The latest government to up the stakes was the US. The massive stimulus package it unveiled includes a public-private investment fund of US$500bn to absorb banks’ toxic assets with the potential to expand this fund to $1trillion.
This sounds a great idea and should enable banks to remove capital-hungry loans from their balance sheets.
The theory goes that once these skeletons are parked elsewhere banks will start trusting each other again and the interbank flow of money will start again.
The only trouble with this scheme is that no-one knows the true level of toxicity in mortgage portfolios.
I have to admit to seeing some horrific examples of lending in recent expert witness cases that I’ve dealt with and a look at recent Financial Services Authority enforcement decision notices shows some underwriters fell asleep while on watch.
If we are not to miss any spring home buying activity the government needs to move forward quickly with its own bad bank scheme.
But for such a plan to work detailed independent analysis will be required so that lenders fully understand the problems that lurk within their balance sheets.