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Terms in this set (27)

UK government unveiled a comprehensive £400 billion bailout/rescue plan for the UK banking sector designed to restore financial confidence, stability and credit flows to UK businesses and individuals.

This follows a state-financed capital injection of a sufficient size to ensure continued viability but without eradicating private shareholders.

Potential costs:
-loss of taxpayers' money if equity investment is not subsequently retrieved
-how much management control is secured?

Biggest banking groups were bailed out by the state investing in them on taxpayer's behalf to keep them sound.
RBS = 58% gov stake. HBOS & Lloyds TSB combined (Lloyds banking group) = 43.5% gov stake.

-$250bn of $700bn. 'TARP' troubled asset relief programme funds used to recapitalise US banking system, with the 8 biggest recipients being:
Bank of America (including Merrill Lynch), $25bn.;
JP Morgan Chase, $25bn.;
Citigroup, $25bn.;
Wells Fargo, $25bn.;
Goldman Sachs, $10bn.;
Morgan Stanley, $10bn.;
Bank of New York Mellon, $2bn.; and
State Street $3bn. [October, 2008]

-under a further bailout of Citigroup, another $20bn. of Trouble Asset Relief Programme money is used to buy preference shares in the bank, while the bank has to provide another $7bn. of preferred stock to the government in return for having its potential losses on $306bn. of toxic assets capped [November, 2008]
-Bank of America receives an additional $20bn. of TARP money [January, 2009]
-Fed pledges an additional $250bn. of loans to Citigroup [January 2009]
This situation represents the case where the bank becomes 100% owned by the state, on behalf of taxpayers. Existing shareholders are usually wiped out, financially.

Potential problems:
- taxpayers put at high risk
- who will run the bank?
- danger of bank being run for political reasons and not as a commercial enterprise

Nationalisation of the Bradford and Bingley (Sep 2008) - costly because taxpayer has to cover. Supposed to be temporary management of the bank by the gov.

Reasons for B&B collapse:
- crash in profits due to exposure to UK property market (another former building society), especially with respect to buy-to-let (buy to let it out to someone else e.g. student housing) and "self-certified" mortgages ask lender to loan. Opportunity to lie.
- downgrading of its credit rating;
- a precipitous fall in its share price, which destabilised its rights issue process (issue shares to existing shareholders at a discount)
- a failure to find a "White Knight' from the UK banking community. No other bank wanted to take it over/ rescue it.
- Nationalised because rightly or wrongly it was deemed too big to fail, its failure would do too much damage to economy.

Structure of the nationalisation process: Way B&B was nationalised:
- Government takes over the £42 billion mortgage book, to be wound down in due course;
- The bank's branches are sold to Banco Santander for £612 million
- The UK banking industry is asked to (eventually) fund the £14 billion transfer of the insured deposits to Banco Santander.