UK Begins Nationalization of Banks

So much news this morning; of course we have the global rate cut which is again "Unprecedented" but so many people have been expecting it, I am not sure if it will matter in the near term. In the long run, as we face down a deflation spiral it is a positive.

More interesting, and a precursor for what I believe will be the eventual solution in the U.S. is the beginning of nationalization of UK banks - that is government buying preferred shares to create capital. This is really the only option and far superior to the US solution of buying bad debt. For every 1 dollar of new capital "created" the banks generally loan in a 10:1 ratio. So in theory if we "created" $700B of new capital in the banks (and take ownership through shares) we'd have $7 Trillion of lending capacity which would be a heck of a lot better than the plan we are embarking on.

This is an extreme measure, it is socialization, but we are already on that path. Why we are wasting time with interim steps is beyond me, when obviously we are in emergency mode - we should be skipping the current step and follow the UK blueprint. Because that's where, I believe, we will end up in the end.

• British banking stocks soared Wednesday after the government announced a 50 billion pound (US$88 billion) plan to partly nationalize major banks and promised to guarantee a further 250 billion pounds (US$438 billion) of bank loans to shore up the beleaguered sector amid the world financial crisis.
• Prime Minister Gordon Brown billed it as a "radical" plan to stabilize banks so that they could resume normal lending and other operations, rather than trying to buy up bad assets as the United States is doing. "All these are investments being made by the government which will earn a proper return for the taxpayer," he told a news conference. "This support is on commercial terms. We expect to be rewarded for the support we provide." "This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," Brown told a news conference.
• Under the British government plan, the Treasury said that it will offer to buy up to 50 billion pounds worth of preference shares from at least eight of the county's largest banks and building societies, including HBOS PLC, Barclays PLC and Royal Bank of Scotland. The investment will give taxpayers a share stake in many of the country's biggest banks.
• Treasury chief Alistair Darling said the government was "absolutely not" seeking to take control of the banks. "We are not talking about running the banks. The banks will are going to be run as commercial operations, albeit with government help in restructuring," he said at the news conference with Brown. But the Treasury said government support would come with strings attached: "The government will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and home buyers."
• The rescue plan marks a sharp turn in the fortunes of Britain's proud banking sector

Historic stat of the day

• The three-day decline for the S&P 500 as of last night's close was -14.44%, beaten only by June and September of 1932.