U.K. banks get bailout to boost lending

Prime Minister Gordon Brown speaks during a press conference at 10 Downing Street in London, England.


KAI RYSSDAL: Over in the U.K., bank shares took a drubbing for the second day running. Royal Bank of Scotland fell 11 percent in London. That's after having plunged almost 70 percent yesterday.

That's not quite the reaction the British government might have been hoping for. Prime Minister Gordon Brown has just unveiled a second, major package of measures to help the banking sector over there.

From the European Desk in London, Stephen Beard reports.

STEPHEN BEARD: Britain's first banking bailout last October saved the banking system from crashing and was hailed a masterstroke. But yesterday's effort to get the banks lending again has not gone down so well.

One of the main elements is an insurance scheme. The government will insure the banks against losses from their toxic assets. Opposition politician Vince Cable is one of the many critics.

VINCE CABLE: You can't have meaningful insurance until you know the value of the underlying assets, these bad debts. It is seriously scary that the government is embarking on this with so little detail.

He says this looks like a blank check for the banks. But the government says the insurance will come with strings attached. Banks that sign up to the scheme will have to commit themselves to a specific increase in lending. That's proved unpopular with investors. It seems to have caused the collapse in bank shares.

Not surprising, says fund manager Justin Urquhart Stewart. After all, who wants to invest in a bank dictated to, by the government?

Justin Urquhart Stewart: The banks are now going to be operating for the benefit of the community. They're going to be seen as utilities, just like any water or electricity company. They will not be as profitable as before.

Other analysts say the two-day slide in bank shares suggests that a third British bailout plan may not be far away. And that will be the most drastic, bringing outright nationalization to three or four major banks.

In London, this is Stephen Beard for Marketplace.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.
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I believe this story was followed by a comment that I consider very misleading. It is not true that "...Bank of America lost a third of its value...".

The (market)"value" of the bank is the sum of ALL claims against it and not just those of the common equity holders.

The difference, ordinarily ignored, is crucial at this time.

Since the infamous meeting with former Sec. Paulson, the largest American Banks have been able to issue debt backed by FDIC. Thus, the risk of bankruptcy, in the short term, has disappeared, which means that the banks can continue to operate even if their stocks go to zero.

In recent years the stock market has ceased to be a place to allocate excess savings into equity (i.e. most junior security) investments to become a place were dreams are sold. This fetish is at the root of many of the problems as managers, policy makers, and other "experts" seem to concentrate a great deal of effort in saving the stock when they should try to save the company.

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