The fund manager says the UK bailout is too restricting compared to its US counterpart, which was announced yesterday, and could lead to failure.
New Star economist Simon Ward says: “Can you rescue and punish failing banks at the same time? I doubt it, which is why I am less optimistic about the success of the UK banking rescue plan than its US counterpart.”
Ward has compared the two bailout details and has found that the US model heavily favours the banks future interests. He says the appropriation of future profits, which is entwined into the UK model, is going to detract from new private sector capital investment.
The economist sites the benefits of the US’ proposed transfer of troubled assets from banks’ balance sheets, which promises $450bn to purchase illiquid securities. He admits the UK plan may include a bad asset buyout option after the publication of the final Crosby report, but “a similar programme is unlikely”.
He has also found that when it comes to bank recapitalisation, the US bailout has allowed redeemable preference shares with 5 per cent yield and attached common stock warrants, with no requirement to stop paying ordinary share dividends, while the UK model has 12 per cent yield, which is irredeemable for five years and has no ordinary share dividends until it is repaid.
Ward criticises the difference in security swap facilities: the US bailout is secondary to direct Fed lending, over a one-month term and the fee is determined by an auction but the UK Special Liquidity Scheme is the primary means of liquidity support, which is up to three-year term and a fee is set at the opening of the three-month LIBOR OIS rate.
He also says that the US bailout allows the Fed to buy three-month unsecured commercial paper at 2 per cent spread over OIS rate. Ward says any similar addition to the UK bailout plan would only happen “over Mervyn King’s dead body”.
Ward concludes: “The penal conditions being imposed on British banks place them at a competitive disadvantage to their US counterparts, increasing the risk that they will require prolonged public support or even eventual full nationalisation.”