The Bank of England will this morning agree to pump billions of pounds into Britain's financial system to bolster the struggling mortgage market. It is expected to announce it will lend the banks about £50bn of government bonds, taking banks' assets, in the form of mortgage-backed securities, as collateral.Lending between banks has dried up since the collapse of the sub-prime mortgage market in the US sparked a global credit crunch. The government hopes the banks will use the bonds to restart lending between themselves and that this in turn will make funds available to mortgage customers.The bonds-for-mortgages swap is expected to be structured to try to ensure the credit and default risks on the mortgage-backed securities remain with the banks and are not switched to taxpayers. For example, the mortgage-backed securities are expected to be valued at a significant discount to their nominal value.The government and the Bank are also likely to insist that banks disclose the losses they have on their mortgage books, and that they put forward plans to rebuild their balance sheets by asking shareholders to stump up cash.
The Bank of England will this morning agree to pump billions of pounds into Britain's financial system to bolster the struggling mortgage market. It is expected to announce it will lend the banks about £50bn of government bonds, taking banks' assets, in the form of mortgage-backed securities, as collateral.
Lending between banks has dried up since the collapse of the sub-prime mortgage market in the US sparked a global credit crunch. The government hopes the banks will use the bonds to restart lending between themselves and that this in turn will make funds available to mortgage customers.
The bonds-for-mortgages swap is expected to be structured to try to ensure the credit and default risks on the mortgage-backed securities remain with the banks and are not switched to taxpayers. For example, the mortgage-backed securities are expected to be valued at a significant discount to their nominal value.
The government and the Bank are also likely to insist that banks disclose the losses they have on their mortgage books, and that they put forward plans to rebuild their balance sheets by asking shareholders to stump up cash.
We're saved. Hurrah for everyone.
The underlying solvency problem has not only not gone away, but will gradually get worse as people actually begin to default.
This measure won't stop property prices falling, or prevent an accompanying increase in the number of people with low or no equity.
It won't make 800,000 Northern Rock mortgage holders any more capable of affording their loans as they reset upwards, and it won't lead to anyone else refinancing them either.
Northern Rock will be a political disaster in the run up to the next election.
We are at the End of the Beginning in fact, the end of the Phoney War. The next step, which is a full blown Recession, if not a Depression, is just beginning.
Apart from that, it's quite a nice day, really... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Yes, but the bonds effectively indemnify the banks against the defaults.
So the UK government holds onto the toxic paper, while the banks get to keep the profits - until the paper stops being profitable, at which point it's dumped on the Treasury. with anguished cries of 'Oh what a terrible shame' and 'Who could have expected...?'
This is much nastier than NR, and - unsurprisingly - it's also more or less the same bail out as the Fed engineered for Wall St.
So only banks are bond investors are protected, not stock holders... In the long run, we're all dead. John Maynard Keynes
