Nightmare Day For Banks

The Times Online is reporting 300,000 frozen accounts at Icesave bank.

The Financial Services Authority this afternoon drafted in Ernst & Young (E&Y) as emergency administrators of Landsbanki’s UK operations in a bid to protect retail depositors and British financial stability.

However, a spokeswoman for E&Y said the move will not protect the deposits of the 300,000 customers of Icesave, the internet savings bank that is owned by Landsbanki, who found their accounts frozen this morning after Iceland’s financial regulator took control of the country's second largest bank.

A notice on Icesave's website said: “We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts. We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly.”

The Icelandic central bank said that Russia had agreed to provide Iceland with a €4 billion (£3.1 billion) loan to strengthen foreign reserves and support the Icelandic crown, which fell by 35 per cent on Monday.

The Icelandic crown continued to be volatile in today's trading, forcing the central bank to introduce a currency peg at a value of 131 per euro. It was last trading at 144 per euro.

Bank Shares Collapse



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First Quote Of The Day:
Banking Finance Editor Patrick Hosking "No one trusts the banks anymore, it has to come from politicians."

That's one hell of a choice.

Brown Holds Emergency Meetings With Finance Chiefs

Prime Minister Gordon Brown and Chancellor Alistair Darling call an emergency meeting with finance chiefs after nightmare day for banks.

Gordon Brown and Alistair Darling were tonight meeting with finance chiefs to discuss the recapitalisation of the UK banking system after a turbulent day on the markets which also saw British savers hit by the collapse of the Icelandic bank Icesave.

The Prime Minister and Chancellor will meet the Mervyn King, Governor of the Bank of England and Lord Turner of Ecchinswell, Chairman of the Financial Services Authority at 5pm.

No 10 denied that it was “an emergency meeting” and had been in the diary for sometime. But officials had to admit they had not given notice of the meeting at an earlier briefing today.

This suggests that Mr Brown and Mr Darling have been convinced that they must show the market that they are at least close to an announcement in order to restore some calm.

On another rollercoaster day for the markets, banking shares were badly hit as a report leaked out from top-secret talks between the banks and the Treasury in Downing Street last night.

HBOS shares were down 41.5 per cent at 94p, Royal Bank of Scotland was below £1 at 90p, 39 per cent, down, while Lloyds TSB fell 12.9 per cent, or 33.5p, to 225p. Barclays was 9 per cent down at 285p. HSBC was the only big bank to rise by 19p, or 2 per cent, to 901.25p.

The Government is furious with the banks for apparently divulging details of their meeting with the Chancellor at which they asked him to speed up the injection of taxpayers money into their coffers.

In Europe, the 27 member states today agreed to more than double the minimum level of bank deposit protection in Europe to €50,000, and the US Federal Reserve announced that it would start making loans directly to businesses to help them with short-term funding difficulties.

Meanwhile, Icesave's 300,000 British now face a struggle to extract their cash, after withdrawals were blocked this morning when, Landsbanki, the Icelandic parent bank, went bust and was nationalised.

Iceland has been battling to stave off national bankruptcy after its banks took on massive debts in expanding overseas, far exceeding the country's gross domestic product.

British Taxpayer On Hook For £50bn Bailout

In the US the word "recovery" replaced the word bailout. The UK is calling their bailout an "investment". Whatever you want to call it, British taxpayers are on the hook for a £50 billion.

Taxpayers will be committed today to providing more than £50 billion to bail out high street banks in an attempt to avert a cataclysmic failure of confidence.

Alistair Darling was due to tell the City in an early morning announcement today that the sum will be available for “investment” in banks that have demanded help from the Government. The drastic rescue move is designed to help to reassure savers and to kickstart the paralysed credit markets by encouraging banks to lend to each other again.

After meeting Mervyn King, the Governor of the Bank of England, Downing Street was forced to make the announcement earlier than it had intended because of fears that a second day of hammering for bank shares had made leading institutions vulnerable. HBOS shares slumped by 42 per cent yesterday, Royal Bank of Scotland was down 39 per cent and Lloyds TSB dived 13 per cent in another torrid day for the banks.

The taxpayer will take a stake in banks that seek assistance through the purchase of preference shares, which the Chancellor will say could mean ordinary people making a profit once the crisis is over.

Holders of preference shares are the first in line for the payout of dividends but they do not carry voting rights. The bailout is expected to be structured so that the Government also receives rights to ordinary bank shares at low prices, holding out the prospect of profits if and when banks recover. Mr Darling will also announce extra help from the Bank of England to ensure that the banks have enough cash to run their day-to-day activities.

The collapse of the online bank Icesave, leaving 300,000 British depositors with no certainty that they will get their £4.5 billion of savings back, added to the urgency for a scheme to restore confidence. The part-nationalisation of the banks — “recapitalisation” will be the term used by Mr Darling, while Gordon Brown will refer to a “stability and restructuring plan” — comes amid fresh evidence that the economy is deteriorating quickly because of the drying-up of credit.

The British Chambers of Commerce said that Britain was now in recession and faced 350,000 job losses in the next year. Confidence had collapsed in the manufacturing and services sectors, it said, and it joined the CBI and other employer groups in calling for an immediate interest rate cut.

George Osborne, the Shadow Chancellor, reiterated that the Tories would work with the Government, although he added: “We must make sure that any support from the taxpayer is used to help save small businesses from closure and enable families to stay afloat, not to pay the bonuses of bankers. We should be rescuing the banks to rescue the economy, not to rescue the bankers.”

Terms Used So Far

• Bailout
• Part-Nationalisation
• Investment
• Recapitalisation
• Recue Plan

We’re All Brazilians Now

Krugman has an interesting chart on GDP in It’s a small world after all. Let's take a look.


One point I think is really important in understanding the crisis is that there has been a huge increase in financial globalization just in the last few years — basically since 1995. The chart above shows rest-of-world assets in the United States (red) and US assets abroad (blue) as a percentage of non-US GDP; while we talk a lot about the US as a debtor nation, what’s really striking is the surge on both sides of the balance sheet. This has made the global financial system a lot more tightly linked, so that big economies are now experiencing the kind of contagion previously associated with emerging markets caught up in the 1997-1998 crisis. We’re all Brazilians now.

Second Quote Of The Day:
"We’re All Brazilians Now "

In the UK, taxpayers are likely to get some consideration. In the US, Paulson will give every penny to Wall Street. In Both the US and UK these actions are just the initial salvo. More bailout schemes are sure to come.

In the meantime, look for the Bank of England and the Fed to cut interest rates by at least 50 basis points each. The ECB will follow, probably sooner than anyone thinks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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