Where is the liquidity crisis?

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The UK's banks are beginning to be hit by a liquidity crisis. They won't lend to each other because they don't know what debt the others have on each other's balance sheets.

That's not surprising. Look at this list of deals done by offshore lawyers Ogier.

Take one of them - Grampian Funding Limited, whose sponsors they care not to name. Actually, it's HBOS. There is no Grampian Funding Limited in the UK or Guernsey. But there is in Jersey. You can be pretty sure that's the one. Ogier are pretty big in the Jersey legal market.

How much is involved? EUR40,000,000,000. That's £28 billion, near enough. A figure just a little less than the UK spends on public order and safety a year.

Now of course the money isn't really in this company - it's just a conduit, but these things sure cause stress for banks. Take this press release via Reuters about this particular 'conduit', issued two days ago:

British bank HBOS (HBOS.L: Quote, Profile, Research) in August said it would lend money to its Grampian Funding CP programme to repay maturing debt as market pricing was unacceptable. Market participants fear that more banks may be forced to take a similar decision, potentially reducing their appetite to lend elsewhere.

So, let's be clear. British banks are facing a liquidity crisis because no-one trusts the debt they package offshore in opaque funding vehicles with obscure names. What is more, in companies which they usually say they do not own. There is no mention of Grampian Funding Limited in the HBOS plc accounts for 2006. Nor in its annual return to Companies House -which I bought to make sure. This activity is therefore almost certainly 'off balance sheet' in a 'special purpose vehicle' with ownership being recorded as being in a charitable trust in Jersey to ensure it does indeed stay off the parent company accounts. This is normal for such a structure. But no one is fooled - the FT says Grampian is HBOS's. And no doubt it is, whether the accounts say so or not.

And what's the outcome? As the FT says:

Problems in funding so-called conduits - which are used to fund lending to clients and to invest in longer-term bonds backed by mortgages and other debt - have led banks to hoard cash in recent weeks and all but refuse to lend to each other.

That's why we have Northern Rock in a liquidity crisis right now, putting £24 billion of depositor's (that's people like you and me) funds at risk.

Now tell me that offshore does not impose a cost on society.