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Q&A
Robert Lea6 Oct 2008
The Government is looking at rescuing British banks by taking shares in them. How will that work?
The idea is that rather than just throw money at the banks - as in the $700 billion Paulson rescue plan in the US - to relieve struggling Wall Street institutions of their liabilities, the UK government would offer cash injections to individual banks but in return for a stake in the company in shares. So rather than see taxpayer money simply sucked in to keep the banking system afloat, the cash not only saves the economy but could get some upside if and when banks recover with the money invested potentially reaping a profit if shares rise.
Has this been tried before?
Yes - the model is a bailout of the Swedish banking system in 1992. The Stockholm government pumped in the equivalent of $18 billion or around 4% of the country's gross domestic product. And depending on how you calculate it it worked. The Swedish banking system remained intact and the Swedish taxpayer lost little or nothing.
How expensive will it be here?
Potentially the initital cash injections could run into tens if not hundreds of billions of pounds depending on how much the banks needed and how bad the banks debts get. That's the conundrum. The Treasury and the taxpayer ultimately could be left with worthless shares and then still have to pick up the bill for liabilities as well.
Didn't the Government do a similar thing with British Energy?
Indeed they did. In 2002 British Energy the nuclear generator was all but bust when the price of electricity collapsed. The Government stepped in, propped up the company financially and, in its case, brought in new management to shake it up. When the business was rescued and returned to the stockmarket, the Governmment - ie the taxpayer - was left with a 65% share. Having already partially sold down its stake when British Energy gets sold to EDF of France, the Government will have been paid back £6 billion. The catch however is that as part of the rescue, the Government took all British Energy's nuclear clean-up liabilities off its hands. They will end up costing the taxpayer over time billions of pounds.
