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Merv adopts FT plan to solve credit crisis

Greg Newton at Naked Shorts merrily (and justifiably) took the proverbial earlier in the week when an FT story indicating that central banks were considering direct market purchases to help resuscitate the mortgage backed securities market was roundly denied.

The FT’s Chris Giles and Krishna Guha said the Bank of England was most in favour of the plan, which was being considered with the Fed and the ECB as part of a broader discussion about solutions to the ongoing credit crisis.

The story led all editions of the newspaper around the world. But as Reuters stated:

The Bank of England denied a report in the Financial Times on Saturday that it was proposing using public funds to make mass purchases of mortgage-backed securities in order to ease the credit crisis.

“Central banks, including the Bank of England, have been looking at ways to ease the strain,” a BoE spokesman said. “The BoE is not, however, among those reported today to be proposing schemes that would require the taxpayer, rather than the banks, to assume the credit risk.”
So there was some confusion on Wednesday when BoE governor Mervyn King told the Treasury committee in Westminster that central banks were discussing direct market purchases to help the MBS market - a move would involve the use of public funds to shore up the market in a key financial instrument.
Speaking to MPs, Mr King stressed that such a move would be subject to two conditions - first that on the “risk of losses on their lending should remain with banks’ shareholders” and second that “a longer-term solution must focus on the overhang of assets and not subsidise issues of new assets”.

That implies the BofE will only pay firesale prices for assets and/or demand some sort of indemnity from the selling banks in order to protect taxpayers. And the Bank does not want a fresh glut of dodgy MBS issues.

All of which begs a question: Why was the original FT story denied?

We think there is an explanation here. Merv read the paper on Saturday, decided Giles and Guha had come up with a cunning plan to solve the crisis, and so-turned idle newspaper speculation in central bank policy.

Simple as that. Maybe the paper is worth £1.50 £2 on a Saturday after all.

This entry was posted by Paul Murphy on Wednesday, March 26th, 2008 at 13:36 and is filed under Capital markets. Tagged with , . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Mar 26   18:38 Posted by T2K [report]

    Maybe it’s time to test the UK Banks by changing their gearing rules such that they have to raise, say, £100bn by issuing new equity in short order. Seems fair as the B of E (aka UK taxpayer) has bunged them at least that much one way or another, and any other business finding itself short of the readies would be obliged to do same or else ….

  2. Mar 26   15:34 Posted by Paul Murphy [report]

    DH — copy corrected!

  3. Mar 26   15:26 Posted by Andrew Teasdale [report]

    As I said on this blog on March 11….

    http://ftalphaville.ft.com/blog/2008/03/11/11506/concerted-central-bank-action/

    “The trouble is this does not flush the proverbial out of the system. Ultimately the Central Banks may be forced to buy the real crap from the banks and then sell this onto an open market exchange (as opposed to over the counter). Once this happens central banks will be better able to influence economic activity through interest rate policy and raise rates if need be.

    We will still be left with the large issue of structural economic imbalances but we will no longer have the intense systematic financial risks which the makes the current crisis one to be feared. ”

    Andrew Teasdale

    The TAMRIS Consultancy

  4. Mar 26   15:00 Posted by pegnu [report]

    any purchasing of MBS would be utterly disgraceful.

    “risk of losses on their lending should remain with banks”

    if this is so, what would be the point of it anyway?

  5. Mar 26   14:52 Posted by Anonymous [report]

    The U.S. Fed is already doing this so why not the BoE? Perhaps they can get the MBS at a very attractive price with put-back options; something that the Fed has not done. Finally, the purchase of MBS by the BoE will not resuscitate the MBS market since the housing itself is in a crisis - on both sides of the pond.

    Also, both sides are also facing a growing consumer issue. What will the BoE do then? Buy ABS?

    http://riskyops.blogspot.com/2008/03/risk-of-growing-consumer-debt-when-will.html

  6. Mar 26   14:23 Posted by coffin dodger [report]

    Poor Merv’s in a bit of a tizzy, isn’t he?

    Reactionary times call for reactionary measures, I guess.

    At what point does confusion become a rout?

  7. Mar 26   13:51 Posted by Dave Heasman [report]

    It’s 2 quid on a Saturday

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