Simon Gompertz

Working Lunch

Return to sender... Plenty of viewers are writing in to ask about the billions of pounds being "pumped" or "injected" into the banking system or given to banks to improve "liquidity" or generally being transferred to them to tide them over. And what most of you would like to know is: "Where has all the money gone?" The problem is that while bankers, economists and Treasury Mandarins tend to be very precise about where numbers are entered into their ledgers, they can be rather sloppy about language. Often when they say that a bank has been "given" funds, they actually mean "lent", or simply that they have been allowed to swap one sort of asset for another. Take the recent statement from the Treasury that "At least £200 billion will be made available to banks under the Special Liquidity Scheme". It sounds like a handout from the taxpayer, but it's not. It's all in the assets Banks have assets, such as mortgages on our homes, which they can't use. They're desperate to raise cash to fund their day-to-day operations or lend out to people and businesses who need it. But other banks and investors won't advance funds on the strength of these assets. In today's climate of suspicion, they assume any asset is dodgy, unless they see proof to the contrary, even if it's a mortgage earning juicy interest from a homeowner. So the government has come up with the Special Liquidity Scheme. The Bank of England swaps cash or IOUs, which are as good as cash, in exchange for the banks most secure mortgages, or other top quality assets. It's done on the assumption that everything gets paid back, often in a matter of days. In fact, the Bank of England, and hence the taxpayer, earns a fee for providing the service. The big shares gamble Brown and Darling to the rescue Another figure bandied about is a sum of up to £50bn which is being used to buy shares in banks for the taxpayer. Will we see this money again? Let's hope so. The shares (some of them are preference shares - no time to explain that here) will be worth nothing if the banks go bust or never make any money. That's the downside. On the other hand, the PM and the Chancellor have already committed themselves to defending our major banks. If they are successful, the value of the shares might rise and they could be sold, eventually, for a profit. People who bought shares in the banks previously have to lump it. They still own a proportion of RBS or Lloyds - but their cut is now much smaller. The idea behind the share-buying scheme is to load the banks' coffers with loot. Every bank has to have a certain amount of money of its own stashed away before it is allowed to take deposits or lend. It's a bank's capital, its stake in the game. The government wants our banks to have so much capital that they can stand a financial eruption of Pompeian proportions. The back-up billions Which brings us to the most staggering sum of all, the £250bn we are supposed to be "dishing out" to encourage banks to lend to each other for a bit longer, up to three years. Add this £250bn to the previous £50bn and the £200bn in the Special Liquidity Scheme and see where some journalists get the apocalyptic figure of £500bn which is being doled out to banks to stop them from going bust. But the £250bn is money which banks will borrow from each other, helped by a guarantee from the taxpayer that everyone will get paid back. It's like parents guaranteeing a son or daughter's mortgage. the £250bn covers guarantees which might be made available and the £200bn is taxpayers' money swapped for bank assets. Only the £50bn (or £37bn so far) is actually being spent

With any luck the state will not be called on to honour the guarantee. It's there to oil the wheels. And there's another fee for the taxpayer. So the £250bn covers guarantees which might be made available and the £200bn is taxpayers' money swapped for bank assets. Only the £50bn (or £37bn so far) is actually being spent - and the Chancellor can wave his bank share certificates in the air to try to persuade us that this money hasn't been wasted. Of course, some of these billions could still be lost. But Mr Darling is selling the package as a win-win for the rest of us. Why the banks can't use their own profits Meanwhile, some viewers are asking what has happened to all the profits our banks have been racking up in recent years. Why can't they use them to buy their way out of trouble? There's that £1bn a year, for instance, that they are supposed to have been making from charging penalties to customers who went unexpectedly into the red. Where has all that cash gone? Well, some went in dividends, some has been lost because they took on swathes of American mortgages which are now in default. But those losses on their own wouldn't be enough to topple institutions such as RBS, Lloyds or HBOS. It is the sudden loss of confidence in banks across the world which has left them exposed. Crisis of confidence Last year's run on Northern Rock After the collapse of the US investment bank, Lehman Brothers, in September, bankers started putting down the phone on each other. They wouldn't lend to other banks and they took out any deposits they could get their hands on. Last year High Street customers started a run on Northern Rock. This year, bankers and investors started runs on any banking institution which looked weak. On top of that, banking became an impossible job, even for banks which seemed solid. They source much of their funding from depositors who can ask for their money back at short notice. But they lend the funds out for longer terms, often of several years. Once deposits start flying out the door, it becomes impossible to cover all those longer term loans. A bank can start to look shaky. In a matter of months our most venerable banks have been made to look like basket cases, because confidence in their financial strength has evaporated. In fact, a lot of the money is still there. It's just not moving.



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