We now know that the strategy behind Northern Rock was to wind much of it up at taxpayers expense. Their mortgage outstanding lending is falling rapidly.The government probably wants to have something left for the General Election, and is telling North Eastern MPs and their constituents that the nationalised company will still make payments to the North East in the meantime. I have never understood why they wanted to manage this run down, and have always felt it would cost taxpayers substantial sums. I do not expect to see our £3 billion of share capital back.
RBS is a very different matter. The Labour party rightly sees this as a going concern. There is now an argument about what to do with it.
In the capitalist corner are those who say the government should help the bank get back into healthy profit as quickly as possible, and then sell the shares on to the private sector, making a profit for taxpayers. They favour changing the terms of the current offer, to make it easier for RBS management to pay for the capital, and easier for them to make good profits. They accept the City argument that 12% interest on the Prefs is too high in the current climate.They believe the goverment should not appoint Directors, and should stay at arms length.
In the socialist corner, they take a very different view. They see nationalisation as an opportunity to change banking, curbing the excesses of the private sector. They favour government Directors. They want the government to limit salaries and bonuses for senior people, urge increasing certain kinds of lending that they think are needed in the economy and propose lower fees, charges and interest rates for preferred account holders and borrowers like people on low incomes and small businesses. They favour banking with a conscience or a social purpose.
Both groups share the heroic assumption that the nationalised banks have been through the worst. They are discussing how to share or spend the proceeds of success following cheap purchase of the shares.
The market is offering a different warning. RBS shares trade well below the government’s proposed purchase price. If the market thought the government capitalists were right and would prevail, investors would be buying the shares at least up to the goverment price so they could enjoy the ride and profit alongside taxpayers. Either they think the government will require too many social policies from its bank, or they fear that the underlying financial position of the bank is worse than the government optimists believe.
What could go wrong for the goverment capitalists? The banks have admitted substantial losses on mortgage lending, but house prices are still falling and mortgage lending experience could deteriorate further. As more lose their jobs so more people will find it difficult to pay the mortgage. The banks have not yet written much off their corporate lending. This winter will see a big deterioration in the financial position of many companies. More bank write offs here are likely. The security banks have taken for many loans, based on property or shares, is being undermined by the day. Any prudent buyer of bank shares would do a lot of due diligence on loan books before commitment, and would apply a discount to the current assets to allow for more hostile conditions ahead. The government has done none of this.
Nor should we assume the capitalists in the government will have it all their own way. Whilst PM and Chancellor are mainly in the capitalist camp along with other Treasury Ministers, they are politicians wanting to do well in an election. They may seek behind the scenes to get the nationalised banks to lend more, to go easy on certain fees and charges, and take certain social matters into account. There will be limits to how much pain these politicians will take in the case of defending well paid bankers saying No to too many people and businesses.
The more I look at it, the more I conclude the government in its own political interest, let alone the country’s economic interest, should renegotiate its package of bank support. It needs to stand behind the main banks, but it does not need to buy such large shareholdigs at the proposed prices. The risks are simply too great. The banking crisis did not end with the announcement of government cash for shares. It simply entered a new and worrying phase, where the taxpayer is too much on risk, and the government faces nasty political dilemmas aout how to run these huge organisations. It is cheaper and less risky to support banks by short term loans and guarantees for which the banks pay a fee or charge.
November 21, 2008
Today the Chancellor has announced that he will put pressure on banks to lend to small businesses who are struggling with the downturn.
Surely with the banks experiencing such difficult financial conditions where raising reserves to comply with new guidelines is hard enough, forcing them to lend more than they can currently sustain is going to put even more pressure on our banking system.
Secondly lending to struggling businesses may not be enough to save many of them from going under, this will lead to many more defaults on loan payments further undermining a banks balance sheet.
Would you agree that government interference is forcing the banks to do again the very things that caused the problem in the first place?
Reply:Yes, that is the danger.
November 21, 2008
What an almighty mess. Alistair Darling is sounding more and more like a socialist with every day that passes, and I fear that doing the best for the future of banking in this country is rapidly going to make way for short term electoral boosts to set up the possibility of a spring 2009 election.
http://www.lettersfromatory.com
November 22, 2008
LFAT: "Alistair Darling is sounding more and more like a socialist with every day that passes .."
That would be because he is a socialist. The odd think is there are apparently Tories around that thought he was something other.
November 21, 2008
I understand that Granite, the Rock's vehicle to issue loan notes (i.e. how they raised the money to lend in the first place) has given notice of a "non-asset trigger event" If I cut through the accountant speak, it seems to mean they can't pay the bills, and if they can't pay the money back they themselves borrowed, then clearly no profits can be made for shareholders, namely us.
So right now, your prediction that the £3B has gone west, seems as ever, right on the mark.
November 21, 2008
Stuart, I spotted this one as well and the Credit Default Swaps (CDS) market saw it coming. You will see on the following link that the premium for insuring holders of our sovereign debt has gone up this week. It now costs about twice as much to insure Gordo & Co than it does Germany or Japan. But, we are still cheaper than Italy, whoopee!
It will not be long before buying HSBC paper will be more secure than buying UK Treasury paper – IOUs that is.
Perhaps we should sub-contract both our Treasury and the Bank of England to HSBC to manage for us. ( bp = basis point = 0.01 percent point)
http://www.markit.com/information/news/commentary…
November 21, 2008
Thank you for a really succinct summary which even I can understand.
Surely, any organisation as deeply divided as you say Labour are over the Banks cannot do a thorough job?
Socialists, who want a better society and capitalists, who want to make money to fill the rapidly increasing gap between income and expenditure, cannot agree on how to run their business?
What happens when people get thrown out of their homes by Northern Rock? What happens when the "fat cat bankers" cause a rumpus on the front pages of all the papers like they did this week?
You are so right! A poor woman from the government was on at lunchtime trying to bridge the gap between reality and her socialism.
Meanwhile, full steam ahead for government expenditure! What was is? 50,000 more non-jobs this month according to today's Telegraph?
November 22, 2008
As a Socialist, I support bank nationalisation and was suggesting it on this site in August (as an extreme case,never expecting it would happen and under a Republican presidency in the U.S as well)
But there is certainly a case for saying, as Mr Redwood does, that the government is paying too much for bank shares. Patrick Hoskings in The Times is saying today that all British High St banks are,in fact, bust.This being the case, you would n't expect to pay more than the pound or so they are asking to take on the whole of the stricken Woolworths.
In my view the Gov should announce it is going to introduce a Land value Tax as soon as land values start going up again.This would cause the property market to bottom out,as people hanging onto property in hopes of an upswing would realise the game is up and sell, allowing the banks to resume lending into a property market at very much lower average house prices,making their reserves stretch further and avoiding the nightmare of another house bubble forming,then collapsing, destroying the banks' investments and wealth generally.Advances to businesses would also be cheaper and more plentiful minus the element of inflated property prices,although rates on empty commercial property have done LVT's job for it in this regard ,though not as thoroughly , as LVT would stop property owners knocking down buildings to avoid business rates.