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Tony Bonsignore

The Bank's secret £62bn loan: shouldn't we have been told?

By Tony Bonsignore | 15:58:31 | 24 November 2009

So that was what was going in October 2008. I had been wondering.  

Today it emerged that the Bank of England was forced to act as lender of last resort to both RBS and HBOS in autumn of last year - to the tune of some £61.6 billion.

This included a peak loan of £36.6 billion for RBS and £25.4 billion for HBOS.

And that was on top of the taxpayer bailouts, and the Asset Purchase Scheme, and the Credit Guarantee Scheme, and the Special Liquidity Scheme.

A desperate HBOS was first bailed out by the central bank on 1 October – less than two weeks after the government-sponsored takeover by Lloyds was first announced but nearly a fortnight before the government announced a £17 billion taxpayer capital injection.  

RBS, meanwhile, first received lender of last resort assistance on 7 October - six days before the government was forced to invest some £20 billion of taxpayer money as emergency capital.

Most of us knew none of this at the time, though we did watch the share prices of both banks tanking and wondered what the hell was going on.

Revealing the bailout to the Treasury Committee today, Bank governor Mervyn King said ‘confidence can best be sustained if the Bank’s support is disclosed only when the conditions that gave rise to potentially systemic disturbance have improved to a point where the disclosure itself should not be a cause of such disturbance.’

So not only did they not tell us about it then, but they also decided against doing so more than six months later.

‘Having carefully weighed the public interest case for disclosure against the potential systemic consequences the Bank decided to use its powers to limit the extent of disclosure in its financial statements in the 2009 annual report,’ the statement said.

This report was published on 18 May 2009.

The Bank is clearly convinced it was right to withhold details of the loans - especially in light of the run on Northern Rock in September 2008, which was sparked by leaked media reports of a £25 billion emergency bailout of the former building society.

It even feels that disclosing the loans in May 2009 would have been too dangerous, considering the difficulty some banks remained in.

Today, however, it judges that the danger has passed, and that we can be trusted to know the truth.

‘Now that RBS has signed up for the Asset Protection Scheme and Lloyds Banking Group has embarked on its alternative strategy for capital raising, the Bank judges that there is no longer a need for the assistance to remain secret and that it is now appropriate to disclose details relating to the emergency liquidity assistance provided to RBS and HBOS last autumn,’ it said in a statement today.

Well thanks for that, Mervyn.

The problem, however, is that the disclosure raises all sorts of difficult issues - ones that some of us would have liked to have debated at the time.

Was this secret taxpayer bailout a political decision by a supposedly independent body?

Sure, the central bank is mandated to provide assistance to the banking sector in its role as lender of last resort, but is its job to keep unviable institutions afloat in the long term? That is exactly the kind of decision it seems to have made here, with the support of the government and the Financial Services Authority (FSA).

What discussions were made between the politicians, regulators and central bankers? What were the different options? And how far did the lender or last resort action form part of the negotiations?  

Many people, it should be remembered, were against a wholesale taxpayer capital injection into both banks, preferring instead either complete nationalisation (at the expense of shareholders) or to let the bank fail and simply ring fence retail depositors.

That, after all, is what happens in a free market, isn’t it?

Whatever the case, it seems a little disingenuous for the Bank to now implicitly suggest that the course of action they took was the only option, because it really wasn’t, even if it’s too late now to do anything about it.

Secondly, many would like to know exactly how the Bank, along with the FSA and government, managed to mismanage the financial sector so spectacularly that it was forced to spend close to £90 billion in lender of last resort assistance in little more than 12 months – just to stop these broken banks from imploding.

How are these people still in jobs? And where is the personal responsibility?

Thirdly, why is this news coming out now? Has the BoE’s hand been forced? Or has it had a sudden attack of honesty? And how does this affect its credibility going forward?

Fourthly, and perhaps of most immediate importance to retail investors and shareholders: is it right to withhold such vital information? Information about the institutions where we deposit or invest our money - information that can have a pivotal effect on the decisions we make?

Can’t people be trusted to make rational decisions, in other words, as the BBC’s Robert Peston famously argued in the wake of the Rock run?

Fifth, who knew about this? Given the volatility in the banks' shares at that time, was there anybody trading with the benefit of privileged information?

And, finally, what is going to happen next time? Another banking crisis is entirely possible, it should be remembered, given the mess the sector remains in. Is the Bank - in collusion with the FSA and Treasury - going to bail out these broken institutions forever, but only deign to tell us after the fact?

It's a depressing thought.

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Comments (14)

Dave - It should have been secret

16:09 | 24 Nov 2009

It is suggested that the banks should have been allowed to fall "ring fencing the depositors funds" as this is a free market. In a free market, depositors funds wouldn't have been ring fenced and people would have lost their money. If the bank was to fall it was because it was unable to meet its liabilities and therefore depositors wouldn't have been protected.

The secrect loans provided cash flow for the banks during a difficult time (I think they were fully repaid after a few months) and no depositor lost a penny.

If the loans had been made public, there would have been a run on the banks (as per northern rock) and the tax payer would have been left with two more broken institutions (life northern rock) with no depositor base.

I think that many things that the Government/Bank of England/FSA have done have been utterly idiotic, however as far as I can tell, this isn't one of them.

Jumbo Whiffy - To Dave

16:20 | 24 Nov 2009

Are you saying both banks now operate without government support? From what I can see they only paid back the BoE when they nicked almost the same amount from the taxpayer. Since then they've borrowed more!

Philip Wise

16:56 | 24 Nov 2009

I think what they did at the time was probably the best (but not the only) choice.

However, nothing has been done, it seems, to prevent a repetition, apart from some soundbites about bonuses.

The important thing to do is to prevent a repetition of the events. It's quite simple - retail and business banking should be separate from investment banking (and, indeed, any other activity). If you want to operate as a retail bank, and have the marketing advantage of a £50,000 guarantee from the UK taxpayer, then you should be prevented from doing anything else.

This would mean a restriction of trade, but heyho, taxpayers cant afford to bail out riskier businesses again.

The political elite havent suggested this because the gravy train runs from Whitehall to the City and Canary Wharf in both directions. Ron Sandler seems to know best where the station is.

Amongst the political elite in the UK, we now have the same problem with face-saving that the Japanese have been trying to get over since their economy failed ten years ago. There is a need for the political elite to own up to their mistakes and get on with it. There is a need for the rest of us (including journalists ) to accept that mistakes were made. We all need to learn from the mistakes, rather than bleating on about them.

Tony, you have to ask yourself why no journalist was able to uncover a £61 billion loan from the Treasury - I suspect it was partly the result of newspapers desperately wanting advertising revenue from the institutions who borrowed the money. Let me see if I can find the Telegraph/St James's Place guide to IHT now... If journalists were asleep on the job, then you cant really have a go at others.

Ronald O'Brien - Secret £62bn loan

16:56 | 24 Nov 2009

I agree with Dave, neither the media or indeed the general public are very sensible in both managing and digesting this type of action by either Government, regulatory bodies or the BOE.

The media seem to wheel out all sorts of doom and gloom mongers to tell us we are all doomed and dont trust banks- how helpful is that in recifying these historic events.

As for the public, as Dave said, witness the lemming situation that exacerbated Northern Rock's downfall.

Anybody that thinks the same wouldn't have happened to HBOS and RBS is deluded.

Carefully managed information in these extremely difficult financial times will always be required.

Peter W Rees - My Tax Money

17:01 | 24 Nov 2009

RBOS shoud have been allowed to go to the wall and our taxes used to support depositors monies. It is wrong for tax payers money to be used to prop up any non essential business, by that I mean any businesses that are widely duplicated. there is not a shortage of banks in this world as if there were many entrepeneurs would be there to take advantage of that scenario.

Peter Rees.

James Clancy

17:12 | 24 Nov 2009

The BOE should have been the regulator in the first place. Even priory to the crises last October Mervin King and the late Eddie George voiced concerns.

Sadly no one took heed To a degree they were in the wilderness, as not only did Brown make the political decision to appoint the FSA as regulator of the Banks.It also suit his own political ambitions.

I am sure if King was in charge the HBOS and RBS crises would have been dealt with differently

The quicker banks are put under the supervision of the BOE the better for all of us.

Dermot Brannigan

17:27 | 24 Nov 2009

There really isn't a story here.

We don't have a right to know everything that is being done, when it is being done.

I agree with Dave that it was right to keep it private and I also agree with Philip, that very little has been achieved to ensure it doesn't happen again (other than the securitisation market, which propped all those US banks up, has virtually disappeared).

Let's not forget that the fuss about Northern Rock was because they asked whether an overdraft would be available if they needed it. Then suddenly Peston gets hold of it, and in an attempt at his 15 minutes, suddenly we're all doomed!

Funny how he didn't know anything about this isn't it?

Not sure people have really thought through the effects of a bank running out of money. Who would pay your wages this week? Who would provide a retail business with cash to trade tomorrow? What does a business do with the cash it made yesterday, and how do they stop it being knicked? What happens to a council's services if all their money is tied up with that bank?

Lastly, Tony is right. People cannot be trusted to make rational decisions. That's why stock markets around the world are based on sentiment and nothing more.

Will it happen again? Sure we'll have recessions again - we need them, to stop us from ourselves, but whether we'll see a banking crisis like this, really depends on the Americans

Syndicate - The Bank's secret £62bn loan

06:41 | 25 Nov 2009

It seems that the Government can do whatever it likes and have no accountability! It would have been better to let the Banks go under rather than put everyone in hock for that sort of money. At the very least, Parliament should have been asked to authorise it.

Ian Craik - Lender of Last Resort

10:12 | 25 Nov 2009

There was no alternative at that stage. Had cashpoints ceased working, which was only hours away, the financial system would have come to a grinding holt and the long term loss of confidence would have been huge. Recovery would have taken years or possibly decades.

Brian Hammond

10:26 | 25 Nov 2009

I have stated before that any failed bank should be allowed to go to the wall, just as all other businesses do when management fails !

The banks have been unregulated (and it appears that financial advice given to their customers is the same) for the last 12 years, and they knew what all the risks were.

The BOE and FSA are certainly NOT independent of this govt. as can be demonstrated by the debacle in the commons over the banning of short selling by Brown and then its' re-instatement by the FSA.

The Queen's Speech shows what an irresponsible govt we have when it comes to public spending, and it just goes to show that the economy is never safe in the hands of loony lefties !!! (repeat of the seventies).

Phil Castle - We can argue all we like BUT

16:39 | 25 Nov 2009

Fifth, who knew about this? Given the volatility in the banks' shares at that time, was there anybody trading with the benefit of privileged information?

CK - Had to wait till the end

23:12 | 25 Nov 2009

I'm with you Phil, the fluctuation in share price is what should be studied and who was making these trades.

There can't really be any doubt about it, the people who got the banks in the shit probably made plenty cash from their failure.

Simon Kershaw - Lender of last resort.

02:44 | 26 Nov 2009

I was always taught that lender of last resort would only happen if we were all fucked.

Maybe we are.

Chris Geeson - Everyones equal just some are more equal than others

14:58 | 27 Nov 2009

Only just picked this blog up but must agree with Phil striaght away, how much insider trading took place with the knowledge and in a, so called, free market artifiicial tampering, however well meant, has consequences.

The old boys network could well have been in full swing and how would we know.

I dare say that if asked the policy makers will tell us it was for our own good that we never knew at the time, but I really do wonder how many knew and how much of the collective "good" meant those in the know turned a fast buck.

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