An alternative source of finance

The present financial situation has already produced some novel developments. For example the British Government has acquired at knockdown prices substantial stakes in several major banks. IT STANDS TO GAIN SUBSTANTIALLY WHEN THE SHARES IT HOLDS ARE EVENTUALLY SOLD BACK INTO THE MARKET. Surprisingly a Labour Government, once the proponent almost the inventor of nationalization, is resisting calls from all quarters for outright nationalization of banks.

Her Majesty's Government has also embarked upon credit insurance and may acquire a taste for receiving premiums as well as tax revenue although how it will square this with its historic opposition to hypothecated revenue remains to be seen.

Unheard of probes into the secretive world of banking have been announced together with unusual criticism of bankers for recklessness and irresponsibility. There has been the revelation of excesses amongst some of the big names, particularly in investment banking, creating credit to unheard of multipliers of the capital assets they actually hold. It has also emerged, by implication, that the domestic banking industry is not big enough to finance the economy. It is apparently embarrassed by the withdrawal from London of foreign banks to tend their own domestic patch.

The apparent inability of viable businesses to obtain working capital calls for a solution. At the same time the power of the financial authorities to decree that certain depositors and investors shall receive virtually no return on their capital( an unacceptable situation) calls for somewhere else for them to place at least some of their capital where it will earn a commercial return.

I suggest that listed companies whose accounts are in the public domain should be empowered (if they are not already) to issue fixed term, fixed interest, non transferable bonds. The purchase of such bonds would be an investment decision with the risk involved. Such bond holders however should have a priority claim on the assets of the company not less advantageous than that accorded to banks in the event of failure.

Naturally the interest that companies would have to offer for such finance would reflect the standing of the company and public perception of its viability in the medium term. That would be entirely healthy.

Availability of this alternative finance might well alert banks to the possibility of permanent loss of business with beneficial results in the short term which is what is required.

For commercial concerns to be financed at least in part by their customers could generate a valuable brand loyalty. It would also create an additional body of people vigilant in their own interest.

Very practical and immediate reasons dictate that companies and investors should experiment with this solution. Dire necessity demands that any legal obstacles be smartly removed. In the circumstances of the time perhaps the Bank of England should underwrite these issues. In the long term there could be no objection to other financial institutions undertaking this role.

This could well be a positive outcome from a sad situation. Given their behaviour during the past decade it is high time that the dominance of the big banks was challenged.

NOTE An e-mail request to the Bank of England to know what legal obstacles if any stand in the way has gone unanswered for most of a working day.(07 02 2009).