Bank Bailout

[drplokta]

The joke about the UK bank bailout is that the taxpayer is going to lend money to the banks so that they can lend it back at a higher interest rate and make a profit on the difference. But it seems more likely to me that the taxpayer is going to lend the banks money so that they can lend it back at a lower interest rate, and make a loss on the difference. Warren Buffett's similar (if private sector) bailout of Goldman Sachs pays him 10% interest, well above the rate of most bank loans and mortgages. And the banks don't need extra profitability at this time, they need extra liquidity, and if it makes them a loss that's a small price to pay for being able to keep going until they can rebuild their balance sheets and pay back the government loans.

Comments

[andrewducker]

The question being - how are they going to rebuild their balance sheets when they're borrowing money for more than they can lend it...

[drplokta]

Most of their funds will still come from deposits or interbank loans at much lower interest rates, which are profitable for them. The government preference shares will just be that little bit of extra funding on top to enable them to stay in business. So they may make a loss on the government preference shares, but they'll still be profitable overall.

[voidampersand.livejournal.com]

I hope that is how it works out. I know that over here, Krugman wrote that the US policy should be to say "Yes, Mr. Prime Minister" and follow the UK lead.

[erikvolson.livejournal.com]

Exactly. If a bank is profiting on a bailout loan, the profit -- or the bank -- needs to be seized. The costs of the loan need to be somewhat putative, because the only reason the loan is being given is that it's better to not let your failed bank actually fail.

[zeit.livejournal.com]

Was that the Daily Mash?

Good joke, but (all together now) it's a lot more complicated than that.

[alexmc.livejournal.com]

Totally agree.