The Government launched its five point plan last month to save the UK banking sector, including an asset buy up scheme and an asset guarantee scheme. But sources say this is a “halfway house” and the only way to save the banks is to remove the bad assets completely, putting them into a ‘bad bank’.
Odey Asset Management banking analyst Ben Lambert told the Financial Times: “It is quite clear that the government’s priority right now is not to nationalise the banks.” He told the FT that the “bad bank” scheme proposed in the US to bail out the banks proves that there is an alternative to state control. “Our numbers show that an asset-guarantee scheme can work,” he said to the FT.
Exact Mortgages managing director Alan Cleary agrees. He says: “Politically this is a big decision, but there are only two eventual outcomes; either create a bad bank and take these toxic assets off the balance sheets or nationalise the struggling banks.”
Cleary says mathematically a bad bank is the most prudent choice. He surmises that of the £1.2 trillion UK mortgage book, a very worst case scenario would be that 30 per cent were ‘toxic’, meaning £350bn would need to be bought. He then calculates that even if there were only returns of 50 per cent, this would cost the Government £150bn.
“But that’s an highly irrational calculation,” says Cleary, “realistically only between 5 per cent and 10 per cent of all UK mortgages could be ‘toxic’ and then of them, you could expect losses of 20 per cent. That means if the Government were to buy up the toxic assets, they would stand to lose maybe £15bn, which is small in the context of the recent financial packages.”
Cleary says this could actually be beneficial to taxpayers: “If these ‘toxic’ assets were held long-term they would give a rate of return,” he says. “As soon as house prices begin to bottom, and they will, the assets could rise in value by as much as 50 per cent.
“This has to happen, the plans so far are just a halfway house. We are at Defcom 4 now; whether the Government takes its time and the banks suffer more damage or its acts now, a bad bank will be a reality.”