Secret Bridge Loans

We learn yesterday from the Bank of England that Britain's two largest banks - Royal Bank of Scotland and HBOS - given a £62 billion 'bridge' loan last year on top of the £500 billion tax-payer bail-out (a "bridge loan" usually two weeks to three years pending the arrangment of a larger or longer term financing; if the financing fails, the bridge collapses. Exhibit A: First Boston (now Credit Suisse) and Ohio Mattress) This emergency funding suggests our banks in far greater peril then understood generally and, according to the BoE Governor Mervyn King, within hours of collapse. Who can forget the 2007 run on Northern Rock? What makes the secret bridge-loans more astonishing: Chancellor Alistair Darling tried to convince Lloyds to buy HBOS - in short, the Chencellor knew he was selling Lloyds a lemon. Why do this? To save his own skin.

The same shoddy deal occurred when sub-prime Merrill Lynch hoisted on Bank of America's shareholders who had no idea the depth of Merrill's problems. So bad the transaction that in April, 2009, BoA CEO Ken Lewis testified to Congress that he was pressured to keep silent about "deepening financial difficulties." Ken got fired.

The Bank in England's bridge loans fortunately repaid while the Government scrambles to justify the Bank's decision to keep the bridge-loans secret for a year. The aborted Lloyds deal collateral damage. Parliament gave the Bank a green-light to operate covertly supporting the banking system., trying to keep them alive and avoid panic. We know today how close to ruin we came. Government did the right thing.

Image from Top Secret Plant Nutrients