The Bank of England confirmed the introduction of a “special liquidity scheme” whereby Treasury Bills will be swapped for high quality AAA rated mortgage backed securities. The Labour party that once represented socialism in Britain, is now coming to the rescue of poorly managed private banking enterprises. This gift to these banking failures is disguised as a loan with the people of Britain picking up the tab for the banking sectors grave mis-management.
In an article carried by the FT.com, the asset backed mortgages are described as difficult to sell, which begs the question of why they are described as AAA rated, surely a single ‘C’ rating would be more appropriate. The article goes on to describe the new facility as a cross between a temporary purchase of assets and a loan. Ha! It would appear that the banks only need to default on these loans and the Treasury will seize the assets – well that’s one way to get rid of the burden. Didn’t this government state that the funds pumped into Northern Rock were a loan and what followed, oh yes; it’s now a government liability, sorry asset!
Looking at the big picture what does this tell other banks? It tells them that they can all take extraordinary risks in an attempt to generate profits without the worry of failure because the Treasury will bail them out.
However there are conditions applicable to these loans, one of which is as follows; for every £1 of mortgage-backed assets handed to the Bank, commercial banks will get significantly less government paper in return. These “haircuts” will range between 12 per cent and 22 per cent for AAA-rated mortgage-backed securities, with the highest rate for those securities with maturities longer than 10 years.
It sounds tough, however some of these mortgages were given at 125% of the value of the property to people who were allowed ‘self accreditation’ regarding their earnings. So even if we use the 22% reduction it is still a great deal for the banks. Now throw in the fact that property prices are falling in Britain as widely reported in the media and the Treasury have shot themselves in the foot.
Heads should roll!
As we have said before, liquidity is not the solution to insolvency; it just delays the day of reckoning. The printing presses will continue to produce pound notes out of thin air, thus diluting the pounds value and driving more and more people to a save haven. One of the beneficiaries of this mess will be gold and its associated mining stocks.
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