New bailout 'is not a blank cheque'

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Indy Politics

Gordon Brown insisted today he was not handing a "blank cheque" to banks which have taken on bad loans - but refused to say how many more billions the taxpayer would be asked to underwrite.

The Prime Minister was under pressure to spell out the cost to the public purse after announcing a second massive bailout of the banks in an attempt to unblock the flow of credit.

The Treasury is to insure banks against potential losses from "toxic" assets as it tries to restore confidence to the ailing sector.

The premier said the scale of the asset guarantees was yet to be negotiated with individual banks but insisted they would be required to improve lending facilities in return for support.

"It's for the Treasury to decide after an analysis of the banks, in a published way, what is the insurance we are prepared to take on this and what the cap is going to be," he told a Downing Street press conference.

"I think you would be completely misunderstanding the situation if in any way you were suggesting this was a blank cheque. Quite the opposite.

"At every point, conditions are laid and the greatest condition of all is that in return for our support for the banking system they have an obligation to lend to small businesses and to families in this country."

In a bid to increase lending to the country's largest companies, the Prime Minister also announced the Bank of England would be buying up to £50 billion of "high-quality" assets from banks and other financial institutions to improve liquidity.

Further efforts to reinvigorate the stalling mortgage market will include an extension of the credit guarantee scheme.

State-owned Northern Rock is also to slow its strategy of winding down its mortgage book.

And he voiced anger at the "irresponsibility" of bankers, insisting the Government's measures were not to help them but to support those in need of credit.

He said he was "angry" about the record losses racked up by Royal Bank of Scotland - which could hit £20 billion for 2008 - but refused to say whether action should be taken against former chief executive Sir Fred Goodwin or other senior figures.

"It is not for me to talk about what action, for example, the Financial Services Authority or any other authority takes," Mr Brown said.

"Now we know that so much was lost in sub-prime loans in the US and now we know that some of that was related to the purchase of ABN Amro, I think people have a right to be angry that these write-offs are happening and that these write-offs were caused by decisions that were made about international investments that were clearly wrong investments."

Chancellor Alistair Darling is to negotiate legally-binding lending responsibility agreements with each bank in return for the insurance of their assets, the premier said.

The agreement would include "precise and clear quantitative targets" in increased lending levels, he said.

Mr Darling said the Treasury had already been holding talks with "a couple" of banks over the "backstop" insurance for potentially toxic assets.

However, it was not possible to say how much assistance the Government would offer each institution until full audits had taken place.

"Each bank will have to take a decision on whether they want to take out backstop insurance," he added.

Mr Brown said much of the credit squeeze was down to the withdrawal of lending facilities by foreign institutions, saying the main UK banks were maintaining lending.

"I know from meetings up and down the country that many individual borrowers are facing difficulties," he said.

"A principal reason for this is the reduced availability of credit across the economy because of the retrenchment of many overseas banks back to their home markets and the withdrawal of non-banking financial institutions from funding."

The Prime Minister said the "widest possible" international agreement was needed to ensure the world acted in unison and expressed confidence that US President elect Barack Obama was looking at "similar" measures.

"I believe that unless we come together to address these problems in a co-ordinated way, the world is at risk of a damaging spiral of de-globalising.

"It is fuelled by the combination of de-leveraging and national only policy solutions.

"This financial protection could be every bit as damaging to jobs and businesses in every part of the world, as the protectionism in trade has been in the past."

Mr Brown insisted the measures announced today were temporary and vital to support businesses and jobs.

"I came into politics because of the scourge of unemployment in my own home area and I will not sit idly by and let people go to the wall because of the irresponsible mistakes of a few bankers," he said.

"Good businesses must have access to credit, jobs should not be lost needlessly.

"It is because of this that we are taking the action to expand lending that we are outlining today.

"The impact of today's announcements on public finances will be temporary, investments will be held for no longer than is necessary to ensure stability.

"We will protect taxpayers' interests, liabilities will be backed by assets and fees will be charged for the schemes that we are introducing.

"But the costs of doing nothing are simply too great. These are extraordinary times, they require unprecedented action."

Tory MP John Redwood said it was impossible to say whether the latest package would work.

"We can't tell today, because the Government doesn't yet know how many assets it's going to cover, what sorts of assets they're going to be or what it's going to charge for the insurance," he told BBC Radio 4's The World At One.

"It's an extremely difficult thing they are trying to do. If they are too generous with the insurance amounts they charge the banks then the taxpayer ends up with huge losses for no good reason.

"If they are too tough the banks won't find them an attractive scheme, and these are colossal banks with massive obligations worldwide."

He added: "The taxpayer is standing behind these hugely complex financial transactions that could turn out to be very risky in international markets and I just don't know why we would want to go there."

Liberal Democrat Treasury spokesman Vince Cable warned there were potentially "enormous losses" set to hit assets.

"There are some very reputable people in the City this morning estimating that on a £100 billion insurance scheme the taxpayer could lose £30 to £40 billion.

"If this isn't very, very carefully structured, there are enormous losses on a scheme that very clearly hasn't been properly thought through."

City Minister Lord Myners said the assets insured by the Government could be "very large" but insisted the Government would know the potential extent of its liabilities.

"There is no blank cheque here," he said.

"Business obviously involves some uncertainty, but as far as the insurance scheme is concerned it is very clear we will know the liabilities we are insuring, we will know the likely maximum loss, the probable loss and importantly we will have a premium and conditions from the banks to extend new lending."

Challenged as to whether the insurance scheme could cover liabilities of £100 billion, he said: "The scale of the assets involved could be very large.

"The actual scale of risk is far, far less. In nearly all these cases we will be getting assets in exchange for the money that's being spent."