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99 on the one hand the fate of german landesbanken

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quality of assets and guarantees backing the special purpose vehicles.
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99 On the one hand, the fate of German Landesbanken illustrates the reach of global capital markets. The U.S. and the U.K. housing booms were fueled – and put at risk – by not just their domestic financial sectors but also foreign ones. On the other hand, it illustrates the risk of government institutions’ veering away from their original mission, and placing vast amounts of tax-payer money at risk due to the combination of subsidies and guarantees. The conditions at the Spanish Cajas – savings banks that were originally aimed at creating the habit of thrift amongst the very poor but that evolved out of this charitable objective to become private commercial banks – has not been much different. The Cajas fueled the credit and construction boom in Spain, with their lending standards’ highlighting the poor governance of government-owned financial institutions and the collective risk from them even when each is individually small. In fact, due to competition from local Cajas, the large global Spanish banks struggled somewhat unsuccessfully to get their hands into the housing cake -- something that turned out to be a boon in disguise. Large Spanish banks such as Santander entered the crisis with robust balance sheets and have in fact been the purchasers of last resort in the financial sector of other countries. These failed government enterprises – Fannie and Freddie, the Landesbanken, the Cajas, and the like, all of which were set up with an initial government mission, followed by a “mission creep” and eventually the mission going awry -- are now being addressed or overhauled (or, at least, are being brought under greater scrutiny). The emerging risk, however, is that the resolution of other failed private institutions with massive government recapitalization or outright nationalization is creating a new vintage of government-owned financial firms. In the U.K. Northern Rock, one of the top five mortgage lenders, was heavily exposed to U.S. subprime mortgages. Not being able to roll over its short-term funding, it received a liquidity lifeline from the Bank of England in September 2007, and promptly suffered the first bank run in the U.K. in 150 years. It collapsed and was nationalized in February 2008. In January 2010, the bank was split into a “bad bank,” which contains the assets, and a “good bank,” which continues the banking activities. The U.K. Treasury also infused £37 billion ($64 billion) of new capital into the Royal Bank of Scotland Group plc, Lloyds TSB, and HBOS plc, to avert a financial sector collapse in October 2008. The government provided more loan guarantees to the banking system in January 2009 in an effort to restart personal and business lending. After experiencing massive losses, the government’s stake in RBS was raised to 84% in
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100 November 2009. The question of when the government will exit these stakes is constantly under debate.
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