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Too little, too late

Who would have thought anybody could describe a £75bn cash injection “a leap in the dark”, as it was described by Conservative Shadow Chancellor George Osborne or unfortunately as it will also be described, too little too late.

Now £75bn is a lot of money in anybody’s terms but, in the context of the UK mortgage market, pitifully inadequate. Less than 25 per cent of 2007 gross lending and way short of the estimated £600bn needed to “cleanse” the banks.

HBOS alone has close to £250bn of its own “toxic” assets, with RBS a similar amount. The ongoing squabble between Lloyds Banking Group and the Treasury over the numbers involved illustrates just how close we still are to a UK economic meltdown. By the time you read this, there is every chance that Lloyds will have been nationalised as well as RBS, NR, B&B….

But credit where it is due… at least the authorities (that is, the Government) are vaguely getting closer to the real issues. Zero base rate, zero VAT rate, public spending gone mad – none of this will make a difference.

Now unless the Government plans to nationalise all UK lending (and who knows, maybe this is the advice they are following now), it needs to understand part two of the problem.

Yes, they have correctly identified that we have a wholesale funding problem, and hence the £75bn or first instalment of many (and remember the global debt market for mortgage-backed securities closed in August 2007). But unless the Government plans to issue so much debt of its own to fund the shortfall in the UK they have to think about part two as well. How do they intend to attract investors, and their capital, back into the market?

Zero rates (and close to zero yields) will certainly start to force investors to think about future returns but even at current values it will take a brave investment manager to recommend buying new mortgage assets (assuming the asset hangover from previous lending finally gets resolved).

Today, the market price for performing loans of 12 to 18 month”s seasoning is 65p to 70p in the pound. Now, I don’t want to state the obvious but that pricing hardly reflects keen investor interest.

Investors initially will want some comfort. This will either happen by waiting for market conditions to provide that, that is, the market cycle back on an upcurve, asset values stabilised, unemployment and GDP heading the right direction and therefore about three to five years away.

Or by direct market intervention, through insurance in some shape or guise, Government-backed or provided a la Freddie or Fannie.

So 20 months on from the start of the crises, we are about to see some real action now, as I said too little, too late…

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