Brown, Paulson go in different directions
Written by changthai11 on Saturday, October 11th, 2008
Brown, Paulson go in different directions
Confronting the worst financial crisis since the Great Depression, Gordon Brown and Henry Paulson went in different directions.
Brown, who opted Wednesday to spend 50 billion pounds ($87 billion) to partly nationalize at least eight British banks, took the most direct route to shore up the system. The U.K. prime minister’s approach contrasts with the one taken by U.S. Treasury Secretary Paulson, whose more complicated $700 billion plan is aimed primarily at taking bad debt off financial institutions’ books.
“The U.S. is just less predisposed toward nationalization than all the European countries,” said Joseph Mason, a professor at Louisiana State University in Baton Rouge who used to work at the Treasury’s Office of the Comptroller of the Currency. He praised the British plan as more straight-forward. “I just think they’re way ahead,” he said.
Brown’s plan returns his Labour Party to its roots, reflecting post-World War II policies of taking ownership of industries ranging from airlines to mining. Margaret Thatcher’s Conservative government reversed those policies in the 1980s, and they were all but abandoned as Labour doctrine when Tony Blair was prime minister.
Now Brown is once again taking the state-ownership road, saying he’s ready to invest in any bank that needs capital and to guarantee interbank loans. Paulson pushed for the power to provide direct aid, including the authority to buy stakes, without saying how he’d wield it, beyond a promise yesterday to “use all of the tools we’ve been given.”
“I like the U.K. package,” said Andrew Clare, finance professor at Cass Business School in London. “There is a clear equity stake. The U.S. package is more wishy-washy, it just asks for the $700 billion without spelling out exactly what will be done. All they are really doing is buying a load of bad assets.”
The U.K. initiative comes after the government took over Northern Rock Plc in February and, more recently, Bradford & Bingley Plc. The United Kingdom also arranged for Lloyds TSB Group Plc, the U.K.’s biggest provider of checking accounts, to take over HBOS Plc, the country’s biggest mortgage lender. Governments in Belgium, France and the Netherlands also have stepped in to take bank stakes in the past two weeks.
The recent crisis has given Brown a respite from the battering he’s taken in polls and from members of his party after missteps over tax policies since succeeding Blair in June 2007. With the economy at the center of the agenda, the former finance minister is winning support for leading rescue efforts.
“This may be the saving of Gordon Brown,” said Meyrick Chapman, a strategist at UBS Investment Research in London. “This is a comprehensive, well-designed, credible plan that ticks all the boxes at once and gets released all at once. The problem in the U.S. is that their response has been piecemeal. They’ve got some of the elements but not all of them. Overall, this is a much better solution.”
Brown and Chancellor of the Exchequer Alistair Darling took pains to argue that their plan was superior to Paulson’s, even as they stressed how much they admired him.
“This is not the American plan,” Brown told reporters in London. “The American plan is to buy up these bad assets by a state fund. We know that the taxpayers’ interest has got to be protected at all times, and that is why we are ensuring that it is an investment stake in the banks. We are not just simply giving money.”
Britain’s banking crisis stems from the meltdown of the market for U.S. subprime mortgages, which began last August. But because U.K. banks aren’t as advanced as their American counterparts in packaging and selling loans, Brown doesn’t have to cope with the volume of bad loans that Paulson faced.
At the end of the first quarter of this year, U.K. banks had about 280 billion euros ($383 billion) of residential mortgage-backed securities outstanding, representing half of the European market for such assets but just 5 percent of the 4.68 trillion euros in the United States, according to a report for the U.K. Treasury published in July.
Britain’s main problem is increasing arrears on mortgages written to landlords, or so-called buy-to-let loans. About 1.1 million buy-to-let mortgages worth 133 billion pounds were outstanding at the end of June. That’s 10.9 percent of the total, up from 2 percent in 2000. And about 1.1 percent of such mortgages were in arrears for three months or more at the end of June, double the rate at the end of 2006.
“This is a plan better suited to the U.K. banking problem,” said DeAnne Julius, a former Bank of England policy maker. “In the U.S., there is a huge problem with bad assets. They do have a major subprime problem. We did not have that kind of subprime exposure here. The way to tackle the British banks’ problems is through the capital problem.”
Brown, who spent years shedding Labour Party policies that called for nationalizing the “commanding heights” of the economy, won plaudits from bankers and even rival lawmakers for the rescue plan.
Paulson doesn’t rule out more direct measures to help banks once he sets up a new office to run the rescue and hires fund firms to help manage the assets.
“It is the policy of the federal government to use all resources at its disposal to make our financial system stronger,” Paulson said yesterday in Washington. “We will use all of the tools we’ve been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size.” (Bloomberg)
Brown described his move as one others will want to follow. “We have led the world today,” he said. (Bloomberg)
