Britain and US at odds over further bank bail-outs

Britain and US at odds over further bank bail-outs
Gordon Brown and Alistair Darling are growing increasingly concerned over America's failure to clean up the "toxic" debts of many of its major banks despite repeated attempts to do so.

By Robert Winnett and James Quinn
Last Updated: 11:15AM BST 22 Apr 2009

Although President Barack Obama announced a plan last month to offer fund managers and private investors the equivalent of cheap US government loans to buy up $1 trillion (£681bn) of toxic debts from big American banks, the plan has yet to swing into action with many details still unknown.

There are now growing fears in Westminster that President Obama's proposed "public-private" partnership will fail to solve the problem as there is not sufficient appetite among the investment community to buy up the dubious loans. Mr Darling is understood to believe that President Obama will have to announce a new state package of assistance for American banks. In Britain the Treasury has agreed to underwrite 90pc of losses from questionable loans incurred by banks including the Royal Bank of Scotland.

The Treasury is now concerned that unless a new American package is announced imminently, British attempts to tackle the recession may be hindered. "America will have to announce a new package to help its banks, this needs to be sorted before we can move forward," said one well-placed source.

The growing signs of tension between Westminster and Washington DC – the first between the Brown and Obama administrations – come as the US Treasury completes a series of financial "stress tests" designed to measure the capital requirements of 19 of America's largest financial institutions.

Publication of the test results are scheduled for May 4, and it is thought highly unlikely that the Obama administration will make any move to shore-up the banking system before then.

One source close to the US Treasury expressed surprise that Mr Darling would think the US is not doing enough, given that the public-private partnership to buy toxic loans is just one of a number of programmes launched by the Obama administration to rescue the financial system.

Those programmes include the Federal Reserve's $1 trillion Term Asset-Backed Securities Loan Facility designed to fund new bank lending through buying up existing securities, and efforts to resuscitate the ailing US housing market.

Under President Bush, the US initially apportioned $700bn to rescue its banking system, choosing first to inject money straight into bank's balance sheets, but it has also since been used to help the car industry.


http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5196478/Britain-and-US-at-odds-over-further-bank-bail-outs.html

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Toxic debts could reach $4 trillion, IMF to warn

April 7, 2009

Toxic debts could reach $4 trillion, IMF to warn

Gráinne Gilmore, Economics Correspondent

Toxic debts racked up by banks and insurers could spiral to $4 trillion (£2.7 trillion), new forecasts from the International Monetary Fund (IMF) are set to suggest.

The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF's new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system.

Paul Ashworth, senior US economist at Capital Economics, said: “The first losses were asset writedowns based on sub-prime mortgages and associated instruments. But now, banks are selling ‘plain vanilla' losses from mortgages, commercial loans and credit cards. For this reason, the housing market will play a crucial part in how big the bad debt toll is over the next year or two.”

In its January report, the IMF said: “Degradation is also occurring in the loan books of banks, reflecting the weakening outlook for the economy. Going forward, banks will need even more capital as expected losses continue to mount.” At the same time, there is a clear shift in congressional attitudes in the United States about simply pumping money into the system, Mr Ashworth said. The British Government is also under pressure to repair its tattered finances. Injecting more money into the banks could further undermine its fiscal position.

The IMF's jump will come as little surprise to economists who have suggested that the bad debts will be much higher than anticipated. Nouriel Roubini, chairman of RGE Monitor, expects bad debts from US-originated assets to reach $3.6 billion by the middle of next year. This figure is expected to rise when bad debts from assets elsewhere are calculated, he said.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6047929.ece

Q&A All about 'toxic' debt

Q&A All about 'toxic' debt

Last Updated: 7:42PM BST 16 Sep 2008

What are "toxic" debts?

"Toxic" debt has become shorthand for the various asset classes hard hit by the financial crisis, such as sub-prime mortgages – the original "toxic" asset.

The word "toxic" caught on because these assets have proved financially ruinous. They have seen their valuations cut and buyer demand dry up.

The holders of the debt have in many cases fallen into a loss and been forced to raise emergency capital. The worst hit UK lender so far has been Royal Bank of Scotland, which has taken £5.9bn of writedowns and has had to raise £12bn from shareholders.

How much "toxic waste" is there?

Nobody really knows. Sandy Chen, banks analyst at Panmure Gordon, has estimated there are about $2,000bn (£1,127bn) of US sub-prime mortgages and another $1,000bn of "Alt-A or near-prime".

Those have been packaged into collateralised debt obligations (CDOs), pools of assets that are then spliced into several classes – from AAA secure through to BBB junk status.

More complex still are the "synthetic CDOs", which are not backed by assets but track asset performance. Panmure has estimated that there are $1,700bn of synthetic CDOs.

Asset backed securities have also been packaged into CDOs and have suffered writedowns. US commercial mortgages and leveraged loans, the debt provided by banks to finance private equity takeovers, are similarly now worth less than headline prices.

Even insurance taken out to guarantee bonds sold by the banks has turned "toxic". As the so-called monoline insurers have had their ratings downgraded, the banks have been exposed to more potential losses.

So, the potential exposure is hundreds of billions of dollars more than Panmure's estimate for the size of the sub-prime and near-prime market. As the economy weakens, the "toxic" portfolio is likely to widen to include credit card and car finance debt

What's the cost?

How long is a piece of string? The International Monetary Fund in April estimated that the US sub-prime meltdown will cost banks and other institutions $945bn.

For UK banks alone, it estimated the damage will be £20bn. Monoline exposures, commercial property and leveraged loans increase that estimate significantly.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2971683/QandA--All-about-toxic-debt.html

Financial crisis: just how big is Britain's toxic debt?

Financial crisis: just how big is Britain's toxic debt?

An army of accountants is combing through the books, trying to establish just how much the toxic assets of the bailed-out banks are actually worth. At stake, says the Government, is the future of Britain's economy.

By Gordon Rayner

Last Updated: 7:27PM GMT 23 Jan 2009

Toxic asset: Sir Fred Goodwin of RBS has seen his reputation collapse Photo: REUTERS

Before he was unceremoniously fired as chief executive of Royal Bank of Scotland, Sir Fred Goodwin often said that he had turned the 280-year-old institution into "a sausage machine".
RBS, like other banks, was buying and selling pre-packaged parcels of debt, which started out as mortgages and loans but were put through a corporate mincer and wrapped into packages containing small pieces of hundreds, if not thousands, of loans. Rather like sausages, no one could be entirely sure what was in them – but as long as they paid a decent rate of interest and the bonuses kept flowing, no one cared.
As we all now know, those parcels had been bulked up with sub-prime loans, which became effectively worthless "toxic assets" when the US housing market crashed.
Confirmation yesterday that the bankers' avarice has officially plunged Britain into recession added to the growing bewilderment as to exactly why we are on the hook for almost £1 trillion in bail-outs and guarantees.
No one even knows exactly how many of these toxic assets British banks are holding, and how much more it might cost the taxpayer to get out of this unholy mess – which is why an army of accountants is about to begin the daunting, if not downright impossible, task of tracking down and putting a value on all the debts of all the banks in which the taxpayer has taken a stake.
In effect, to borrow Sir Fred's analogy, the Government-appointed debt hunters will be carrying out the accounting equivalent of dissecting all of those sausages and turning the constituent parts back into pigs. It will be a laborious, thankless task which is likely to take at least six months. But according to the Government, nothing less than the future of Britain's economy depends on it.
The reason all the rescue packages have failed is that no one has yet calculated the full extent of these toxic assets – and nothing spooks the City so much as uncertainty. Lord Myners, the minister organising the hunt, says his sleuths will have to deal with "well over a billion items of individual data for each bank".
The desperate need for some hard and fast facts was underlined on Monday, when the value of banking shares collapsed, despite the announcement of a raft of new measures. Gordon Brown is said to have been taken aback by the City's panicked reaction to RBS's announcement of a £28 billion loss, the largest in British corporate history.
Experts say the losses reveal the markets' fear of more bad news to come. Despite the Government pledging £954 billion so far – or £31,800 per taxpayer – some analysts believe another £200 billion in insurance may be needed to protect the banks fully against future losses. But no one is willing to predict that it won't be more, just as no one can be sure that our children, or even our grandchildren, won't still be paying off the debts the nation is accruing, as this economic black hole swallows a seemingly limitless amount of our money.
In other words, until the number-crunching is done, there is no prospect of an end to the crisis. "The problem is that we don't really know just where these bad assets are, and the banks are not going to 'fess up," explains Peter Spencer, professor of economics at York University. "As things stand, it is a near-bottomless pit, and no one knows how smelly the stuff at the bottom is."
The Prime Minister is pinning his hopes on the Asset Protection Scheme, announced this week, which will assess the exact extent of the toxic assets (currently estimated at £200-350 billion). The theory goes that once the banks know the worst-case scenario, and are insured against it by the taxpayer, they will be able to start lending again.
But the Government-appointed investigators, drawn mainly from Goldman Sachs, Credit Suisse and Deutsche Bank, will be entering uncharted waters when they set up shop in the offices of banks such as RBS. Few people on the planet understand the complexities of such opaque instruments as collateralised debt obligations (the technical term for those minced-up sausages of debt, of which £2 trillion were traded in 2006, £188 billion of it in the UK). In some cases they were dreamed up by real-life rocket scientists, poached by Wall Street from Nasa's labs in California.
Until as recently as 2000, British banks lent only as much money as they held on deposit. But the availability of cheap financing on the money markets enabled banks such as Northern Rock to lend up to seven times the amount in their coffers.
Rather than holding on to people's mortgages, the banks packaged them up with other loans and sold them on to investors, who could repackage and sell them on again and again. Unpicking these bundles of debt may involve tracking down and valuing the assets on which they are based – such as houses or commercial properties, or even part-shares of them.
Nor will the vastly complex, and vastly expensive, hunt be confined to Britain. To pick just one example, RBS acquired 26 other companies during Sir Fred's eight-year reign, leaving it with £250 billion of foreign loans in the more than 50 countries where it has offices. These include Vietnam, Columbia, Uzbekistan and Pakistan, where RBS is the second-largest foreign bank – there are even seven branches in Kazakhstan, all of which are now 70 per cent owned by the British taxpayer.
Many of those loans will be sound, but the investigators must sniff out those that are not. "It will be a very intensive job and we will need to get professional support," one Treasury source says. "It's complicated, but if you didn't have these complicated problems, there wouldn't be a crisis in the first place."
But how could the banks lose control to such an extent?
"Greed is part of the answer," says Vince Cable, the Liberal Democrat Treasury spokesman. "We have had a bonus culture in which profits were the only motivating factor, and bankers were getting enormous bonuses on the back of very highly leveraged deals. It's also the case that even some of the bosses didn't understand the things they were trading in, because they had become so complicated. The banking regulators knew this and should have put a stop to it, but they didn't."
It wasn't just the executives who failed to understand what was going on – the Prime Minister and his team were equally clueless. Treasury officials who began going through the books of RBS when the Government took a majority share last year were horrified at the way the bank had been run, as it borrowed more and more money to fund more ambitious deals, such its share of the £49 billion takeover of Dutch bank ABN-Amro in 2007.
The previously lionised Sir Fred has now been labelled "the world's worst banker", with growing calls for him to be stripped of his knighthood. Although the Financial Services Authority insists that there is no evidence he broke any rules, many investors who have lost money believe he was less than candid about the state of the bank's finances and recklessly overstretched himself in the battle for ABN-Amro.
In America, RBS's subsidiaries are already the subject of two separate investigations. The Securities and Exchange Commission and New York's attorney general are both looking into the exposure of RBS-owned companies to the sub-prime mortgage crisis.
Although he has said he is "angry" with Sir Fred, Mr Brown refused to be drawn this week on what action, if any, should be taken against his former friend, who was a valued adviser during his time as Chancellor.
Nor has anyone at the Treasury offered an estimate of how much it will cost to work out the value of the toxic assets.
Yet many of the country's leading economists believe that there is an alternative to the scheme: to nationalise the entire banking system to restore confidence, and take control of lending once and for all.
George Magnus, chief economic adviser to UBS Investment Bank, and the man credited with being the first to predict the current global recession, says: "There is a danger that a few months down the line further measures will be needed to shore up the banks. It would be cleaner, neater and cheaper just to call a spade a spade and take them into public ownership.
"That would enable the Government to set up a 'bad bank' that could take on these toxic assets and hold on to them for 50 years if necessary, until their value rose and the taxpayer saw a return.
"In the meantime, once the crisis is over, they could refloat the banks, as they did in Sweden in 1992. I just don't understand the hang-up the Government has with nationalisation."
Professor Tim Congdon, a former adviser to the Treasury, agrees. "The idea of having these civil servants poring over the banks' books is barmy. There are much simpler solutions, such as the Government borrowing from the banks to increase the amount of money in the system."
One thing all sides are agreed on is the need for a return to old-fashioned banking, preferably without so much as a rocket scientist – or sausage machine – in sight.

http://www.telegraph.co.uk/finance/4325899/Financial-crisis-just-how-big-is-Britains-toxic-debt.html