Thursday, March 27, 2008

Liquid assets

The FT reports,
The Bank is preparing to swap illiquid mortgages, mortgage securities and other asset-backed securities on banks’ books for liquid assets it will provide, so long as commercial banks carry the can if the loans go sour.

“The banks neither need nor want the taxpayer to insure them against these losses,” Mr King insisted.

The Bank is now discussing with big UK banks how best this should be done. The options range widely.

At one extreme, perhaps the cleanest solution is for the Bank to purchase mortgages at a price close to face value, with the banks promising to insure the central bank fully for any loans that go bad. Taxpayers would take a hit only if the banks themselves went under while the banks would get cash, providing a welcome increase in tier one capital in return for illiquid assets.

Alternative mechanisms could include banks issuing covered bonds for the Bank to buy which are backed not only by the assets but also by the issuer. Or the central bank could buy mortgage-related assets at a big discount to face value to give taxpayers a high probability of coming out making a profit.

What were once liquid assets are no more.

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