Thank heavens, we can expect a plan to tackle the credit crunch by September. There was a sigh of relief when Prime Minister Gordon Brown appointed James Crosby, deputy chairman of the Financial Services Authority and former chief executive of HBOS, to head a crack team of commandos to tackle the credit crunch.
Its task is to leap into a burning mortgage market and rebuild a killer economic machine out of a crumbling financial system.
Crosby could come up with this plan in his sleep. Thanks to his leadership the team could finalise an effective strategy before you’ve time to pity the fool who messed with your mortgage-backed securities.
So it’s frustrating that the team is not required to report back for six months but at least we’ve got a business-minded expert in charge. I love it when a plan comes together, albeit slowly.
The government’s idea to tackle the credit crunch will see major banks swap their pre-December mortgage-backed securities for one to three-year government bonds. The idea is that lenders can trade the bonds with each other and third party investors for negotiated prices.
The market for government bonds is more liquid. Pension funds and private equity firms like to buy them and as there will be more cash suddenly available the costs won’t be so high. And new borrower rates stuck at around the 6% mark should return to normal levels thanks to the bonds.
This begs the question of whether this is a nationalisation of existing mortgage debts. Landing taxpayers with the remaining pile of charity shop mortgage bundles that no-one wants to buy is going to raise a few eyebrows, although not in the Cabinet.
But we are assured that taxpayers’ money shouldn’t be at risk because the government will carefully rate mortgage books before taking on low-performing investments.
And the bond swap won’t be pound for pound. For every 100m of mortgages the government takes from a lender, it might only give 90m worth of bonds.
The next concern will be whether the swap will be priced attractively for lenders. After all, this is a government bailout and it has every right to make a profit. Hopefully the bonds will be offered at a low enough exchange cost to make it worth the government’s while.
There is the added concern that a sudden boom in the bond market will reduce overall values. Perhaps in three years’ time the flood of mortgage-backed securities could have a negative effect on the market. But if it all works as planned there should be more liquidity in the market. This will allow lenders to offer low rates to get the mortgage market back on its feet.