EUROPE RE. BAIL OUTS
Well we knew who this Bail out was for didn't We?:Bank Chiefs are facing probe into Share Deals. Our Taoiseach only had to open his mouth and say "I am calling this meeting to discuss saving six Irish Banks and immediately the Chairman and the Director of Anglo Irish Bank just on the point of liquidation or bankruptcy rushed out and bought one and a half million shares in their own Bank = Insider Dealing. Are they arrested? Haha, setting a good example perhaps?

14th October 2008

Europe to U.S.: You messed up the rescue, too

The plans for a massive bank bailout by European governments differ strikingly from the U.S. approach.

By Peter Gumbel, Europe editor Last Updated: October 13, 2008:

PARIS (Fortune) -- First you mess up the world's financial system. Then you blow the rescue of it. Now let's show you how to do it properly.

That, in a nutshell, is the less-than-flattering message European governments are sending to the U.S. as they mount their own gigantic bank bailout. The plans, announced Monday after two weeks of dithering, involve Britain, Germany, France and some others recapitalizing national banks that require help, and providing state guarantees and other measures to kick-start the stalled credit market. The details are strikingly different from the U.S. approach adopted by U.S. Treasury Secretary Hank Paulson and the Federal Reserve Board. And there's a big reason for that: The Europeans think Paulson got it badly wrong, and have watched aghast as he failed to restore confidence in the world's financial system.

In particular, they now think - and are openly saying - that it was a huge mistake to allow Lehman Brothers to fail. But they also believe that the $700 billion bailout plan was badly misdirected. Rather than buying up toxic assets, as the Paulson plan initially intended, they believe the role of government intervention should be to recapitalize the banks directly in exchange for some control of operations. That's at the core of the European plans announced Monday (and apparently the direction Treasury is now heading, too).

Much of the griping has been taking place anonymously, so as not to cause political ructions. But France's Finance Minister Christine Lagarde cast aside diplomatic niceties on the eve of last weekend's G-7 meetings in the U.S. when she told French radio: "as soon as you let one domino fall, the rest risk crashing down."

While not defending Lehman - "there were certainly bad decisions taken by that bank, bad management," she said, Lagarde nonetheless argued that allowing the investment bank to fail merely heightened anxiety in international banking and led to the seizing up of interbank lending. It's an argument that has now become conventional wisdom in Europe, where the mantra for this week's rescues is: Relax, no bank will be allowed to fail.

Too complex, too opaque

The second lesson from the U.S. handling of the crisis concerns the way government money is best used. Here the Europeans have a valuable precedent: Sweden's banking crisis in the early 1990s, which was resolved by the state forcing a consolidation and clean-up of the system even as it kept the banks afloat. Starting in Sept. 1992, the government in Stockholm announced a general guarantee for the whole of the banking system, encouraged the central bank to organize massive injections of liquidity, and created a state agency that essentially forced banks to give up any remnants of make-belief accounting and quickly write down the value of their assets to much more realistic levels. The strategy worked, and Urban Bäckström, the former Swedish central bank president who played a central role in the rescue, has said that "prompt and transparent handling" of the problems were a key to the success.

By contrast, the initial Paulson plan involved the U.S. government buying up the problem securities of banks in a procedure that risked being anything other than prompt and transparent. "It looks as complex as the credit derivatives that caused the problem in the first place," one top European finance official told me, on condition I didn't quote him by name.

Of course, this is not exactly a time to crow, and there are some big unanswered questions about the European solution, too. One is just how tough governments will be in imposing their conditions on national banks, including forcing mergers of stronger and weaker ones. That's particularly a concern for Germany, which has the most fragmented banking sector of any of the big European nations and has the biggest potential for discovering nasty surprises. Germany's problem is that any banking consolidation is likely to run into opposition from regional authorities, who have a say in the running of savings banks networks. And with national elections scheduled for next year, the fragile coalition government under Chancellor Angela Merkel doesn't have a very strong hand to play.

Her finance minister Peer Steinbrück, who could end up as her challenger in the election, has been among the most vocal European government official complaining about how the problems started in the U.S. sub-prime market - and how they will result in the erosion of American influence. "The U.S. will lose its superpower status in the world financial system," he has said, predicting that the dollar will also lose ground to the euro and the Japanese yen.

Stock markets for the moment are applauding the concerted European response. Only time will tell whether they're getting it right. It puts a huge onus on governments to fix the system, and the track record there is mixed. France nationalized its banks in the 1980s under President Francois Mitterrand for ideological reasons, but made such a mess of the job that it privatized them again. Still, after two weeks of conflicting and contradictory moves and statements in Europe, a bit of coordination certainly feels good - and if it looks like it stands a good chance of working, all the better.

EU big four gather for financial crisis talks

LUCIA KUBOSOVA

03.10.2008 @ 09:27 CET

The leaders of the EU's four biggest states - Germany, France, Britain and Italy - are gathering for emergency talks on the financial crisis in Paris on Saturday (4 October), one day after US lawmakers are expected to vote for the second time on an amended bail-out plan for the country's financial sector.

European Commission president Jose Manuel Barroso on Thursday welcomed the approval of the package by the American Senate, which had enabled another attempt to hammer out the bill in the House of Representatives and described it as "a good step forward in the right direction."But after receiving negative signals from both Berlin and London on the idea of a similar emergency fund worth €300 billion for Europe's banking sector, French president Nicolas Sarkozy distanced himself from the proposal."I deny the sum and the principle," he said, according to media reports. An official in French finance minister Christine Lagarde's office added that "there was an exchange of ideas but no French proposals. There was no French plan," AFP says.

Asked by journalists about a possible EU version of the US banking rescue scheme on Thursday, the European Central Bank (ECB) president Jean-Claude Trichet - also to attend the Paris mini-summit together with commission chief Barroso - openly said it would not work for Europe."We do not have a federal budget, so the idea that we could do the same as what is done on the other side of the Atlantic doesn't fit with the political structure of Europe."After Paris seemingly took the bail-out plan off the table, the question remains what kind of a co-ordinated strategy - if any - the four large EU countries could come up with at their emergency session over the weekend. Britain has suggested that solutions to the financial crisis need to be primarily sought by national authorities. "It is right that individual countries would want to take their own decisions, particularly when national taxpayers' money is potentially at risk," said spokesman of Gordon Brown, UK's prime minister.

"The purpose of the [Paris] meeting will be to discuss how each of the four major economies in Europe are responding to the global financial crisis," he added, according to the BBC.

Irish rescue plan sparks controversy

But French finance minister Christine Lagarde insisted that there is a need for a joint strategy among the EU's member states, referring to the latest developments in the banking sector and how they affect neighbouring countries, such as Britain and Ireland.The Irish parliament on Thursday passed a bill fully guaranteeing all bank deposits, which has sparked a controversy in other European capitals about unfair advantage for Irish banks over foreign competitors.British media reported a rising interest among Brits to switch from the UK's to Ireland's banks in a bid to secure their savings in a rising atmosphere of insecurity.Minister Lagarde said in a BBC live interview that better European co-ordination could prevent such cases, arguing that "a measure decided in one [EU] member state has to be shared in advance with other member states.""When something happens in one member state it affects everybody else around, so there needs to be that level of cross-sharing of information," she added.

ECB mulls rate cuts

Meanwhile, the ECB on Thursday agreed to keep the interest rates in the 15-strong monetary union at a seven-year high of 4.25 percent, while hinting at possible cuts in the future."We had examined two options, one letting interest rates unchanged and one decreasing interest rates," said Mr Trichet. However, ultimately the bank left rates alone, in a unanimous decision that had been expected. The ECB has far from abandoned inflation fears, as the eurozone inflation rate of 3.6 percent is still sharply higher than the bank's target range of a rate below but close to two percent."The economic outlook is subject to increasing downside risks,'' as a result of the "ongoing financial-market tensions," Mr Trichet told reporters.The ECB chief said that this meant that while "upside risks to price stability have diminished somewhat, they have not disappeared." Analysts interpret the statement as meaning the Frankfurt-based bank is now clearly considering when would be the best time to cut the cost of borrowing money.

IRELAND rte(TV) comment: Sarkozy backs bank guarantee - Cowen

Wednesday, 1 October 2008 16:20

Taoiseach Brian Cowen, who is visiting Paris, has said his bank guarantee scheme has received backing from French President Nicolas Sarkozy.

Mr Cowen told reporters he thought Mr Sarkozy, whose country holds the rotating six-month presidency of the EU, understood precisely the reasons the Irish Government had to act.

Shares in Irish banks are continuing to recover after the Government's plan to guarantee their deposits and debts.

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The ISEQ index was up 4% by 1pm, with shares in Anglo Irish Bank gaining 14%.

Meanwhile, EU Competition Commissioner Neelie Kroes has appealed to national governments not to act unilaterally in the current financial crisis, and to consult the commission especially on the question of offering state aid to financial institutions.

Speaking at a press briefing in Brussels, Ms Kroes said that the Commission is in close contact with several governments, including Ireland, but declined to comment on individual cases.

Britain wants Ireland to look closely at its guarantee to make sure it complies with EU law.

Prime Minister Gordon Brown said European governments should make sure that whatever actions they took to tackle the global financial crisis complied with EU competition law.

EC chief Jose Manuel Barroso said the EU needs a shake-up of banking deposit insurance schemes so that there will be more consistency across the Union.

Currently, deposit guarantee schemes vary widely across the EU with some countries offering much greater protection of depositors' savings than others.

Italy to guarantee banking system

Separately, the Italian government is to take steps to guarantee the stability of the banking system as Italy's leading bank, UniCredit, took a battering on the stock market today.

The Bank of England has offered a total of €40bn (€28bn) in short-term loans to banking institutions hit by the global credit crunch.

The bank began injecting dollar funds into money markets last month as part of a coordinated central bank action.

Europe's four biggest economic powers - Britain, France, Germany and Italy - are to meet on Saturday in Paris for talks on the global financial crisis.

Most world stock markets made gains this morning, but some European markets have retreated since then.

In London, the FTSE was stronger. The EC this morning approved the British government's plans to rescue mortgage company Bradford & Bingley, which is to be nationalised.

German regional bank WestLB is drawing up a timeframe for a possible merger with Dekabank, an institution that manages funds from German savings banks.

The state-owned bank is under pressure from the EC to find a partner after it benefitted from a €5bn rescue package which included controversial state aid.

Germany's DAX index was down 0.75%, after trouble in car manunfacturing companies: Porsche had plunged by 9.35% after it declined to issue an outlook for the current fiscal year.

BMW was down by 4.18%, while Volkswagen had lost 5.10%.

Shares in Italy's the second biggest bank, Intesa Sanpaolo, were suspended on the Milan stock exchange after an excessive fall.

It lost 5.33% in early trading, as it became the second Italian bank to be hit hard by the shockwaves of the US financial crisis.

Top bank Unicredit also saw its stocks suspended as the share price dropped to €2.55.

Banking Crisis Leaves Europeans with Bill in the Billions

By Stefan Schultz De Spiegel

This week Europe has fallen deeper into the credit crunch. With multi-billion euro bailout packages, Germany, Britain and the Benelux states have saved banks from collapsing. Hypo Real Estate, Fortis, Bradford & Bingley. Three European banks nearly collapsed in the course of just two days on Sunday and Monday, showing that the Wall Street financial crisis is pulling European companies into its pincers at an ever-faster clip. With trust between banks waning, analysts believe Europe is threatened with a serious credit crunch.

In order to protect the financial system from collapse, governments across Europe are being forced to intervene. Britain, Germany, Belgium, Luxembourg and the Netherlands all began spectacular rescues at the start of the week:

• the British government nationalized large parts of mortgage lender Bradford & Bingley on Monday, taking over some €63 billion ($90.6 billion) in bad loans;

• the governments of Belgium, Luxembourg and the Netherlands nationalized large parts of wobbling finance giant Fortis;

• in Germany, the government is providing a massive loan package together with a consortium of banks to prevent the collapse of the Munich-based Hypo Real Estate.

The latest wave of bad news indicates the crisis could hit Germany and Europe harder than politicians previously believed.

Thomas Hartmann-Wendels, a banking expert at the University of Cologne, also spoke of "numerous factors" that are spurring the crisis in Europe.

• European and German private banks are being forced to write-off billions of euros in from securities portfolios linked to the US subprime crisis.

• European banks also provided bankrupt Lehman Brothers with credit that, for now at least, is lost.

• Through the collapse of numerous financial institutions, an atmosphere of mistrust has emerged in the money markets, making it harder for European banks to refinance themselves. They are lending each other less money and interest rates for interbank loans are rising. These conditions led to the near collapse of Hypo Real Estate.

• The downward spiral in European stock markets is also causing an increasing number of bonds to lose value. As that happens, investors are flooding the market with new issues, creating an oversupply that is causing prices to sink even further. That, in turn, is forcing all banks that have those bonds in their portfolios to accept even further write-offs.

Burghof and Hartmann-Wendels believe these factors pose a serious risk for Europe.

Dithering Britain needs its own plan, and it may hinge on joining the euro

The rot has deepened to the sound of twiddling thumbs. A lopsided UK economy could be left relying on European help
by Will Hutton Guardian

David Scholey, former director of the Bank of England and ex-chair of Warburg, likes to say that in financial crises it is never too early for officials to panic. Nobody could make that claim of today's Bank of England, Treasury and No 10 - or of the parliamentary opposition. The British financial, official and political class have been astonishingly inactive about the gathering financial crisis - only as Armageddon has loomed has there been any sign of the necessary urgency.

However here we are in the aftermath of the nationalisation and forced sale of Bradford & Bingley (B&B) and Britain still does not have a comprehensive system of deposit insurance for retail depositors, let alone some temporary guarantee for wholesale depositors as announced yesterday in Ireland - largely because the government has genuflected towards bankers' concern at its expense. Meanwhile the Tories are so ideologically opposed to public ownership and taxpayer support for bust banks that they propose that bank bail-outs should be led by the Bank of England under a special regime for companies under administration. Sounds solid, until you learn that consequently access to all deposits over £50k would be frozen - a policy that, had it been used for either Northern Rock or B&B, would have prompted a bank run and collapse of the system.

It has been the same from the start. A seven-month dither over taking Northern Rock into public ownership. A six-month wait for the Bank of England to launch its special liquidity scheme, with the governor being more concerned by moral hazard than financial stability - a proper concern for an isolated bank bail-out but wildly off the mark for a systemic crisis. The prime minister and chancellor still fail to introduce the Crosby scheme to insure new issues of residential mortgage-backed securities that would open the supply of mortgage finance. The monetary policy committee refuses to cut interest rates. And nobody in the opposition cuts to the heart of the matter. In today's markets a large part of the banking system is in the same trap as B&B. It has an inoperable business model with tiny or even negative margins, too little capital supporting too much low-quality ending, and a balance sheet poisoned by toxic debt and write-downs.

There is only one solution, as US treasury secretary Hank Paulson recognises. The government has to corral the banking system's toxic assets in a "bad bank" underwritten by the state and sold off over time, hopefully in better market conditions. Simultaneously "good" banks must be established with taxpayer-provided capital and government-insured liabilities that allow their overall cost of capital to be low enough to make a margin on new lending. Only thus can frozen credit flows be unfrozen and blocked markets unblocked. This will reopen the supply of credit; to ensure there is demand, interest rates have to be cut and the budget deficit boosted by tax cuts and public spending increases - and depression averted.

Easy to set out in theory; very hard to do, as Paulson has discovered. The schemes have to be legitimate to win taxpayer and citizen support. To win support the package must be ultra fair, force change and retribution on the banks and give the taxpayer a chance of making a significant profit. Ideological objections to public ownership and taxpayer support have to be set aside; in financial crises, as Ben Bernanke, chairman of the Federal Reserve, says, there are no ideologues.

But any package also has to be big. The US is a continental economy; it can find $700bn for its toxic debts. The UK is a medium-sized economy - but has giant banks. Royal Bank of Scotland has 2 trillion euros of assets; HSBC 1.6tn; Barclays 1.5tn; and Lloyds/TSB/HBOS 1.4tn. Together those 6.5tn euros of assets are four times Britain's GDP. It seems incredible, but these huge banks are now so concerned about each others' business model and creditworthiness that they have stopped lending normally to each other in a form of City of London bank run - forcing the London Interbank Offer Rate (Libor) to record levels.

The UK government has to hope that the Bank of England's willingness to lend in the banks' place and an eventual Congressional agreement will stop the rot, and that confidence will return. But why should it? Some of the these banks cannot lend profitably and have toxic debts on an epic scale. It only needs an unexpected trigger event - a collapse of China's bust banking system or continued stalemate in Congress - and international investors will single out Britain's banks as the weakest in the international system with only a medium-sized country behind them. Britain will need its own Paulson plan to respond, but has not got the financial firepower.

Faced with this risk, you would think our policymakers would be using every tool at hand to avert the possibility - lowering the cost of bank funds by slashing interest rates, launching the Crosby plan to help the housing market, emulating the Irish and offering comprehensive deposit insurance. Yet they continue to behave as they have throughout - too little too late.

Cameron and Brown are united in saying they will do what is needed and not allow political differences to get in the way of financial stability. Good, but do either realise what may be needed in a worst case? The only viable British Paulson plan - bar a £500bn-plus international loan - may require us to join the euro to win the support of the whole of the European economy and European Central Bank as part of a pan-EU initiative to create "good banks" for Europe. Cameron was basking in praise for his statesmanlike intervention yesterday. He will find delivering the Tory party to Britain's membership of the euro to avoid a British slump as difficult as George Bush has done persuading the Republican party to use the taxpayer to save Wall Street's overpaid fat cats. The world is being turned upside down - and it is not over yet.

• Will Hutton is chief executive of the Work Foundation

will.hutton@observer.co.uk