成人论坛

I was puzzled by the prime minister's remarks on the Today programme this morning about what has gone wrong at our banks.

He said it was all about their "off-balance-sheet" activities - or transactions for which they are liable but were kept off their books.

Some may pipe up something about pots and kettles: when he was chancellor, Gordon Brown wasn't exactly shy about using clever accounting techniques to keep liabilities associated with major public sector projects out of the national debt (the relevant initials are "P" and "F" and "I").

But he does have a point. Some of what ails our banks is those off-balance-sheet chickens - called conduits and SIVs - coming home to roost.

They were a ruse used by banks to accumulate putatively profitable assets while putting little strain on capital. But they ended up putting quite a lot of strain on banks' capital, when outside sources of funding for these financial vehicles dried up.

That said, in the case of Britain's banks - and Gordon Brown was asked by about Britain's banks - SIVs and conduits are a relatively small contributor to their current woes.

Much more important was their na茂ve and reckless lending and investing, most of which was on their balance sheets, not off it. What's mullered their capital is markdowns and losses on , subprime, , , monoline exposure and loans to private-equity deals (if that's impenetrable gobbledegook, just think "investments which were too clever by half").

Yesterday, the governor, , put the blame for this mess squarely on the remuneration incentives for bankers to do as many deals as possible, and never mind the long-term consequences.

You might think I would concur with the governor's assessment, since the thesis of my recent 成人论坛 Two documentary - - was that the remuneration system of bankers, private-equity partners and hedge fund superstars provides excessive rewards to those who take big financial risks, without penalising them in a commensurate way when their deals go wrong.

I wonder why the prime minister felt unable to criticise the rewards that accrued to those bankers who bear some responsibility for the current financial mess we're in. Perhaps you have an explanation.

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• - What's this?

is, as expected, raising of new shares. But the total amount it is raising from issuing shares is about 拢600m more than that, because it is also proposing to pay its first half dividend in shares.

It is also conserving precious capital in a further way by reducing the proportion of its earnings that it pays out in dividends from 46% to 40%.

This reduction in the dividend-payout ratio is the starkest example of how HBOS, like most big banks, was deluded last year about the fundamental strength of financial markets.

What now seems astonishing - and reckless - was that on August 1 2007, just days before what most of us see as the official start of the credit crunch, HBOS actually announced an increase its dividend-payout ratio from 41% of earnings to 46%.

Less than nine months ago, HBOS swaggered: "It is clear that HBOS has a strong capital generation capacity, as a natural consequence of returns on equity running above 20%, increased capital generation from our Investment businesses, and the benefits to be derived from the move to Basel ll [the new international regime for measuring the robustness of banks' balance sheets]".

That statement looks absurd today, as it nails to the floor every last penny it can find.

So the one thing that is perhaps lacking from today's rights-issue statement from the bank is a statement from management, led by the chief executive, , about how they got it so wrong last year - and what lessons have been learned to prevent those errors being repeated.

In business, as in life, there is much to be said for owning up to mistakes and taking steps to avoid repeating them.

That said, HBOS wasn't alone. More or less all banks made the same misjudgement - as did the , the City watchdog, that allowed the likes of HBOS (and, infamously, Northern Rock too) to hand out more and more cash to shareholders at the tail end of an unsustainable bull market.

However, in view of the uncertainties ahead, it is probably judicious for HBOS to have performed this sharp u-turn. And, just like 's 拢12bn rights issue, HBOS's decision to massively strengthen its balance sheet by raising equity-capital shines a very bright spotlight on the reluctance of to do the same.

Barclays has weaker capital ratios than HBOS. The economic and financial risks that lie ahead are no less for it than they are for Royal Bank and HBOS. Investors in general plainly have an appetite for new shares issued by banks. The and the FSA both want all banks to strengthen their balance sheets.

So it is slightly odd that Barclays has sent out a strong signal that it has no urgent need for new capital. The humiliation for its management would probably be greater if there were a further downturn in credit markets and it was forced to ask shareholders for significant financial help some months after this opportune moment.

That said, Barclays has become something of a maverick player over the past few years. And its judgements have turned out pretty well. So maybe Barclays is right and maybe it's HBOS that's too fearful of the icebergs that may lie ahead.

In that context, it is striking that HBOS is not forecasting a meltdown in the economy. Its statement says it expects GDP growth of between 1.25% and 1.5%, fairly strong employment prospects, low interest rates and mid-single-digit falls in house prices this year and next.

That's not a disaster scenario. But, because of the instability of global financial markets, there is a meaningful risk that the out-turn could be a lot worse.

Which is why HBOS has decided to reinforce its hull against the risk of hitting an iceberg. And if you are a shareholder or customer, you will probably sleep easier knowing that the hull is that much stronger.

UPDATE 09:26: The , the chairman of Alliance & Leicester, is a serious loss to the City and the wider business community.

He was the rock of Warburg's corporate finance department in the 1980s, when Warburg was Europe's most toweringly successful investment bank (those were the days).

Latterly he performed a valuable public service in modernising the rules that govern the composition of boards - and took on this difficult role at the behest of the Treasury when most business people lacked the gumption to attempt to reconcile the clashing interests of shareholders, management and ministers.

I've known him for 25 years, in my evolution from cub reporter to boring old fart. We had one of our regular lunches only a month ago - when, as usual, he spoke the kind of commonsense that is a foreign language to a younger generation of bankers.

I'll miss him, as I'm sure will his many current and past colleagues.

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It's another big week in the rebuilding of our battered banking industry.

British banks will start to liquefy, or turn into cash, their hard-to-refinance mortgages by taking advantage of the new collateral swap offered by the .

And my sense, from talking to the banks, is that there is going to be something of a stampede to exchange mortgage-backed securities for easy-to-refinance bills.

In fact, the 拢50bn mooted as initial demand by Mervyn King, the governor, is likely to be exhausted within a few short weeks.

Which shows you the severity of the cash shortage in the banking system, since the Bank of England is not giving the money away.

So Mervyn King and the chancellor will have to decide whether to formally announce that drawings on the facility are quite rapidly expected to exceed 拢100bn.

This is taxpayers' 拢100bn, which means they'll be under some political pressure to do so.

And then there's 's - which will be announced tomorrow morning, unless investors send a clear and unambiguous signal today that they don't want it (which is highly unlikely).

By British corporate standards a 拢4bn rights issue would be one of the biggest ever - though it is a fraction of the 拢12bn being raised by the .

The needs of our biggest mortgage bank are a bit different from Royal Bank's.

It starts with more capital relative to its assets - or, to put it another way, it is already quite a bit stronger than Royal Bank.

But that strength is being undermined by an estimated 拢3bn of markdowns or losses on its investments linked to US residential mortgages.

What's irksome for HBOS is that it largely avoided the sub-prime debacle. But it has not been insulated from the fall in the market price of securities backed by so-called Alt-A assets (the grade above subprime) and prime assets.

However the main reason it wants the money is that it believes that in the difficult market conditions that all banks face, fortune will favour the strong.

That's what its advisers, and , will tell underwriters of the new shares in the City today, in the hope that investors put a positive gloss on the fund raising - and see it as a constructive move to generate future profits, rather than an admission of past failure.

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Another day, another raid by the competition watchdog, the , on our big supermarket groups.

This one took place last week and was an attempt to gather information of alleged price collusion on .

Actually to call it a raid may be to slightly over-glamourise it, in that it was carried out without a court order. That said, the OFT never goes on pure fishing exercises. It has reason to believe the supermarkets may have engaged in unacceptable pricing practices, even if it cannot be sure that the law has been broken.

What triggered this latest probe? It's difficult to be sure, but there is a possibility that one supermarket has identified possible price-fixing and has attempted to obtain leniency by co-operating with the OFT.

There is a resonant recent precedent. In the recently disclosed tobacco case, I have learned that Sainsbury has been given immunity, having from 2003 onwards agreed to provide relevant information.

Just in the past few months, the OFT has explicitly or implicitly accused supermarkets of anti-competitive behaviour in three separate areas: milk, cigarettes and now this latest more generalised case.

Which is a bit odd, since the other British competition watchdog, the , has - in its long-running enquiry into grocery retailing - concluded that supermarkets operate in a highly competitive market.

So is there a contradiction between the OFT's attempted reinvention of itself as the cartel-busting Untouchables of the food retailing bit of our economy and the Competition Commission's general thesis that the supermarkets spend most of their waking hours trying to kill each other?

Not really. Across the many thousands of products sold by supermarkets, it's always possible that rogue managers will attempt to stifle legitimate competiton.

Also when homogeneous products are being sold, the scope to woo customers other than through price is limited. And the penalties in the form of lost sales from being out of line on price are such that there is a dangerous incentive for retailing managers to coordinate prices.

Price rigging may not have occurred - and all the supermarkets have today denied that they have done anything to damage the interests of their customers. But don't assume it cannot have occurred, as a matter of principle, just because in general supermarkets compete hard.

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As a passionate anti-smoker, my wife this morning said it would surely have been a good thing if tobacco companies and retailers had been conspiring to keep cigarette prices higher than they would otherwise have been.

I doubt that will be the defence put forward by and , the cigarette manufacturers accused - along with a bunch of retailers - of co-ordinating prices to the detriment of consumers.

What, however, is striking about the against Imps, Gallaher, Tesco, Sainsbury, Asda and Shell's forecourt business, inter alia, is it comes after a great wave of attempts by the competition watchdog to crack down on what it sees as harmful collusive behaviour by British companies.

Only last week it accused g. In December, Asda, Sainsbury and others admitted engaging in anti-competitive practices and in total. And the OFT roughed up British Airways something rotten for talking to Virgin about planned increases in the fuel surcharge on airline tickets.

Given how incredibly hard it is to find enough useable evidence of collusive behaviour even to allow a public statement of suspicion, let alone mount a successful prosecution, the great barrage of cases disclosed recently by the OFT may be indicative of a systemic problem in British industry, viz a tendency to share information in a chummy way to the potential harm of consumers.

That said, the OFT is stressing that those in the frame over tobacco prices may not have broken the law. And in some ways this case is less serious than some because the alleged breaches would all be civil offences, not criminal ones.

What the OFT fears happened was that between 2001 and 2003 there was an illegal dampener on proper price competition in cigarettes because retailers allegedly told manufacturers of their pricing plans and those manufacturers then allegedly conveyed that pricing information to other retailers.

A separate allegation is that there was an understanding between each retailer and each manufacturer from 2000 to 2003 that the price of certain cigarette brands would be linked to those of rival brands.

If true, the impact of both of these devices would have been to maintain prices at levels higher than they would otherwise have been.

But although it's embarrassing for the supermarkets, it is the manufacturers that would incur the heaviest fines, not the retailers (if any are levied).

Those fines would be fixed by reference to sales, up to a maximum of 10%.

What's that in real money? Well the market was worth 拢3bn (that's excluding tax), but double counting is allowed, since both makers and sellers are under investigation. So the maximum possible fine would be 10% of 拢6bn, or 拢600m.

However the OFT's fines have been averaging 6% of turnover - which in this case would translate into 拢360m.

At a time when most businesses are anxious about the outlook for sales and profits, that's quite enough for the manufacturers and retailers to work overtime to prove to the OFT that this is a case of smoke without fire.

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There are contrasting stories from a couple of the global super-banks this morning.

suffered after suffering 拢2.6bn of write-downs on its credit-market exposure. And what's disturbing about Credit Suisse's performance is the scale of the mark-downs it has incurred on leveraged finance (largely loans to private-equity deals) and commercial mortgages.

Credit Suisse's 拢850m of write-downs on leveraged finance and 拢400m on commercial mortgages is further confirmation that imprudent lending and investing was not confined to US subprime and collateralised debt obligations. The inevitable hangover has arrived following the frenzied obsession to do private-equity deals at almost any price in 2006 and 2007.

And in that context, today's that Deutsche Bank is reducing its exposure to private-equity loans is not exactly reassuring. Deutsche has been providing buyers of those loans with finance to do the deals at below market rates - which implies that it retains an exposure, even if it avoids having to incur a write-down. Too clever by half?

In fact, there is evidence that investors in banks' shares would prefer banks to simply own up to the sins of the past and atone for those sins - as battered has been doing.

Also, regulators and ministers have been explicit that they want banks to rebuild their battered foundations by raising capital, as the "quid" for the "quo" of all that financial support central banks have been providing to the cash-strapped banking system.

It doesn't seem wholly unreasonable for banks' shareholders to make a contribution, given the unprecedented monetary commitment being provided by taxpayers (through central banking operations) to underpin banks' commercial activities.

So what about Royal Bank's great rival, ? There was, and is, an expectation on the part of the British authorities that it will raise capital.

What will , Barclays' chief executive, say in response to his shareholders at the annual meeting later today?

Well, his remarks - which were published at 0700 BST this morning - look like a pretty unambiguous "hop off" to those who think it needs a big rights issue.

He says that the bank remains profitable, even though . And he says that the bank's capital ratios - the measures of its financial strength - are more-or-less where he wants them to be.

Varley is not saying "no, nay, never" to raising cash by selling new shares - but he is saying "not now".

It's a brave statement. Barclays, through , has very substantial exposure to sub-prime, collateralised debt obligations, monolines, loans to private equity, and all the toxic stuff that did for Royal Bank.

But there are degrees of toxicity. And there is evidence that Barclays' holdings of the poison are less noxious than Royal Bank's (Barclays perhaps has a bit more collateral underpinning the direct subprime lending; the loans to private equity may be a bit more senior in the pecking order of debt; the subprime underpinning the may be the older vintage that's less loss-making; and its hedges may be smarter).

However, with , Royal Bank's chief executive, just about clinging on to his job after having made a clean breast of it, John Varley's position would not be strong if shareholders felt he had misjudged his bank's need for capital.

And, as I said, since the , the and the are united in their view that our banks as a group need to err on the side of having too much capital rather than too little, Varley would be a very lonely and isolated banker if he's got this one wrong.

That said, there would also be a substantial reward for him if Barclays survives the current downturn without raising new equity capital. His reputation, and that of his bank, would be significantly enhanced.

It's a big bet, at a time when such bets are not really in vogue. But you have to admire Varley's confidence, because he'll be aware that it's his job that's been staked.

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When banks were prepared to provide mortgages equal to 100% of the value of properties, it was because they - like most of us - foolishly thought that it was the natural order of things for house prices to rise.

Now that banks have rediscovered the financial law of gravity, they are insisting that house purchasers provide at least 10% of the price in the form of a deposit - so that homeowners, and not banks, would be exposed to the first 10 percentage points of any market fall. And the new norm for the better mortgage deals still available is a deposit of at least 20%.

But banks' change in behaviour acts as a downward ratchet on prices: the fear that prompted the tightening up of lending practices becomes self-fulfilling.

They have made it respectable for all or any of us to expect a 10% fall in house prices. It means rational purchasers would now ask for at least 10% off the asking price for any residential property, to protect themselves from the impact of a falling market.

Sellers may simply say no. But some will capitulate - and in time the new market clearing price would be where we are now minus 10%. How quickly that would happen is difficult to predict. Some agents are saying it's already happened. After all these months of gloomy prognostications about house prices, it will probably happen fast, like a dam bursting.

However that would not necessarily be the end of it.

Even after prices in general had fallen 10%, the buyer of any particular house could never be confident that the particular property he or she wanted to buy was being priced 10% below its peak. Houses are not like shares, where every minute change in value is recorded for posterity.

It means that even after prices have started to fall, it would still be rational for a buyer to demand a 10% reduction on the asking price, as insurance. Which is why a general expectation that prices are to fall 10% would probably precipitate a fall significantly greater than 10%.

That's one of the reasons why house prices have a tendency to drop more than is economically justified on the way down, as much as they had a tendency to overshoot on the way up.

So the banks' collective decision to withdraw all 100% mortgage offers just like that - and thus send out a signal that they fear prices could fall 10% - may not turn out to be the prophylactic measure they hoped.

Depending on the magnitude of the housing-market downturn it precipitates, banks could end up poorer as a direct consequence of their rediscovery of the virtues of prudent lending. Just deserts some might say, except that millions of homeowners would feel poorer too.

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• - What's this?

As credit has become more difficult to obtain and more expensive for most of us, two issues have become confused.

One is the shortage of cash in the coffers of some banks - which has been addressed to some extent by the to allow banks to swap their mortgages for the equivalent of cash.

But there is a second reason why banks haven't cut mortgage rates in line with recent falls in the Bank of England's official lending rate: in a slowing economy and with house prices dropping, banks believe the risks of lending have increased.

Banks are deliberately widening the difference between what they charge for money and what it costs them.

And in doing so they have the explicit support of the Governor of the Bank of England, .

Here are what the banks see as the killer facts that explain why consumers are wrong to moan about the cost of credit.

In 1998, the difference or spread between average mortgage rates and the Bank base rate was just under 1 陆 percentage points.

Last year that had narrowed to almost nothing, 0.27 percentage points, which meant that most mortgage loans were barely profitable.

Banks have since attempted to rebuild the profitability of mortgage lending and have doubled the difference between what they charge and the base rate.

They believe this is prudent, not extortionate. And some would argue that the insanity was when they lent too much too cheaply in the previous few years.

Which is why the banks will resist the urgings for cheaper money coming from borrowers and the Chancellor. And it's also why the bonhomie between ministers and bankers that broke out at 11 Downing Street this afternoon will probably last about as long as it takes for them all to return to their offices.

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• - What's this?

The City watchdog, the , is monitoring the health of banks much more assiduously than it was a year ago - and is assuring itself that each of them has enough capital to support their business plans.

That's one of the reasons why has decided to raise a record-breaking 拢12bn of new cash from its shareholders in a rights issue.

Or to put it another way, the climate for banks has changed in a fundamental way.

It seems only yesterday it was all about growth and opportunities.

Today bankers have remembered - some would say belatedly - that there are risks associated with lending.

So Royal Bank has also announced that, on a permanent basis, it will retain more capital in its balance sheet to meet the risks of default by borrowers than it had been doing.

The bank's shareholders are not happy that it has had this awakening only after suffering record write-downs for a British bank (of 拢5.9bn before tax) on its investments and loans related to sub-prime and private equity (though they will, in the end, probably decide that the best punishment for the chief executive, Sir Fred Goodwin, is to insist he stay in place at least long enough to reap whatever incremental profits are available from the tricky job of integrating the sprawling international wholesale banking operations of the Dutch bank ABN, which Royal Bank acquired last year).

The scale of Royal Bank's humiliation is that it is raising an additional 拢4bn by selling businesses - including all or part of its substantial insurance operation - to cover those losses.

What about its big rivals? Are they too going to raise new equity capital through rights issues and disposals to reinforce their foundations?

None have quite the same urgent need as Royal Bank. But it would be slightly odd if Barclays and HBOS did not conclude that their advantage lies in pumping up their stock of capital earlier rather than later.

Why? Because in the new, scarier climate, the Financial Services Authority will allow them much greater latitude in pursuing their ambitions if they can swank that they are among the best capitalised banks in the world - and they can't boast that now.

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• - What's this?

It was the money-market mayhem in March, when the US investment bank Bear Stearns came within a whisker of running out of cash, which persuaded the Bank of England that it had to provide more financial help to banks.

At the time, the Governor of the Bank of England, Mervyn King, became concerned that almost any bank could be brought down by a combination of vicious market rumours and the difficulties all were experiencing in obtaining funds.

So the is effectively a statement that it won't let any well-run bank collapse because of a temporary problem finding cash.

But the Bank is adamant this doesn't mean Northern Rock would have been saved, had the scheme been in existence last summer - because it was, in the Bank's view, badly run. It would not therefore have been allowed to swap billions of its mortgages for Treasury bills.

The banks I've spoken to are hopeful that the Bank of England's initiative will strengthen them and reduce the risk that another one will bite the dust.

But, in spite of what certain politicians and analysts seem to believe, this initiative was not designed to reduce the cost of mortgages or significantly increase their availability.

So both the banks and the Bank of England are explicit that the cost of credit for many of us, relative to the official lending rate, will continue to rise.

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The has rewritten the rules of how it provides help to the banking system.

First, the scale of the financial support it's providing is immense. It says discussions with the banks suggest they will initially swap about 拢60bn of their mortgage assets for nine-month bills worth around 拢50bn. But the banks tell me that in the coming months they expect the swaps to rise to well over 拢100bn

In other words, the Bank of England is becoming the market for mortgage-backed securities. This is a banking-market bail out of an ambition we haven't seen in this country since the early 1970's and possibly longer than that.

Also, this is no quick fix. The Bank of England is no longer hoping that all will be back to normal in a matter of days or weeks. The support will remain in place for three years.

The scheme is so substantial that the Bank of England has had to be indemnified. So taxpayers will be at risk.

But the primary purpose of this scheme is to prevent another Northern Rock. Or to put it another way, taxpayer support is being provided to minimise the risk of huge future losses for taxpayers from another banking collapse.

It's a crisis measure to prevent the mess in money markets precipitating further financial calamity and a very serious economic downturn.

But it won't lead to a sudden re-awakening of banks' desire to lend as much to us as we want as cheaply as we want. Credit will remain relatively tight.

And don't expect the downward trend in house prices to be reversed.

UPDATE 10:40: I forgot to mention that banks can also swap their credit card loans for the Treasury Bills - which underlines the magnitude of what is being attempted here.

As expected, all these loans - mortgage ones or credit-card receivables - will have to be converted into AAA-rated securities before they can be swapped for Treasury paper. But that's a relatively straightforward technical process.

But all these mortgages and other loans will only be eligible for the swap if they were made before the end of last year - because the bank does not want to use public money to stimulate new lending, only to replace the funding that disappeared when money markets seized up last August.

UPDATE 11:44: If this liquidity scheme had been in existence last summer Northern Rock would not have been saved by it - or so the authorities are saying. Why? Because it was too dependent on the sale of mortgage-backed securities, in the Bank of England's view.

Or to put it another way, its business model was too risky - and therefore the Bank of England would not have given it access to the mortgage-for-bonds swap (even though the Financial Services Authority was desperate for the Bank of England to provide just such a bail-out).

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The will on Monday morning perform what some will see as one of the greatest u-turns in its 300 year history.

Having been far more conservative than the and the in the way that it provides financial support to banks, it will announce what may be the world's most ambitious and generous plan to pump money into the banking system.

The Bank of England will offer banks the opportunity to swap their mortgages for rock-solid government securities or, more specifically, nine-month bills.

It will offer to do so in the form of a standing facility that will remain in place for up to three years. And banks will be able to draw on it on a daily basis, as needed.

The Bank will say that it expects around 拢50bn of these securities to be issued to banks in the first instance, but that it would be prepared to provide more help if required.

And the scheme will remove any stigma from banks' requests for such financial support, because the fee for the funds will be set at a commercial, risk-based level: there won't be the penal rates or charges that the Bank of England has traditionally demanded for emergency help.

When the dust settles, the proposal will spark controversy - though not because the Bank of England will become directly exposed to the downturn currently afflicting the housing market.

In this kind of long-term collateral swap, the credit-risk on the mortgages being handed over to the Bank of England will remain with the banks and building societies that provided the original mortgages. So if there were a sudden rise in mortgage defaults and the value of the swapped mortgages fell, well then the banks would have to provide new, unimpaired collateral to the Bank of England.

Which is not to say there is no risk for the Bank of England or by extension for the taxpayer. The Bank of England and taxpayers would emerge as losers if there were a collapse of a bank to which it had lent - but, to be clear, a bank collapse would be much more likely in the absence of this kind of liquidity injection.

The real controversy will be over whether the Bank of England is being too forgiving of the sins of our banks.

The Bank of England is, in effect, replacing much of the vital finance banks have raised over the past few years by selling mortgage-backed bonds to international investors.

Since last August, those investors have no longer wanted to buy those mortgage-backed bonds. So British banks have found themselves short of tens of billions of pounds for lending to all of us. Which is one of the reasons why it has become harder and more expensive for many of us to borrow money to buy a home.

But international investors' decision to boycott those mortgage-backed bonds is partly the banks' fault. Arguably many of them lent recklessly and stoked up a housing-market bubble. And it is the pricking of that bubble which has scared off the erstwhile purchasers of mortgage debt.

Now it was only a few weeks ago that Mervyn King was arguing passionately that banks should pay for their mistakes. He now needs to explain why he thinks they have paid enough and have learned their lesson.

Which brings me on to the second reason why the Bank of England should be bracing itself for a storm of protest.

Many bankers are convinced that if this scheme had been in place last August or in early September, would have been able to raise enough money to avoid the humiliating financial crisis that took it from run to nationalisation during an autumn and winter of very public mayhem.

The City watchdog, the , desperately wanted such a generous mortgages-for-loans swap scheme to be established months ago. So again Mervyn King needs to say why it was inappropriate in the early weeks of the credit crunch but is highly appropriate now.

Finally there is the fairly important question of whether pumping all this money into the system will do the trick.

Well, the banks are cock-a-hoop, which tells you something. But only the biggest banks will have direct access to the standing facility, so the Financial Services Authority is gearing up to put pressure on those gorillas to pass on some of the new money to the smaller banks and building societies - which are the ones currently experiencing the most acute shortage of liquid funds.

On the other hand, the Bank of England's largesse won't miraculously lead to a great gush of loans to all of us from the credit tap. Mortgages have become less cheap and easy to obtain in part because banks - like many others - fear that house prices rose too high and will now fall for an indeterminate period.

Just because they will have access to new money from the Bank of England doesn't mean they will splash it around in the form of new cheap mortgages, as though the euphoric madness in credit markets of the past few years had never ended.

There's a new climate of caution and prudence in the banking system. That change to grey in the financial weather will endure for months and possibly years.

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• - What's this?

I have learned that the scale of the writedowns to be announced by next week will be at the top end of analysts' expectations - or around 拢5bn.

That will be a record loss from all that ghastly subprime and related bubble-market exposure for a British bank.

Which may sound like horrible news.

But investors may well see it as a recognition that RBS has properly owned up to its past boo-boos - and they would view such catharsis as very good news.

In fact, the rise in RBS's share price today shows that shareholders are hoping the losses and the associated rights issue will mark the nadir of the bank's recent poor performance.

Customers too should take heart.

If RBS has fully owned up to its losses and succeeds in raising its 拢10bn of new capital - and the City believes it will do so - then it will emerge as one of the UK's stronger banks.

The heat would then be on Barclays to make a similar clean breast and raise new money of its own.

PS That doesn't make Sir Fred Goodwin, RBS's chief executive, a hero. He will still have a lot of explaining to do.

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A chill blast hit me as soon as I stepped off the plane last night at the end of a short holiday in a place where the skies are mostly blue. Yesterday's leak (to ) that is contemplating a massive rights issue marks a new and important British phase in the credit-market turmoil that has been shaking the global economy since last summer.

What I have learned is that:

1) Royal Bank will ask its shareholders for around 拢10bn, equivalent to a bit less than a third of the bank's current market value.

2) Following the leak, the formal announcement will probably come on Monday or Tuesday, a bit earlier than planned.

3) It will ruthlessly write down its exposure to US subprime and any other potential credit nasty. There will be billions of pounds of additional write-downs.

So let's unpack those startling facts. RBS will be severe in marking down the value of its exposure to subprime (about time too, some would say). It will feel obliged to do this, to provide comfort to shareholders that when they stump up the precious 拢10bn in new capital they won't be throwing good money after bad: investors will want some kind of guarantee they won't face the kind of pain experienced by those who last year injected capital into overseas banks such as and .

That said, those subprime losses will be an embarrassment for the bank, not a mortal blow.

There is no liquidity problem at RBS. It is in a relatively strong position in respect of its access to short term funding, both from customers/counterparties and also from central banks (as a big international business, it can for example access all the funds it needs from the ).

Nor is it perilously short of capital. It isn't bust.

However, following of a big chunk of the Dutch bank , it has less capital in relation to its assets (its loans) than many of its British peers.

And what RBS has noticed is that the regulatory climate has changed, in that both the government and the have been sending out clear unambiguous signals that they want banks to raise as much capital as possible.

It's the quid pro quo for the Bank of England's new scheme to pump money into the banking system, which would provide tradable government securities of two or three-year maturity in return for the unsellable and unfinancable mortgage assets that have drained liquidity from the banking system.

The formal launch of the Bank's latest initiative to bring down the market price of money and ease the funding difficulties of smaller banks is still days away. However, it will involve increased exposure for taxpayers to our banks, so it's unsurprising that the Treasury should feel that the banks' shareholders should also do their bit - and RBS has decided that it will ask its owners to divvy up first.

Make no mistake, this will require a bit of explaining from , RBS's chief executive. For years he has argued that it was in shareholders' interests for his bank to operate with significantly less capital than many of its peers. Some will see the rights issue as a humiliating U-turn for him - and the further losses that the bank will announce from its subprime exposure won't be a reputation enhancer.

How big will those losses be? Well, last year it suffered 拢2.6bn of write-downs on its own exposure and what it inherited from the ABN takeover. But that subprime is being carried on its balance sheet at values way above the valuations put on this poisonous stuff by leading US banks.

As we saw from a few days ago, the price of investments linked to subprime and other mortgage assets is still falling.

What's some cause for concern is that some 48% of RBS's so-called high-grade subprime CDO exposure was originated in the nightmare year of 2007, while 69% of its lower grade mezzanine exposure was created in the other annus horribilis, 2006.

So no-one should be surprised if RBS incremental subprime losses turned out to be more than they were in 2007, viz at least 拢2.6bn - and possibly a good deal more.

Is there any comfort for Sir Fred? Only that as and when he gets his bumper rights issue away, the heat will then be on RBS arch rival, Barclays, to disclose whether it too has suffered serious additional subprime losses.

PS. The 成人论坛 has now upgraded its blogging software so amongst other things it withstands the volume of comments we get. So from now on if you want to comment on any 成人论坛 blog you will need to register first. You can read more about this on the Editors' blog.

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We may not yet be free of the ill effects of the credit crunch, but how do we prevent it happening again? Well George Osborne has a plan 鈥� though it鈥檚 still in the work-in-progress file, which is presumably why it was unveiled many miles from home in a speech he gave last night at Harvard.

This speech may, however, turn out to be Osborne鈥檚 most significant policy speech as shadow chancellor. In it he signalled a willingness to consider radical reform of monetary policy with far-reaching consequences for the .

He said 鈥淭he credit cycle demonstrates starkly that controlling retail inflation is not enough. Recent threats to stability have come not just from the demand cycle but from the credit cycle.鈥�

What he means is that governments and regulators across the world 鈥� but especially in the UK and the US 鈥� were wrong to regard the sharp increase in borrowing by households, companies and financial institutions as a benign phenomenon.

We were gulled into thinking our economies were stronger than they really were, he argued, by all those years of steady growth and low inflation. And because of the massively deflationary impact of the transformation of China and much of Asia into great exporting machines, central banks set interest rates at levels that sparked a great boom in borrowing.

鈥淲e are now all discovering that the extra liquidity has flowed not into retail prices, but into asset prices and unsustainable increases in household balance sheets,鈥� Osborne said. 鈥淔or a long time this has been good news for home-owners and investors, but it is at the core of the problems we now face.鈥�

Or to put it another way, our economies are caught in a vicious spiral of banks realising they have lent too much to those who could never afford to repay, which is prompting those banks to rein in the credit they are providing, which is in turn precipitating a fall in the price of houses and other assets, whose poisonous effect is to turn the banks鈥� fears about rising losses on loans into painful reality.

So what鈥檚 to be done? Well, Osborne believes that the monetary authorities 鈥� in our case the Bank of England 鈥� need to take greater account of inflation in the price of houses and other assets when endeavouring to promote economic stability.

But he concurs with the chairman of the , , that economic instability might actually be exacerbated if central banks were to use only interest rates to control both asset prices and consumer price inflation as conventionally measured.

Thus there may have been times in the past few years when a sharp rise in interest rates to restrict the growth of credit might have had a dangerously deflationary effect on the wider economy.

Osborne is therefore attracted to a proposal put forward last year by a former member of the Bank of England鈥檚 monetary policy committee, , whose effect would be to impose restrictions on how much banks can lend during years of strong economic growth and would ease those restrictions when the economic cycle turns down.

As a theory it is attractive (and, by the way, should perhaps also be adopted by the government in its management of the public finances). It would work by giving monetary authorities, such as the Bank of England, the power to oblige banks to hold more capital in their balance sheets relative to their loans or assets when the economy is growing strongly and less capital when 鈥� like now 鈥� it would help if the banks could be encouraged to lend a bit more.

So, for example, in the good years the banks could perhaps lend 拢13 for every 拢1 of capital they hold 鈥� and that could rise to 拢17 in less benign times.

Turning this banking theory into practice would not be easy, however. Determining the appropriate level for capital ratios at any particular point in the economic cycle would probably turn out to be more art than science.

And, arguably, it would be unfair, in a global market for banking, for the UK to unilaterally impose higher capital ratios on British based banks 鈥� though securing worldwide agreement on a new system of adjustable of adjustable ratios could take years.

Also, what about the shadow banking system, which over the past few years has been as big and important as the official banking system? Securitisation may be dead right now, but it will reawaken one of these days. And it鈥檚 very difficult to see how the imposition of capital constraints on regulated banks would have any impact on the provision of credit by the holders of giant pools of liquidity all over the world via their purchase of asset-backed securities.

What got us into the mess we鈥檙e in wasn鈥檛 direct lending by our banks: it was the way they packaged up loans to homeowners and highly leveraged businesses into securities for sale to investors. So unless the largely unregulated providers of credit are somehow brought into the regulatory net, it鈥檚 not clear that imposing new capital constraints on banks will have much of an impact.

PS. Traumatised by the snows of spring, this column will go into sleep mode for a few days. Here鈥檚 hoping for warmer winds and green shoots on my return.

PPS. From 1800 on 16 April (UK time), we'll be doing some essential maintenance to all of the 成人论坛's blogs. As a result of this, you won't be able to leave any comments on our blog posts from that time until early morning on 17 April. More about this on the Editors' blog.

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Stable doors and horses come to mind when reading of conditions in the lending market.

Our banks have suddenly rediscovered the risks of providing credit - but it may be a bit too late for their or our good.

In the years leading up to last summer, many banks lent too much, too cheaply and with too few strings attached.

Now that the economy is slowing down, they are pushing up the cost of credit, reining in the availability of credit, and demanding improved collateral.

The survey shows that's true for residential mortgages, other consumer loans and for lending to business.

But the survey indicates the horse may have already bolted.

There has been a significant rise in the rate of default by companies and individuals - and banks expect more businesses, homeowners and consumers to experience repayment difficulties in the months ahead.

So arguably our banks have behaved in a way that may seem rational for each individual bank but may be irrational for the economy and all of us.

Many of them made it too easy to borrow in the up phase of the economic cycle and may be battening down the hatches too much in this downturn.

Or to put it another way, they inflated the boom and are exacerbating the downturn.

But then that's how it's always been - and can't possibly change unless regulators are prepared to impose lending constraints on banks when the times are good, which would be removed when the economic going gets tough.

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The stock markets appear to think it鈥檚 over. The banks, by their behaviour, seem to fear that it鈥檚 only just the beginning.

I鈥檓 talking about the poisonous impact of the credit crunch.

Yesterday the US stock market enjoyed its best start to the second trading quarter for 70 years 鈥� and the London market fared pretty well too.

But closer to many people鈥檚 lives, said it would while other banks have been hiking mortgage rates and insisting that borrowers put up larger deposits when buying a property.

So do these trends contradict each other, as they appear to do?

Not really.

Markets rose because of relief that (and , on a much smaller scale) had made a clean breast of its losses and the hope that other banks will do the same. The expectation would be that when the full damage has been exposed, the proper rebuilding can start.

And perhaps more important, the 拢10bn odd of new capital being raised by UBS and by shows that the material is available for that rebuilding: investors are supplying funds to strengthen banks鈥� battered balance sheets.

But many banks are still strapped for liquid funds and there are still strains on their capital.

Which is why First Direct has temporarily said no to new requests for home loans after being overwhelmed with applications in the wake of mortgage-rate rises imposed by its competitors.

And the funding drought also explains why almost all British banks are providing fewer and more expensive mortgages.

If this contraction of credit were to generate a further slowdown in the economy, that would generate new losses for banks - and would make the stock-market rally seem a bit premature.

But if the economic landing is soft, then stock markets renewed optimism may turn out to be appropriate.

are not desperately supportive of a very bullish case 鈥� new mortgage approvals in February were 38% lower than at the same time last year.

The interesting question for me is whether the symbolism of First Direct鈥檚 mortgage-lending strike will prompt the Bank of England to be more generous than it might otherwise have been in shaping a new lending facility for banks.

The Bank of England has become persuaded that the biggest constraint on British banks is their inability to raise liquid funds against great swathes of their balance sheets, notably US sub-prime investments, their holdings of regular US mortgages, their lending exposure to private equity and other highly leveraged corporate deals, and their UK mortgage loans.

What the banks would dearly love would be two or three year loans from the Bank of England, with those unsellable and unliquifiable assets pledged as collateral.

Would that represent a sensible refuelling of the financial economy by the Bank of England or a dangerous bailout of banks that only have themselves to blame for the mess they鈥檙e in?

Even if the banks are culpable, would we be cutting off our noses to spite our faces by depriving them of succour 鈥� in the sense that we suffer when the lending dries up.

What do you think?

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The two biggest names I interviewed for my film on the financial mess we鈥檙e in, Super Rich: The Greed Game (to be broadcast at 9pm on 成人论坛2), were Stephen Schwarzman and George Soros.

Mr Schwarzman is the founder and chairman of , which 鈥� with and 鈥� is one of the super-elite of private equity. And Mr Soros, apart from being the trader who broke sterling in 1992, has been one of the most consistently successful hedge-fund superstars.

The take of these multi-billionaires on the causes and consequences of the current global financial crisis is oddly complementary: Soros is very gloomy; Schwarzman sees a glistening golden lining.

Mr Soros says we are witnessing the end of a 60-year 鈥渟uperboom鈥�, characterised by ever-rising levels of debt within the economies of the US and much of the West, especially the UK.

He is a critic of what he calls market fundamentalists who believe that financial markets tend towards equilibrium. His view, which he has applied to great personal profit as a trader, is that markets have a tendency to move towards disequilibrium, that bubbles and excess are the natural order of things.

And each time since the War that one of these bubbles has gone pop, central banks have slashed interest rates and bailed out those with the greatest debts. Which Mr Soros says has created a massive moral-hazard problem, in that businesses, financial institutions and individuals have all been encouraged to become even more indebted in subsequent economic booms - because they鈥檝e been confident that if it all went horribly wrong, the central banks would bail them out.

This is what he says about how bad it will get for all of us:

鈥淵ou can鈥檛 rekindle the willingness to borrow and the willingness to lend because the balance sheets of the banks are now over-burdened and there are all kinds of risks that have become apparent. And they haven鈥檛 yet fully worked themselves out, so there鈥檚 a great deal of unknown credit risk in the system. And as a result, the banks are husbanding their resources because they鈥檝e actually lost a lot of money...

Now the financial crisis is going to abate because basically central banks know how to provide liquidity. But there is also a question of solvency, and that they don鈥檛 quite know how to handle. So there is going to be a fallout... partly because of the housing crisis itself, and partly because of the contraction of the financial system, the de-leveraging of the financial system - because it has become apparent that it was over-leveraged鈥�

Right now it has affected the housing market. It will, in due course, affect commercial real estate as well. It is also going to affect credit card performance and so on鈥� Then there are all these leveraged buyouts which will take a couple of years before a number of those go sour. So you really have now, as I say, the end of a super boom that will take us much, much longer to work itself out.鈥�

What Mr Soros expects is a recession in the US and a sharp economic downturn in the UK. And he expects the financial industry, here and in New York, to shrink very considerably.

He believes the UK economy is vulnerable, due to its dependence in recent years on financial services and the risk that there鈥檒l be a sharp fall in house prices. But he doesn鈥檛 expect the entire world to fall into recession, largely because of the strength of the Asian economies. (You can watch my interview with George Soros here)

Mr Schwarzman is less apocalyptic. Like Mr Soros, he鈥檚 lived and worked through many financial crises 鈥� and he鈥檚 unconvinced that this one will turn out to be significantly more dire than its predecessors. That said, he says that from mid-2006 he became concerned that credit was becoming too easy to obtain and the price of assets was becoming inflated.

But right now, Schwarzman is hoping for the worst. This is what he said to me:

鈥淚t鈥檚 going to be a great opportunity. And when people were giving interviews a year ago talking about the golden age of private equity, my back was just like tensing up because that was a golden age for paying a lot of money to people who were selling businesses.

The real golden age comes when you have a mess. You have economies that are on their back. You know, capital inadequate. And when you start buying businesses at that part in the cycle you inevitably do extremely well - unless you are too early.

And right now it鈥檚 a little bit too early. But as you wait and this develops it鈥檒l be a great time to be buying businesses.鈥�

In a way it鈥檚 a statement of the bloomin鈥� obvious that the best time to buy assets is after they鈥檝e collapsed in price. But to seemingly wish for as much economic misery as possible, so that Blackstone can buy companies at a knockdown price, is perhaps not the most politically sensitive statement ever made by Mr Schwarzman.

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was already one of the main victims of the calamitous losses being suffered by global banks on their exposure to US subprime lending.

But there had been a hope that it and other banks were over the worst.

Today's announcement that the giant Swiss bank has made a loss of around 拢6bn in the first three months of the year - due to losses of 拢9.5bn on what it describes as exposure to US real estate - may unnerve both its shareholders and the markets, although analysts had been expecting more bad news from UBS of this sort for some time.

There had been criticism of UBS's chairman, , for weeks - so it is no surprise that he is now quitting.

And the bank is taking steps to make sure it can weather the global financial storm by raising 拢7.5bn in new equity from its shareholders in a rights issue.

But investors have heard before from UBS that it had identified its problems and taken steps to remedy them.

Earlier this year it raised more than 拢5bn from the and around 拢1bn from a Middle East investor.

They may be feeling a bit sore that they invested at the wrong time and the wrong price - although UBS's decision to raise new capital gives them the right to renegotiate the terms of their investment.

As for other investors, they will be concerned about what other nasties may lurk at other banks.

Only today said it estimates its writedowns on loans and investments were almost 拢2bn in the first quarter of this year, mostly due to worsening conditions in the US mortgage market. That represents a significant rise in such losses for Germany's biggest bank.

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