Negotiation, Negotiation, Negotiation

UK Property Investment news and comments from Mark Harrison of

Want to buy bank shares (If you’re a taxpayer, you just did)

Posted by Mark Harrison on October 9, 2008

It would appear as if Governments around the world have finally realised that the current financial crisis isn’t just about saving bankers’ bonuses, and that normal businesses and their employees are being affected.

So, we have the UK’s biggest (to date) bank bailout, with the Government putting up to £400,000,000,000 (four hundred billion) of money up.

Basically, in various ways, the Government is becoming a big investor in the stock markets and the money markets as follows:

  • Up to £250 billion in loan guarantees. (Basically, a form of insurance policy, where a bank making a loan can pay a premium to the UK Government in exchange for the Government bailing out the loan if the organisation / person who borrowed the money defaults.) Potentially a nice little money-earner… but potentially a way to lose a lot of our cash.
  • An increase of £100 billion in the Special Liquidity Scheme. This is a scheme in which we (as taxpayers) lend money to banks, but the banks put up their assets (mortgages) as security, so if the banks default on the loan to the Government, the Government can take over the mortgages.
  • A straightforward loan of £25 billion to eight banks.
  • An investment of £25 billion in bank “preference” shares.

The preference shares are interesting – they get a guaranteed rate of interest, and get that payout before ordinary shareholders would. However, in order to participate, banks need to make new promises on executive pay and normal dividends (which are likely to be cut.)

The executive pay one is interesting – the normal argument against this is that banks need to attract the “best” managers, and if they are only allowed to pay “only £500,000”, then “the best” will turn down the jobs and go and work overseas. I’m cynical about this – “the best” are, in many cases, the same people who steered the banks into this mess, and it’s not at all clear that economies where the top 1% earn 100 times what the bottom 10% do fare better than those where the ultra-rich / poor gap is a lot closer (say, Germany!)

Overall, there are some fine details to criticise in the plan, but overall it strikes me as a lot better than doing nothing.

However, it’s a gamble – if the economy recovers, then actually, the loans and investments the Government has made could pay off well for us. However, if the economy tanks anyway, then the bailout money could be throwing good after bad. The hope is that, in making this offer, the chances of avoiding a serious recession are much improved. It may well be that, even if this money is lost, it’s still better than the alternative of millions of more people out of work for several years.

Obviously, as a property investor, I’ve got a lot of self-interest riding on this – on the one hand, I want lending rates to come down, and it to be easy to borrow mortgages again… On the other hand, I’d like property prices to come down another 20-25%.

So, a cautious thumbs up, and fingers crossed on this.


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