The Bank reveals trouble ahead

The Bank of England’s Report makes gloomy reading. Why didn’t they foresee more of these problems a year or two ago when they could have taken better evasive action? Today we learn of possible future losses from banks, more difficulties for hedge funds and continuing trouble with derivatives.

If the Bank expects further losses from British based banks, it leads one to ask if the government factored this in properly when promising to buy shares in banks at stated prices. The market prices have fallen below the government price, so the taxpayer is facing an immediate loss of more than £5 billion if and when the deal goes ahead. The share subscriptions are of course subject to shareholder votes, and the HBOS/LLoyds deal has already been renegotiated once.

Some people think that the government is buying very valuable assets at very low prices. Evidence of past nationalisations tells us that all too many nationalised businesses do not run their assets well, and can end up losing substantial sums. Northern Rock lost two thirds of a billion pounds in the first half of this year, and needed another £3 billion of share capital from the taxpayer. This was to support a balance sheet of a mere £50 billion, plus the £50 billion funded off balance sheet. We need to remember that just one of these additional banks has a balance sheet of £1.9 trillion, or 38 times the on balance hseet assets of Northern Rock. That’s a lot of risk for the taxpayer.

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13 Comments

  1. AntiEU
    Posted October 28, 2008 at 1:57 pm | Permalink

    John, just wondering whether you went to the Bruges Group dinner last night, and whether you agree with Lord Tebbit about the need for a referendum on our membership?

    Many of your posts in the last few month have been excellent on the economy, but more needs to be said about the EU as well.

    Reply: Yes of course we need to sort out our relaitonship with EU – there are many blogs on this site from explaining how and why.

    • APL
      Posted October 28, 2008 at 10:31 pm | Permalink

      AntiEU: "but more needs to be said about the EU as well."

      JR: "Yes of course we need to sort out our relaitonship with EU .."

      Note the carefully phrased reply, Mr Redwood doesn't want to sour his relationship with Mr Cameron.
      http://www.telegraph.co.uk/news/newstopics/mandra

      Who we now know is a raving EUrophile.

      Reply: Mr Cameron is no raving Europhile – I voited for him because he made clear he wanted us to get powers back from Brussels, and will fight the new Euro elecitons on a ticket outside the EPP.

  2. Nick
    Posted October 28, 2008 at 4:29 pm | Permalink

    Share Market Price Government Price Size Profit
    LON:HBOS 66.3 113.6 8,500.0 -3,539.2
    LON:RBS 57.3 65.5 15,000.0 -1,877.9
    LON:LLOY 162.1 173.3 4,500.0 -290.8
    TOTAL -5,707.9

    Nearly 6 billion lost on the underwritting.

    • APL
      Posted October 28, 2008 at 9:26 pm | Permalink

      Nick: “Nearly 6 billion lost on the underwritting.”

      Don’t wish to be flippant, but £6billion is about 2/3 of what we pay to the European Union each and every year, that is a total washout too!

      • Nick
        Posted October 29, 2008 at 11:16 am | Permalink

        The EU is lots of decisions. This is just one. 6 billion.

        Now think about government. It is making decisions like this repeatedly, but with hidden costs.

        The underwritting by Brown is a good example because we can clearly see how well he has done. We can mark to market accurately (something that Brown wants for others)

        • APL
          Posted October 29, 2008 at 10:53 pm | Permalink

          Nick: "The EU is lots of decisions. This is just one. 6 billion."

          I thought about that remark for a while, because it wasn't immediately clear to me what you meant.

          So I think you mean, there are lots of ramifications to being in or out of the EU. Well perhaps you are right. I think you are wrong!

          There is only one issue that is worth considering regarding our (the UK) relationship with the EU.

          DO WE GOVERN OURSELVES?

          From that decision, yes, flow lots of other decisions. But those decisions should be made by british people in Parliament on behalf of British people in the United Kingdom.

          At the moment, we have the worst of all worlds. We have Brown prancing around pretending to govern. It will make no difference if Cameron takes his place, nor the cartwheels Cameron chooses to turn, we will still be governed by Brussels. And while that situation exists, everything that goes on at Westminster is a FARCE.

        • Nick
          Posted October 30, 2008 at 11:25 am | Permalink

          OK. Let me explain the lots of decisions bit.

          The decision to underwrite the banks at a certain price is one decision. That price was too high, and Brown has made a huge loss on the trade. One decision, 6 billion lost.

          When it comes to the EU, like any form of government, it involves politicians making lots of decisions on how to affect people's lives. A lot will have the same quality as Brown's underwritting, and cause other people serious harm. They don't care too much about spending other people's money, and they have to take a one size fits all approach.

          You say, "we should govern ourselves". By that you just mean more power to Westminister. There is no difference between the EU and Westminister.

          They both take a one size fits all
          They both make mistakes
          They both impose on others.

          The only solution is referenda. People vote, ideally locally, on what they want with safeguards that the costs are equitably shared. Ideally hypothecated.

          Even the proposers of the Great Repeal bill have it wrong. They want referenda, but haven't even proposed that the voters get the vote on which parts of the Great Repeal bill get repealed (From my quick reading)

          ie. Even they are acting like EU politicians.

          Nick

        • APL
          Posted November 2, 2008 at 10:15 pm | Permalink

          Nick: "You say, “we should govern ourselves”. By that you just mean more power to Westminister.

          Yes, that would be a first step.

          Nick: "There is no difference between the EU and Westminister."

          I accept that they are much the same beast. But I do occasionally have the opportunity to tell the people in Westminister what I think of them – even if it is only once every five years.

          The EU, on the other hand pretends to be democratic, the parliament is trying to get more power, but the real authority, no I mean the real power, lies eslewhere.

          Nick: "They both take a one size fits all, They both make mistakes, They both impose on others."

          Yes, yes, yes. I would forgive them for making mistakes that is a human characteristic.

          Nick: "The only solution is referenda.

          Ok, But all you describe is; the largest mob gets what it wants, the largest mob makes mistakes, the largest mob imposes its will on others.

          Nick: "People vote, ideally locally, on what they want with safeguards that the costs are equitably shared. Ideally hypothecated."

          Despite what I said about mob rule above, I could live with that.

  3. mikestallard
    Posted October 28, 2008 at 5:23 pm | Permalink

    I am getting scared now.
    This government (for the umpteenth time) deals in billions.
    You’re talking trillions.
    The two problems with nationalisation are these:
    1. The people who run them are, as Baroness Thinggy said when she replaced Peter Mandelson in Brussels, “good at people skills”. They know nothing at all about commerce or banking. So they are prey to every change of fashion, to every lobbyist, to every pressure group. They just hope to goodness that nothing goes wrong on their watch and also that they don’t have to make any big decisions. It is like working in the dark. You guess.
    2. The government has lots of calls on their money apart from the banks. For instance, schools’n’ospitals. For instance fighting two wars alongside the Americans. For instance, paying all those desk drivers and their pensions for years to come. And how about paying off all that debt? I fancy that another bank bail out will be way down the list when it comes in a couple of years’ time. Meanwhile, more and more money haemorrages.

  4. Matthew Reynolds
    Posted October 28, 2008 at 4:58 pm | Permalink

    The Monetary Policy Committee should take emergency action & slash interest rates by a third from 4.5% to 3% . Base rates going down by 1.5% now and by another 1% to 2% in time for Christmas will help the economy at a time of dire distress .

    Never mind giving taxpayers money to a load of bankers who along with New Labor caused economic apoplexy – lets cut taxes for the mainstream majority on 20p income tax by raising the basic personal allowance as funded by closing down the Labor crony £100 billion QUANGO state . In Eire small government & lower taxes worked as it did in Reagan's America .

    Falling interest rates , tough spending cuts and lower taxes coupled with real welfare reform and small business deregulation will get us out of recession as will more private money to get the infrastructure right to sustain a recovery and get the jobless figures down . RPI-x is an accurate inflation measure – having that as the MPC's target at 2% will stop future price spirals destroying peoples lives & economic stability .

    Never mind banking mess ups – lets improve things for ordinary folks . This bank bail -out stinks ! Lower interest rates will defrost the credit market which means over taxed people do not need to pay bankers hundreds of billions as a result of the folly of this irresponsible government .

  5. APL
    Posted October 28, 2008 at 7:13 pm | Permalink

    Isn’t it about time somebody on the Tory front benches tabled a vote of (no) confidence in Brown and his administration?

  6. John
    Posted October 28, 2008 at 6:21 pm | Permalink

    The so called Prime Minister is posing on the world stage with his usual "throw money at any problem," policy. Anyone with half a brain can see, it was his policies when Chancellor, that make recovery much harder in this country than in many others. A fantastic opportunity for the opposition to make capital. What do they do!! Cock up the whole thing by going on junkets with Russian tycoons. The Tories seem to be completely at sea. Where is the decisive leadership? Why are they not writing in the popular newspapers exposing bumbling Brown for what he is. Don't tell me that they are frightened they may make things worse by talking down Britain. If something is not done soon we are going to be a third world economy and it will be too late.

  7. Adrian Peirson
    Posted October 29, 2008 at 5:53 am | Permalink

    Isn’t it about time we had our fishing back so we could feed ourselves, our farming restored, our industries rebuilt.
    We always had a Global Economy, we didn’t need to spend £20 Billion Net in the 1700’s to trade with Europe or indeed the World.
    It’s all a Fiddle, 80% is unnacounted for, we are being bled dry.
    Forced onto our knees and into some Police state Socialist construct.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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