- The Washington Times - Monday, January 19, 2009

UPDATED:

Britain announced Monday that it will implement a second financial rescue plan for the nation’s ailing banks but gave no clue about how much taxpayer money it would cost.

The decision, announced by Prime Minister Gordon Brown, closely paralleled the financial problems faced by banks in the United States, particularly Bank of America and Citigroup.

Britain spent about $55 billion in October to bail out its banks to encourage them to loosen credit so that borrowers could spend money and help the economy get back on its feet, a move similar to what the U.S. Treasury Department did in the fall with a bailout allocation from Congress of $700 billion, about half of which was spent.

Congress last week appropriated the second $350 billion at the urging of President-elect Barack Obama as the government helped Bank of America with another $20 billion, bringing the total aid to $45 billion. That $20 billion was appropriated from what remained of the first $350 billion authorization.

Britain’s decision for a second bailout sent shivers through the London stock market because of fears the government would nationalize the banks, particularly the Royal Bank of Scotland. The bank said its losses for the year could total $41.3 billion, the biggest loss in history for a British corporation, the Associated Press reported from London.

Bernard Baumohl, chief global economist for the Economic Outlook Group of Princeton, N.J., told The Washington Times that he doubted that Britain would nationalize its banks though it might be forced to nationalize one or two of them.

“Outright nationalization is not what they want to do,” he said of the British, “but the government might have no choice in one or two cases. The last thing the government wants to do is take [a bank] over if it doesn’t have to.”

Mr. Baumohl said he was not surprised by the British move because the financial crisis faced by the U.S. and British banking systems are very similar. Both countries are consulting closely about the crisis, he said.

“The U.S. and British economies are so closely tied that it’s not surprising that British banks are experiencing serious trouble,” he said in a telephone interview.

“We are still many months away before we approach stability in the financial sector and confidence that the worst is over for the U.S. and U.K. banking systems,” Mr. Baumohl said.

Neither Mr. Brown nor his Treasury chief, Alistair Darling, would say how much the second bailout would cost British taxpayers.

Mr. Brown said the government has increased its stake in the Royal Bank of Scotland to nearly 70 percent. But he refused to say whether the bank would be nationalized.

The U.S. government also has taken part ownership of bailed out American banks by purchasing some of their equity. The banks both in the United States and Britain incurred major losses by investing in securities backed by mortgage, credit card and auto loans.

Consumers have been defaulting on these loans, reducing the value of those securities. Unemployment has risen to 7.2 percent in the United States during the 13-month-long recession, and some economists have predicted that it will rise to the double digits.

“Banks are paying a very heavy price for the lack of appreciation of how these securities can perform when they’re under stress,” Mr. Baumohl said. “Nobody thought twice about the inherent risks in these securities.”

But, he said, as adjustable mortgage rates started to climb and homeowners no longer could afford to pay the mortgages, “the value of these securities began to collapse.

“The banks didn’t do due diligence on these securities when we were coming face-to-face with an economic slowdown. The economic slowdown shows how fragile and risky these securities are.

“Unless banks set aside enough capital to protect themselves against these losses, it would be devastating for the banks.”

Mr. Baumohl said there “is an enormous amount of consultation going on” between the United States and Britain over the banking crisis “primarily because there is so much at stake.”


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