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European banks on the rails

Wednesday, September 3, 2008, 5:34 AM

Troubled lenders in the UK may have tapped the
Bank of England's emergency funding scheme for as much as £200bn,
according to investment bank UBS - double the most aggressive
estimates. Alastair Ryan, UBS banks analyst, has calculated that "the
take-up could be £200bn or more".

When Bank Governor Mervyn
King first unveiled the Special Liquidity Scheme in April he indicated
that it might be used for £50bn, while debt specialists forecast a
total take-up of £90bn-£100bn by the time the scheme closed on October
20.

The scheme, which allows banks to swap untradeable mortgage
securities for liquid Treasury bills for up to three years, has filled
the funding hole left by the closure of the wholesale markets since the
credit crisis. The last major syndication of mortgage securities was in
June last year.

In Europe,
the ECB reacted sooner and more aggressively than did the US, at least
when it came to lending cash to troubled banks. The US reacted more
aggressively in lowering interest rates. Through all of this I can find
nothing except a very strong indication that the credit crisis is still
running strong and that central banks are flooding the world with
liquidity.

And, yes, I find it too cute by half that all of
the various markets that the central banks needed to have turn a
certain direction did so in a coordinated fashion. The world is never
so obliging all on its own, so I suspect a bit of under-the-table help
has been arranged. Bonds have remained well-bid, leaving interest rates
low; the dollar strengthened by record amounts shortly after the G7
said maybe it would be best if it did; and equity markets have held up,
while commodities have, in a word, crashed.

This is, simply,
quite remarkable, and, if it is actually the work of independent
investors, will certainly go down as one of the most fortuitous strings
of happenstance in financial history.

The alternative
explanation is that central banks are attempting to price-set all the
markets in an effort to steer the plane to a gentle landing. My
complaint with this, if it’s true? It is enormously risky, and, even if
successful, it simultaneously rewards speculators and the
well-connected while it punishes savers, taxpayers, and the prudent.

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