If you are already ill don’t expect to get medical insurance. And there is no point in trying to arrange house insurance if you see the burglars making off with your stuff. It is too late. The essence of insurance is that you pay a small premium before the dread – but unlikely – event you are insuring against happens.
But not if you are the banks. They have already bought dodgy assets for inflated prices. The con is over. But the Government has just announced an ‘asset protection scheme’ to insure their losses. It works like this. The bank estimates what it expects to lose – in other words what it paid minus its real price on the market. It then pays the Government an insurance premium to cover that loss minus 10% so the bank will have an "incentive…to keep losses to a minimum".
Suppose the bank paid £10,000,000 for the debt. It now realises the debt was dodgy and a default is probable though there is a chance it will pay up. So the bank reckons it could sell that debt for only £4,000,000. The potential loss is therefore £6,000,000. But instead of selling the debt for £4,000,000 and taking the hit the bank keeps it and pays the Treasury a premium – say 5% of the potential loss – which is £300,000. A few months later the debt does go bad and the bank manages to recover just £2,000,000. The Government then steps in and pays the bank the £6,000,000 estimated loss minus the 10% ‘incentive’ which is £600,000 and another small amount, say 1% or £60,000. Instead of getting back just £2,000,000 the bank gets back £2,000,000 + £6,000,000 - £660,000 = £7,340,000. So the £300,000 fee has bought an extra £5,340,000. Bingo.
Those details are a little speculative. Because every question I have asked the Treasury about the scheme has been stonewalled. There will be no more information before the last week of February. But whatever the small print, it is clearly not insurance. Because the burglar is already on his way out and the swag is long gone.
In other words, the bank makes the mistake, we pick up the bill. The size of that bill is also speculative. But it is not, insist Gordon Brown and Alistair Darling, a blank cheque. The PM admitted it was "costed" and the government could "cap it." But the costing and the cap are both secret. The Chancellor would only add "the cost of doing nothing would be so much more."
The cheque may not be blank. But the number written on it has an awful lot of zeroes.
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