Commentary: Brown's dilemma ... to bail or not to bail

13 April 2012

Gordon Brown is engaged in a dizzying high-wire act. He's weighing up whether to guarantee all UK bank deposits as a slew of other governments have done or he could take shares in the banks in the hope recapitalisation will provide the boost banks need.

It's at times like this it pays not to be the Prime Minister. The upside of the first is that the electorate can heave an almighty sigh of relief. The downside is that it's a potential £2 trillion liability.

With the second, the advantages are that he could exert influence over bank bonuses and if it does get banks lending to each other again and frees the credit squeeze, then the Government could end up owning equity in what were, until very recently, extremely profitable businesses. Heavens - the taxpayer could even end up making money out of this.

But the gamble is that it might not do the trick - in which case, Brown will have written a cheque for many billions of pounds to buy shares in the banks for nought. The omens in this respect are not good - banks in the US received investment from the super-rich sovereign wealth funds of the Middle East and Asia and they still had to rely on the Paulson lifeboat.

With the public finances already facing a deficit because of the economic downturn and the decline in tax receipts, Brown is playing with funds he urgently requires - get this wrong and he will blow a major hole in the Treasury coffers. His model is the move by Warren Buffett, the legendary US investor who put $5 billion into Goldman Sachs. He receives the benefit of the dividend stream and has the option to buy more stock at a knockdown price.

But while the Buffett approach has creative merit, it also displays the shrewd, money-making genius for which "the Sage of Omaha" is renowned. First, he can easily afford $5 billion and, second, he's only going into one bank and at that, the one which has not had to write-down billions on sub-prime losses. If any bank is likely to be in a position to bounce back quickly from the liquidity trauma it is the hitherto imperious Goldman.

What is under consideration by the UK Treasury is of an altogether different scale. They're talking about all banks and unlike Buffett, are not in the happy position of being able to write off the cash they spend.

However, there is an argument that says that if Brown does commit the cash and it doesn't work, the money lost will appear tiny by comparison with the bill the Government could ultimately face.

That is what is going through Brown's mind - to spend now, in the hope it will ease the blockage or announce a promise to spend later if things don't improve. Soundings from banks will, presumably, have told him what they think they need.

But whatever he decides, with the financial markets in the condition they're in and banks continuing to reel, one thing looks increasingly certain: he must do something.

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in