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  1. Wealth
February 23, 2009

Be Gordon Brown for a day

By Spear's

If you don’t like the idea, look away now.

If you don’t like the idea, look away now.

Gordon Brown has done everything he can think of to stop the slide into economic ruin,  but the collapse continues unabated, and is now accelerating out of control. His government now owns three bust banks, hundreds of thousands of cars, a public debt that has soared out of sight and heading to £2 trillion, a lengthening dole queue over 2 million and a totally busted budget of over £77 billion, and all he can think of is throwing more taxpayer money at this over-leveraged and imprudent mess. It’s clearly time for a new analysis, and plan.

Brown’s Bank Bail-out Mk. I threw £500 billion at the banking system, comprising a £37 billion survival package of Ordinary and Preference Shares and £450 billion special liquidity facilities, which no doubt saved them from collapse.

The problem now is the banking system is still seized up and the Credit Crunch is still as bad as ever and now impacting the daily economy. Brown’s plan for Bank Bail-out Mk. II is to throw another £500 billion of taxpayers money at this problem in an attempt to get the banks lending again, perhaps partly by removing toxic assets from the banks into a bad bank paid for by the taxpayer.

This strategy, however, will do nothing for new lending and won’t work, because the banks must deleverage first back to banking reality before they can consider loading up their busted balance sheets with new assets.

It’s a bit like that game Spellicans, when a bunch of ivory sticks are allowed to fall into a tangled pile on a table, and then the players have to remove them one-by-one using just their own stick and a help-stick, but without disturbing any of the others, or the turn passes.

It’s pretty slow and delicate at first, but as the sticks are unpicked it begins to ease, imperceptibly, and the pace picks up and eventually the whole logjam is unwound. In the analogy, the bank’s sticks are their own cashflow of repayments and realisations and earnings. The issue for Brown is the design of the help-stick: just throwing more money on the pile is not the best answer.

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In an article in The Observer on 22 February 2009 Brown said something sensible: bring back the prudent old-style bank manager. So why not do just that? Their pensions have all shrunk under Brown and we are all told to develop three careers these days anyway.

The recruitment process would be very simple: Are you under 60? Can you stress-test a balance sheet on a computer? Do you know what a CDO is? Three ‘No’ answers and you’ve got yourself a job.

And Brown has, unwittingly, got a trump card up his sleeve, good old Northern Rock, which he happens to own 100%, where he could recruit all those over-60s bank managers who knew about proper banking and set them to work, immediately.

He is already planning a £5 to £10 billion injection into Northern Rock’s mortgage arm, so how about a £50 billion injection into the [new] commercial arm? The branches are all there, the back office systems are all there, and the experience is available. I would change the name, though, so lets run with NewBank.

In practice NewBank would work like this: the branches in Newcastle, of course, and in Manchester, Liverpool, Birmingham, Bristol, Southampton, Norwich and Maidstone, say, would be the commercial centres for business loans.

(I would avoid anything within the M25 as the banks in the London area are now in reasonable shape, or if they’re not their clients can always call on HSBC which has no lack of funds.)

Most loans that NewBank makes will be taking out an existing facility in another bank, thus becoming the help-stick to unpick the credit logjam in that bank. On its £50 billion injection, the Bank of England/Treasury could safely gear up NewBank with a Taxpayers Gilt instrument to around £500 billion, providing an income-producing instrument for savers. </p>

As NewBank would be well capitalised and have no legacy toxic assets, it could soon be exited and repay the taxpayer at a handsome profit. The beauty of the ‘Spellican Help-stick Bypass Plan’ is that it doesn’t involve the impossible-to-value transfer of toxic assets to the taxpayer, which is fraught with difficulties and frankly an immoral use of taxpayer funds. So leave the toxic assets where they belong, in the banks that created them, which should slow their outrageous bonuses down nicely.

What if Northern Rock, which led us into the crisis, became the camel that got the credit system over the desert and back to normality… Now there’s a thought for Gordon’s beleaguered imagination!

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