Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Failed Stress Tests...in 2004From the Financial Times:Northern Rock risk revealed in 2004 By Norma Cohen and Chris Giles Published: May 30 2009 00:03 | Last updated: May 30 2009 00:03 Banking regulators identified Northern Rock as the weak link in Britain's banking system during secret "war games" held as long ago as 2004, the Financial Times has learned. The risk simulation planning, conducted by the Financial Services Authority, the Bank of England and the Treasury, made clear the systemic risks posed by Northern Rock's business model, and its domino effect on HBOS, then the UK's largest mortgage lender. The revelation is at odds with the notion that no one could have foreseen the September 2007 collapse of Northern Rock or the subsequent rescue of HBOS, which was sold to Lloyds Bank. The FT has found the troubled lender and HBOS were at the centre of a 2004 war game that regulators held to test how banks would cope with sudden turmoil in mortgage markets and the withdrawal of the money from foreign banks on which Northern Rock's business model relied. Regulators chose that scenario because they were worried about the growing dependency of banks such as Northern Rock and HBOS on such funds rather than on stable retail deposits. Even though the exercise revealed the banks' vulnerability, the regulators concluded they could not force the lenders to change their practices, according to several people familiar with the matter. It was felt that it was too hard to say Northern Rock's business model was excessively risky, and in any case banks following that strategy were profitable and growing, though the Bank did warn of the growth in wholesale deposits repeatedly in its financial stability reports. However, as wholesale lending markets dried up in mid-2007, the war game's findings proved eerily prescient. Both banks sustained irreparable damage beginning in 2007 as wholesale lending markets seized up and mortgage-backed securities became unsaleable. Regulators on Friday confirmed that Northern Rock and HBOS were central to the war game. But spokespeople for the FSA and the Bank of England said the exercise was focused on uncovering weak regulatory practices rather than predicting individual bank failure. Mervyn King, Bank governor, alluded to the war games in a 2005 interview with the FT, saying the Bank had looked at a situation in which "there could be a problem in a particular institution which isn't terribly big, which may for completely unpredictable reasons turn out to pose a liquidity problem to a very big institution". But until now no one has known the name of any banks used in the exercise. The Financial Times sought details in early April under the Freedom of Information Act from the Bank and the Treasury, but those requests have so far been unsuccessful. Copyright The Financial Times Limited 2009 Labels: baillout, Bank of England, financial crisis, HBOS, Lloyd's TSB, Mervyn King, Northern Rock Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). UK Government Takes over Lloyd'sFrom The Guardian:Government takes over Lloyds Taxpayer will own up to 77% of banking group after disastrous merger with HBOS as pressure grows on board to resign guardian.co.uk, Saturday 7 March 2009 10.33 GM Jill Treanor , Nick Mathiason and agencies The government today confirmed it will take majority control of Lloyds Banking Group, with the taxpayer owning 65% of the voting shares in return for insuring 260bn pounds the group's toxic assets. After days of detailed negotiations the terms of the takeover were announced by the Treasury, with Lloyds making a commitment to lend at least 28bn pounds over the next few years. The government is to insure the bank's riskiest loans and in return the taxpayer will up its ownership of the bank from 43% to 65%--rising to 77% when non-voting shares are included. Alongside taking extra shares and obtaining the commitment to lend to businesses and individuals, the Treasury will upgrade £4bn of the non-voting shares it already holds. The government's fee for limiting Lloyds' losses from 260bn pounds of potentially bad assets totals £15.6bn. Under the insurance scheme, Lloyds will take the first hit of up to 25bn pounds on toxic assets before the taxpayer steps in. The new ordinary shares in the bank will be offered to existing private shareholders first, with the government committing to buy whatever is left. Stephen Timms, the chief secretary to the Treasury, told BBC Radio 4's Today programme: "I think in due course this new Lloyds...is going to be a strong and successful bank, and the arrangements that we have been able to facilitate I think will ensure that this is going to be the case." Asked about speculation that the taxpayer could lose up to £100bn on the deal, Timms replied: "Precedents would suggest that the loss would be a great deal less than that, but as I said we just don't know." Timms rejected suggestions that the prime minister had "destroyed a great bank" by pushing Lloyds to take over HBOS as it neared collapse. Eric Daniels, the group chief executive for Lloyds Banking Group, said: "Participating in the government's asset protection scheme substantially reduces the risk profile of the group's balance sheet. Read the rest of the article Labels: bailout, financial crisis, HBOS, Lloyd's TSB Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Dull Compulsion of the Economic (iii)Links only today; there's lots of stuff out there, and I have a headache anyway:(1) Some people may have missed these Financial Times articles earlier in the week (I didn't see them covered on any of the blogs I monitor): (i) it seems that half of all Collateralized Debt Obligations (the favored vehicle for peddling subprime-mortgages) created out of other securitized bonds (namely, asset-backed securities, or ABSs) have failed; (ii) Could the TALF lead to a two-tier market? and (iii) in a sign that the yen carry trade, which played no small role in channeling Asian savings into wacky investments in the US, is kaputt, Japanese retail traders have started buying yen. (2) On climate change, a member of the International Panel on Climate Change refers to two mechanisms which may make climate change worse than forecasted. He also notes that the 2007 IPCC report, covering 2000-2007, seriously underestimated the amount of carbon emissions, largely because it failed to take into account the vast increase in coal-generated electricity use in India and China. (3) Ambrose Evans-Pritchard writes that Eastern Europe may prove to be the ruin of many Western European banks, if not the countries in which the banks are domiciled. He comments on the frantic efforts of Austria to cobble together a rescue plan, and notes that as European banks are more leveraged than American ones, they could be more harmed by losses in Eastern European than US and UK banks have been by the subprime mess and exposure to property bubbles. This is an extremely dangerous situation, particularly with the EU being pulled in several different directions in dealing with the crisis as it is. (4) The Independent on Sunday reports that the HBOS (which just announced a cool 10 billion pound loss) whistle-blower whose revelations led to the resignation of a top UK regulator plans to make public documents he says will show Prime Minister Gordon Brown's personal culpability in the banking crisis (Brown was Chancellor of the Exchequer during the lead-up to the crisis). (5) Business Week's Michael Mandel on the end of the "trade bubble". (6) Japan's 4Q GDP falls a jaw-dropping 3.3% (or 12.7% annualized). (7) Inquiries into the role of US officers in graft schemes in Iraq. This is important because, as the report says, "The wider investigation raises the question of whether American corruption was a primary factor in damaging an effort whose failures have been ascribed to poor planning and unforeseen violence." (8) Michael Perelman makes an important point about the lack of bank lending (short). (9) Marxist writer David Harvey reveals Brad DeLong's refuge in pedantry. Hat tip to Ian J. Seda-Irizarry of the Marxmail list. John Hicks' IS/LM formalization, which DeLong alludes to in support of his screed against Harvey, is dissected by Steve Keen in his book Debunking Economics; it's also referred to in several of his works available online for free, but I can't remember the titles right now. Larry Peterson Labels: bailout, Brad DeLong, climate change, David Harvey, Eastern Europe, financial crisis, Gordon Brown, HBOS, Iraq, Larry Peterson, Steve Keen, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Just In...From (I haven't seen this story reproduced elsewhere yet, even in the British press. This is strange, considering it's 8.00 pm in the UK as I post) the International Herald Tribune:U.K. takes over Royal Bank of Scotland By Julia Werdigier International Herald Tribune Friday, November 28, 2008 LONDON: The British government took majority control of Royal Bank of Scotland on Friday after investors shunned the lender's share sale, paving the way for a larger government role in Britain's banking sector. Investors only signed up for 0.24 percent of the shares, which were offered as part of a plan to bolster the bank's capital, and the government had to take up the rest, leaving it with a 57.9 percent stake in RBS. The government agreed to buy a separate block of preferred shares bringing its investment in RBS to about 20 billion pounds, or $31 billion. The investment leaves taxpayers already with a paper loss of more than $3 billion, based on the closing share price Thursday. RBS was one of three British financial services companies that tapped government help to fulfill stricter capital requirements intended to help them survive the credit crisis. Lloyds TSB and the mortgage lender HBOS, which have recently agreed to combine, also relied on the government to take up any shares they could not sell to investors as part of a banking bailout plan orchestrated by Prime Minister Gordon Brown. But some analysts warned that even those stricter capital rules might not guarantee the stability of Britain's banks as the turmoil in the financial markets continued. Read the rest of the article Labels: bailout, financial crisis, HBOS, International Herald Tribune, Lloyd's TSB, Royal Bank of Scotland Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
