- The Washington Times - Monday, January 19, 2009

LONDON

Britain announced a second rescue plan for the country’s ailing banks Monday, hoping to thaw frozen lending by offering to insure banks against large-scale losses on bad assets they already hold.

Stock investors, however, were spooked by fears that the second bank rescue plan in three months was a step toward full nationalization of one or more banks. Fears focused on the Royal Bank of Scotland (RBS), which disclosed that it is likely to report a record full-year loss; its shares closed down 67 percent.

“There is a great deal of uncertainty. There seems to be some concern doing the rounds that the group will be totally nationalized sometime in the near future,” said Keith Bowman, an analyst at Hargreaves Lansdown stockbrokers.

RBS said its losses for the full year could be as much as $41.3 billion, which would be the biggest loss ever by a British corporation.

Prime Minister Gordon Brown said Monday that the government has increased its stake in RBS to almost 70 percent, but declined to say whether he thought the bank will eventually be fully nationalized. The government took a stake under a first round of bailouts late last year.

Announcing the new rescue package, Mr. Brown said the government would offer to insure banks against default on toxic loans in exchange in return for a fee and legally binding commitments to make credit more available to British businesses and homebuyers.

Mr. Brown’s plan will also see about $74 billion set aside to create a special fund for the Bank of England to buy high quality loans and other assets directly from banks. That plan is also aimed at bringing down borrowing costs.

Britain’s Treasury said precise details of the asset purchase program would be finalized later this month.

Both Treasury chief Alistair Darling and Mr. Brown acknowledged that October’s pledge of about $55 billion to bail out Britain’s banks hadn’t done enough to encourage them to resume normal lending volume.

“Good businesses must have access to credit, jobs should not be lost needlessly,” Mr. Brown told reporters at his Downing Street office. He said stimulating lending is vital to spark Britain’s economy and to limit job losses as Britain tackles a recession prompted by the global downturn.

Britain’s Treasury said the government will offer to insure banks against losses on about 90 percent of specific shaky loans. The plan would require banks to identify their riskiest assets which could be insured with government backing.

Neither Mr. Brown nor Mr. Darling could say how much the plan will cost taxpayers, as details won’t be agreed until banks start participating.

Opposition Liberal Democrat lawmaker Vince Cable said some financial experts claimed British taxpayers face losses of up to $58 billion.

Mr. Brown said the “investments will be held for no longer than is necessary to ensure stability,” but could not specify how long the government expects to operate the program.

“Governments across the world are having to do all sorts of things that they might not wanted to have done a few years ago,” Mr. Darling told reporters.

Some critics called the latest rescue plan a gamble, coming only three months after October’s bailout.

“We still think that the government may eventually have to set state-decreed targets for the banks to lend, perhaps via further nationalization,” said Vicky Redwood, an economist at Capital Economics Ltd.

Bank shares closed broadly lower on the news, with Lloyds Group off 34 percent, HSBC down 6 percent and Barclays down 10 percent.


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