My finance view

Chancellor of the Exchequer Alistair Darling should be careful about adopting proposals to create a “bad bank” because it would trigger a surge in U.K. government borrowing without ensuring lending resumes, economists said.

“The bad bank idea is still suboptimal,” Andrew Clare, professor of finance at Cass Business School in London. “There is no guarantee that it will work, and it will cost several hundred billions of pounds that will go onto the government’s balance sheet.”

Two weeks after pledging credit guarantees to U.K. lenders, Darling is weighing calls for full-scale nationalization of some banks against climbing costs of rescuing the financial system. Creating a state-owned company to take assets off the hands of troubled lenders is one option being studied, he said yesterday.

Before he acted, Darling would first have to identify and price the value of the loans the banks need to purge. JPMorgan Chase & Co. estimates the value of “toxic” assets owned by major U.K. banks at 260 billion pounds ($376 billion), or 22 percent of economic output. Moody’s Investors Service says up to 18 billion pounds in specialist loans must be absorbed.

“The big problem you come up against is how to value those distressed assets,” said Philip Shaw, chief U.K. economist at Investec Securities. “The political barriers to any such scheme might be quite large, especially as unemployment rises and the economy deteriorates.”

The risks for taxpayers are also spiraling. In addition acquiring majority stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, Prime Minister Gordon Brown’s administration has nationalized Bradford & Bingley Plc and Northern Rock Plc, two of the nation’s biggest mortgage lenders.

In all, Britain already has shifted about 1 trillion pounds of contingent liabilities from banks onto the government books, a sum that nears the 1.2 trillion-pound value of goods and services produced in the economy each year, according to the Institute for Fiscal Studies.

Brown and Darling are prodding banks into offering more loans to help businesses and households as the economy tips into its first recession since 1991 cash advance loan. A bad bank alone won’t make that happen, said Mamoun Tazi, a financial services analyst at MF Global Securities Ltd.

“Just the bad bank itself will not be enough for banks to start lending,” Tazi said. “You do this as part of other measures. You provide the framework for things to recover slowly and for lending to come back.”

For now, the Treasury is watching the impact of its existing loan insurance plan that was announced on Jan. 19. It’s negotiating with banks about the terms of those loans and what securities it will cover.

“There is the whole question how you deal with toxic assets,” Darling told the House of Lords Economic Affairs Committee yesterday. “We have set up an insurance scheme and we have certainly not closed the door on a bad bank scheme. You do need a range of options.”

The U.K. is not alone in wrestling with how to fix the financial system. In Germany, Chancellor Angela Merkel and her coalition partners are split over the nationalization of Hypo Real Estate Holding AG. President Barack Obama’s administration in the U.S. “appears to be tying itself in knots” to avoid nationalization, economist Paul Krugman said this week.

Senator Charles Schumer said yesterday the U.S. Treasury should provide guarantees for toxic assets, rather than set up a bad bank to purchase them.

Even so, Brown faces growing pressure to make his next move as the U.K.’s recession deepens and his own popularity ratings slide. Brown said the government “soon” will announce its plans to tighten regulation of the banking industry, which is supervised by the Financial Services Authority.

“This confusion over such a sensitive area of policy gives the impression that the government doesn’t know what it is doing and risks further undermining confidence,” said George Osborne, a Conservative lawmaker who speaks on finance.

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Three regional banks were closed Friday, bringing the total number of failed banks this month to six, as the financial crisis continues to take a toll on small banks nationwide.

Suburban Federal Savings Bank in Crofton, Md., was closed by the Office of Thrift Supervision. The FDIC said the failed bank’s seven offices will reopen on Saturday as branches of Tappahannock, Va.-based Bank of Essex.

The FDIC said it entered a "loss-share" agreement with Bank of Essex, whereby the purchasing bank will share some of the losses associated with certain of the failed bank’s "asset pools." The arrangement is intended to maximize returns on the assets by keeping them in the private sector, according to the FDIC.

In Florida, the Office of the Comptroller of the Currency shuttered the four locations of Ocala National Bank and entered into a purchase agreement with CenterState Bank in Winter Haven, Fla.

Ocala National Bank had total assets of $223.5 million and total deposits of $205.2 million, while Suburban Federal had total assets of approximately $360 million and total deposits of $302 million.

Taken together, the two failures will cost the FDIC an estimated $225 million.

Separately, the FDIC said it was unable to find another financial institution to take over the banking operations of Salt Lake City-based MagnetBank, which regulators also closed on Friday credit score. As a result, it expects to mail checks to retail depositors for their insured funds Monday morning.

MagnetBank, which is estimated to have no uninsured deposits, had total assets of $292.9 million and total deposits of $282.8 million as of last month, according to the FDIC. It was the first bank to fail in Utah since 2004.

The FDIC said it conducted "an extensive marketing process" to seek a buyer for MagnetBank’s assets, but it found no takers.

David Barr, an FDIC spokesman, said MagnetBank had only one branch and did not have the "franchise value" or the "core assets" that would have made it attractive to other banks.

So far this year, bank failures are averaging more than one per week. Last year, 25 banks were closed nationwide, which was the highest annual total since 1993, when 42 banks went under.

Economists expect the number of failed banks to continue rising this year as the financial crisis plays out and the economic outlook remains dark.  

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WASHINGTON–Sales of new homes plunged to the slowest pace on record last month as the hobbled homebuilding industry posted its worst annual sales results in more than two decades.

The Commerce Department said Thursday that new home sales fell 14.7 per cent in December to a seasonally adjusted annual rate of 331,000, from a downwardly revised November figure of 388,000.

December's sales pace was the lowest on records dating back to 1963. Economists surveyed by Thomson Reuters had expected sales would fall to a rate of 400,000 homes.

For 2008, builders sold 482,000 homes, the weakest results since 1982, when 412,000 homes were sold.

The median price of a new home sold in December was $206,500, a drop of 9.3 percent from a year ago. The median is the point where half the homes sold for more and half for less.

Builders have been forced to cut back production during a prolonged and severe slump in housing that has seen sales and prices plummet. December's sales activity was depressed by the worst financial crisis in seven decades, which has made it harder for potential buyers to get mortgage loans payday loan.

The inventory of unsold new homes stood at a seasonally adjusted 357,000 in December, down 10 percent from November. But at the current sales pace, it would take a more than a year to exhaust the stock.

That inventory bulge is still seen as too high, given that many houses are being dumped onto an already glutted market by a tide of foreclosures.

The sales weakness in December reflected a 28 percent drop in the Northeast and a 20 percent drop in the West. The South and Midwest posted smaller declines of 12 percent and almost 6 percent, respectively.

Earlier this month, a key gauge of homebuilders' confidence sank to a new record low, as the deepening U.S. recession and rising unemployment erode chances for a housing turnaround.

Sales of existing homes, however, posted an unexpected increase last month, as consumers snapped up bargain-basement foreclosures in California and Florida. Sales of existing homes rose 6.5 percent from November's pace, the National Association of Realtors said Monday.

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