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Are we one step closer to a government financed toxic bank?

Gordon Brown has today announced another banking bailout with up to £500 billion of taxpayer's money set to be used to insure banks against toxic assets which are literally ripping the industry apart. This is in effect a "bad" bank in all but name as the Royal Bank of Scotland gets ready to transfer £250 billion of toxic assets into the scheme.

In theory the creation of the "bad" bank will allow the UK government to take control of potentially catastrophic toxic assets and allow the UK banking sector to rebuild for the future. However, many of these toxic assets are worthless, or potentially worthless, with little likelihood of a significant increase in value in the short to medium term. This literally leaves UK taxpayers financing another massive investment into an industry which would under normal circumstances be left to its own devices.

The rumour is that the UK government will only instigate the "bad" bank project if it receives written assurances that new credit lines and additional finance will be made available to the UK public. This process appears to have started already with the announcement of a £14 billion mortgage program by Northern Rock, even though the company still owes the UK taxpayer tens of billions of pounds.

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