Thursday, October 9, 2008

Difference Between UK and US Bailout

  • The UK bailout focuses on recapitalising the banking system. It means government money directly goes to improve the balance sheets of banks. With more capital, it is hoped banks will be able to go back to their business of lending to firms and consumers. Government also offer security to bank loans.
  • The US bailout focuses on buying bad debts that nobody currently wants. Indirectly, this helps banks balance sheets because they are able to raise money from the sale
  • The UK government gets shares in the banks. The US governments gets the toxic mortgage debt and loans.
Overall, I feel the UK scheme will have more affect in securing the banking system. It also means the onus is on banks to deal with the bad debts, rather than the government choosing which debts to buy.
  • In the long run, I think owning shares in banks is likely to give the taxpayer the best chance of getting a decent return.
  • Interestingly, the UK model follows very closely what Warren Buffet did to Goldman Sachs and General Motors. He bought an investment in these 2 companies in return for preference shares. At the end of the crisis Goldman Sachs and General Motors have the option to buy back these shares for a premium. But, in the short term they get enough capital to avoid a crisis. Warren Buffet is likely to make a good profit on this deal.
  • Many are now asking why the US government committed to buying $700bn of useless assets when they would be better off directly recapitalising banks and gaining shares for the taxpayer?

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