is a reporter for MarketWatch in London.

4 Comments – Post Your Own

#1) On April 20, 2008 at 12:35 PM, mandrake66 (94.27) wrote:

Looks like the worst is finally behind us. I'm calling a bottom here.

Sorry, couldn't help myself. 

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#2) On April 20, 2008 at 2:04 PM, abitare (36.90) wrote:

It took them long enough to reclaim their lost racket. Putting Washington, Franklin, on the the Central Bank currency is a mockery of those who fought off the British.

Benjamin Franklin wrote in 1775:

“The refusal of King George III to allow the Colonies to operate an honest money system, which freed the ordinary man from the clutches of the money manipulators, was probably the prime cause of the Revolution.”

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#3) On April 20, 2008 at 2:10 PM, angusthermopylae (39.54) wrote:

So, forgive my ignorance, but what does this do to ownership of the actual mortgages?  If the bank has traded mortgage-backed securities for government bonds, then the bank gets a more liquid asset during this crisis, right?  The government now owns these securities (if I'm understanding correctly), and either a) they now have some ownership or lien on the underlying mortgage, or b) they are now "victims" to any changes in the overall market for mortgages and backed securities.

Admittedly, I don't understand derivitaves (sp?) if that's the correct term.  From the layman's view, however, it seems to have only two possibilities:  It's a bailout, and the government gets nothing in return, or it's a transfer of the ownership, and the government gets its hands into the pot...and I tend to take a cynical view of a government's influence on crises in general. 

Any education in this area would be appreciated. 

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#4) On April 20, 2008 at 10:22 PM, madcowmonkey (< 20) wrote:

Its a bailout. The national bank of sinchiruna would have a better standing by investing in commodities and then offering the banks a little forgiveness, by allowing the banks to lose money in the derivatives and then get a small amount of the proceeds from the commidities returns to stay afloat. With bankers margins dwindled to an absolute zero (I say zero, because they don't make enough to cover inflation anymore), wouldn't it make more sense to let somebody else do the investing for them at this point. Main point, I am rambling and this will get a beat down by every caps player imaginable/reads this post.

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