European banks on the rails

Lenders may have tapped Bank scheme for £200bn (September 2 – Telegraph )

Troubled lenders in the UK may have tapped the Bank of England's emergency funding scheme for as much as £200bn, according to investment bank UBS - double the most aggressive estimates. Alastair Ryan, UBS banks analyst, has calculated that "the take-up could be £200bn or more".

When Bank Governor Mervyn King first unveiled the Special Liquidity Scheme in April he indicated that it might be used for £50bn, while debt specialists forecast a total take-up of £90bn-£100bn by the time the scheme closed on October 20.

The scheme, which allows banks to swap untradeable mortgage securities for liquid Treasury bills for up to three years, has filled the funding hole left by the closure of the wholesale markets since the credit crisis. The last major syndication of mortgage securities was in June last year.

In Europe, the ECB reacted sooner and more aggressively than did the US, at least when it came to lending cash to troubled banks. The US reacted more aggressively in lowering interest rates. Through all of this I can find nothing except a very strong indication that the credit crisis is still running strong and that central banks are flooding the world with liquidity.

And, yes, I find it too cute by half that all of the various markets that the central banks needed to have turn a certain direction did so in a coordinated fashion. The world is never so obliging all on its own, so I suspect a bit of under-the-table help has been arranged. Bonds have remained well-bid, leaving interest rates low; the dollar strengthened by record amounts shortly after the G7 said maybe it would be best if it did; and equity markets have held up, while commodities have, in a word, crashed.

This is, simply, quite remarkable, and, if it is actually the work of independent investors, will certainly go down as one of the most fortuitous strings of happenstance in financial history.

The alternative explanation is that central banks are attempting to price-set all the markets in an effort to steer the plane to a gentle landing. My complaint with this, if it’s true? It is enormously risky, and, even if successful, it simultaneously rewards speculators and the well-connected while it punishes savers, taxpayers, and the prudent.

This is a companion discussion topic for the original entry at