Months ago I urged the authorities to override the Bank of England’s MPC and slash interest rates to head off recession. At last the cries are coming from all parts of the spectrum to do just that, months too late.
I have also urged a sharp reduction in UK spending on bank shares and bank nationalisation. You cannot do the one without the other safely. If they press on with both interest rate cuts and with massive spending on bank shares, expect more strain to be taken on the value of sterling and in due course in the government debt markets.
A lower pound means still dearer imports, less spending power and more risk. Why can’t those in authority understand the large numbers they are playing with, and see they are putting too big a burden onto taxpayers? The government has decided to set up a holding company, UK Financial Investments Ltd, to own and manage all the shares in banks and building societies the government is accumulating at enormous expense to the taxpayer.
This conglomerate is designed to give Ministers a buffer between their decisions, and the actions of all the banks in the portfolio. They hope that as the avalanche of letters and emails comes in complaining about repossessions, foreclosures, cancelled loans, higher fees and charges, interest rates well above market rates and reduced company and individual overdrafts, Ministers will be able to claim it is someone else’s fault. The Chairman of UKFI Ltd will need to spend some of his salary on a flak jacket.
Why doesn’t the government just say they will hold the shares direct but leave the management of each bank to get on with it without Ministerial involvement? I guess they have ruled that option out for two reasons. Firstly, they do want to intervene, but need an intermediary or conduit to do it quietly. What better than a well paid quango company acting as the buffer and the prod to the banks? Secondly, they probably reckon the left in their party would not put up with a policy of complete non intervention. What is the point of a nationalised bank, the left would correctly ask, if it does the same things, imposes the same charges, withdraws the same facilities and pays the same bonuses as a private sector bank? UKFI allows some flexibility when answering the left’s criticisms behind closed doors. The plan is to have studied ambiguity, so the left can travel in hope, whilst markets are reassured.
The government has already had to modify three of its proposed interventions. It stated at the time of the original deals with RBS, HBOS and Lloyds that there would be no dividends, no big bonuses and maintained lending at 2007 levels. Now we learn there can be dividends once the Preference chares are repaid – a lower threshold to jump. There can be bonuses to senior people not on the Board – a good reason for some to resign directorships or to refuse them. There seems to be some retreat from the idea of artificially boosting lending to the levels of the boom, when there could be a shortage of takers for new loans on offer.
All this augurs badly for the experiment in nationalised banking. Still there is no proper audit of the risks and liabilities the taxpayer is being asked to take on. Parliament has been presented with no balance sheet, no accountants report, no revaluation of assets, before it makes its possible £37 billion commitment to the famous three, nor its £18 billion commitment to Bradford and Bingley. The most basic things that any private sector buyer would require do not appear to have entered the heads of our Ministers. They behaved recently as if they were in the rush of the first day of the January sales with the chance of mega bargains. They plunged into bank buying with a careless ferocity that will come to haunt them.
We have seen how we as taxpayers have already lost £580 million in half a year on small Northern Rock (c.£100 billion of assets) and had to put an additional £3 billion of equity in. How much could we lose in a full year on the £3 trillion of assets at RBS, Lloyds and HBOS combined and the £150 billion at Northern/Bradford? How big should the write downs be to establish safe values on the taxpayers balance sheet? What assessment has been made of recent and prospective loan loss rates? Can Ministers give us an assurance that all their new banks will be profitable from here, and hold assets that do not have to be written down any more? Maybe the government thinks with a portfolio the profitable ones will offset the loss makers. It would still be wise to undertake some audits and do some sums first.
To those who say there was no alternative, I say fiddlesticks. Of course the government and Bank of England needed to lend money and to make cash available. That is their role in the banking system. The government did not need to put up more capital. That is something the banks could have done for themselves, one way or another. The fact that three did not bother to, shows the terms for the taxpayer were not tough enough on the banks.
Taxpayers will rue the days that the government was so liberal with their money in the banking sector. All these banks had a future without state equity, if the Bank of England did its job as lender of last resort, and if the Regulator worked quietly behind the scenes on a timetable for strengthening their capital. Assurances that the government stood behind the weaker banks was a good idea. Loans were helpful. There was no need to add state equity, which will prove to be a bad idea for taxpayers. Just look at the first half results for Northern Rock – large losses – and get ready for the next results from state banks. The treat is on you.