Published October 9, 2008

breakingviews.com
UK bailout: taxpayers deserve better

By MICHAEL PREST
Email this article
Print article
Feedback

IT'S a big swing but not a knockout blow. The UK government's plan to bolster its banks with extra liquidity and capital, plus a hefty guarantee for wholesale funding, is the decisive - if late - move that's needed.

But the government seems to have capitulated to the banks on the coupon on the preferred stock, board changes, government directors on bank boards and banker's pay. The UK taxpayer deserves better.

The critical new ingredient is the much-leaked boost to Tier 1 capital. Eligible banks - which include all the UK's biggest retail banks and the Nationwide building society - can issue preference shares to the government up to an initial aggregate total of £pounds;25 billion (S$63.8 billion). There's another £pounds;25 billion in the kitty, if it's required, for preference shares or ordinary equity.

The Bank of England will also make at least £pounds;200 billion of liquidity available, as three-month sterling and one-week dollars, under its Special Liquidity Scheme to oil the money market's wheels.

In addition, there will be a £pounds;250 billion government guarantee to help banks raise wholesale funding. This government-guaranteed debt will count as eligible collateral for Bank of England lending.



It all amounts to partial nationalisation. The taxpayer could end up owning the equivalent of as much as half of some banks. But what's the quid pro quo? The details are scandalously vague. What's clear is what he or she is not getting: government directors on the board, warrants over ordinary equity, and a common Tier 1 standard.

There's also the risk that the coupon on the preferred shares will be too low - certainly lower than the 10 per cent Warren Buffett extracted from Goldman Sachs - although Prime Minister Gordon Brown said that it would be a 'fully commercial fee'.

Moreover, there's no mention of whether the taxpayer earns an underwriting fee on equity raised. Top executives' heads stay firmly attached to their shoulders and restraints on their pay are left unspoken.

Judging by the sharp narrowing of credit default swap spreads, the market thinks the plan has a good chance of working. But the taxpayer may prefer the plan less than the banks. The government has pulled its punches.