British govt. would take shares in bailed-out banks

By Robert Winnett
The Telegraph, London
Monday, October 6, 2008

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3141185...

Alistair Darling, the Chancellor, could give the banks billions of pounds in return for shares in an emergency bailout plan to be enacted if the financial crisis worsens, The Daily Telegraph has learnt.

The Treasury has drawn up detailed plans for the scheme, which would put taxpayers' money at risk.

Ministers believe it may soon become necessary if banks do not begin lending money again to consumers and to each other.

Mr Darling hinted at the plan when he said he was "looking at some pretty big steps" to ease the lending crisis and was prepared to step in to help other ailing banks in the wake of the nationalisation of Bradford & Bingley and Northern Rock.

Details of the plan came as pressure intensified on the Government to offer a 100 per cent guarantee on all savings after Germany took the surprise step of announcing a blanket guarantee on private deposits in its banks.

The financial crisis will dominate the return of Parliament, with the banking bailout and savings guarantee likely to be debated ahead of the unveiling of a new banking bill later this week.

Gordon Brown's new National Economic Council will also meet for the first time, with the Prime Minister having put his administration on a "war footing" to tackle the economic crisis.

The Treasury plan to take shares in major high street banks will be discussed by the council. It would be the most radical step yet, putting billions of pounds of taxpayers' money at risk if the stock-market value of banks failed to recover.

However, David Cameron, the Conservative leader, appeared to give his backing to such a scheme.

He warned that an "ad-hoc approach" to the financial crisis was no longer appropriate and that a co-ordinated rescue package was now necessary.

The bail out plan would allow the Government to provide banks with billions of pounds without attaching conditions on how it is spent. By receiving shares -- or an option to buy shares -- in exchange for funding, taxpayers stand to profit when the banks recover.

A similar scheme was introduced in Sweden in the early 1990s when the country was facing a similar banking crisis. Swedish taxpayers eventually profited from the bailout. Warren Buffett, one of the world's biggest investors, used a similar mechanism to provide L2.8 billion to Goldman Sachs recently, which is being closely studied by the Treasury.

In further developments over the weekend:

-- Business leaders, economists, and politicians called on the Bank of England to announce a sharp cut in interest rates this week. A reduction in the base rate of up to 0.5 percentage points is now predicted.

-- A growing number of banks changed their economic forecasts and are now predicting a full-blown recession in this country. Citigroup, the world's biggest bank, expects British unemployment to rise by one million.

-- Mr Darling indicated he will rewrite the Government's economic rules to allow borrowing to increase beyond the previously-permitted maximum limit. The new rules are expected to be outlined in a major speech on Wednesday.

The bailout plan is one of a number of contingency options to have been worked out by Treasury officials over the past few weeks. It follows the emergency nationalisations of Northern Rock and Bradford & Bingley which have led to calls for a more widespread solution.

Treasury aides are cautious about discussing specifics amid fears that stock-market investors will demand the plans are implemented immediately.

However, Mr Darling told the BBC One's Andrew Marr Show: "Be in no doubt we will do whatever it takes to stabilise the banking system. We are looking at some pretty big steps which we would not take in ordinary times but we are ready to take them."

Both Mr Cameron and George Osborne, the shadow Chancellor, also used television interviews to float their support for such a scheme.

Mr Cameron said that the Government may soon have to "do some really quite big things" to stabilise the economic situation and said his party stood ready to support them.

In an article for the Financial Times, the Conservative leader said "more drastic capital measures may be required. It is possible to imagine the circumstances in which government injections of capital, with proper safeguards and strict conditions, may be the best way to safeguard the long term interests of the taxpayer."

Vince Cable, the shadow Liberal Democrat chancellor, also gave his support to such a scheme. "There is a case for a more systematic approach," he said. "A variant of the Swedish model could be applied here."

Mr Darling is expected to make an economic statement to Parliament updating MPs on the actions taken by Government over the summer to tackle the financial crisis. This will include details of last month's emergency bailout of Bradford & Bingley.

On Tuesday the Government will unveil its banking reform legislation which will give the Bank of England and Financial Services Authority greater powers to intervene in failing banks.

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