Monday, April 21, 2008

Bank of England Performs Bail-Out

From the WSJ:

The Bank of England Monday launched a plan to allow banks to temporarily swap £50 billion ($100 billion) of mortgage-backed and other securities for United Kingdom Treasury bills, in a bid to ease the current credit crunch.

The central bank said that by tackling an overhang of assets on bank balance sheets, the plan should improve the liquidity of the banking system and increase confidence in financial markets. It said that financial markets aren't working normally and that failure to intervene in this way would risk a wider impact on the U.K. economy. (Read the bank's statement.)

Banks will be able to enter into new asset swaps at any time from Monday for the next six months, the Bank of England said. That period would be extended if the bank thought it appropriate.

The central bank said that the swaps will last for one year but be renewable for up to three years and that the risk of losses on the securities will remain with the banks. It said the swaps will be available only for assets in existence at the end of 2007.

The bank will swap bills for a range of high-quality assets including AAA-rated securities backed by U.K. and European residential mortgages. It will also accept AAA-rated credit card debt. However, the central bank said it will not accept securities backed by U.S. mortgages. If the collateral offered by a bank is downgraded, it will have to replace it with different AAA-rates assets.

I'm calling this a bail-out. Here's why.

1.) They can always change the plan later on. Expect that. I can hear the back room cajoling now, "we can't find another AAA asset to exchange for the asset that was downgraded. Come on...the taxpayers are the real suckers here anyway. We knew that all along. Let's just get it over with." SO -- whatever media day in England is the slow day, that's when the BOE will start to announce "slight changes" to this plan.

2.) There is no clear end-date. This could go on, well, forever if needed.