Editor's view: Why Dragons’ Den strategy is a must

6 October 2008

Doing nothing was never meant to be an option.

When words themselves move markets it was clear that Darling had to say something that would matter.

European markets slumped as soon as they opened today – coinciding with the first meeting of Brown’s new National Economic Council, a twice-weekly event in the Cobra emergency briefing room in the Cabinet Office designed to deal with the economic crisis.

Seeing the FTSE tumble down 8% while Darling made his speech is perhaps not the movement he or any of us wanted to see.

All Darling did this afternoon was merely round up all the actions he has taken in the wake of the run on Northern Rock, culminating in the privatisation of Bradford & Bingley 10 days ago and the increase to £50,000 in depositor protection (£100,000 per joint couple) which comes into effect tomorrow.

Darling’s priority is to maintain stability and he reiterated again that he will continue to pursue a case by case approach to the banking crisis.

But the credit crunch has moved on.

Announcing decisive measures to boost capital support would have fared better for Darling and the markets rather than spouting more rhetoric.

Some economists are already forecasting that the seizure in the wholesale markets will now be catastrophic due to a lack of urgent action.

One of Mortgage Strategy’s preferred options after boom turned to bust would be the Dragons’ Den approach - taking equity in UK lenders in return for cash.

This model is similar to the the move by Warren Buffett, the legendary US investor, who put $5bn into Goldman Sachs.

He receives the benefit of the dividend stream and has the option to buy more stock at a knockdown price.

Such a move over here would be likely to unthaw the credit markets and allow banks to start lending to each other once more.

That being the case then the government would end up owning equity in what were, until recently, money making businesses.

Indeed, the taxpayer, including you and me, could even see a return.

Yes, it smacks of urgency and comes with a potential £2 trillion liability to the UK tax payer.

It would no doubt also dilute the value of shares already in the market.

But it would perhaps be an immediate answer to an urgent problem.

While Darling has promised to publish Sir James Crosby’s review into mortgage funding “shortly” Mortgage Strategy can only hope that further market speculation will not drag the financial markets down further.

At least for now “all practical options” do still remain option.

A clearer indication of what these options are would have been preferable.

A 0.5% Base Rate cut on Thursday must surely now be a must.

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