UK Financial Investments Limited

Readers of this site will be hearing a lot more about this new “arm’s length, commercial” company “wholly owned by the government” (on behalf of you and me, the taxpayers, who are paying for it).

It has been set up to own our shares in RBS, LLoyds/TSB/HBOS, Northern Rock and Bradford and Bingley. It will own assets worth well in excess of the annual National Income of the country. It will be responsible for a major share of all bank loans and deposits in the UK, and will have large operations overseas as well.

Its success or failure will determine what kind of economic future we will all enjoy. Any sensible person wishes it well, as it is too big for it be comfortable if it fails. In a way what it does is now more important than what most Ministers do, as its reach extends into a major portion of all business and private transactions, and its stance on the availability of credit and cash will determine how long and deep the recssion is going to be. As someone who opposed the nationalisations which underlie its establishment, I now earnestly hope it can do what they say they want it to do, to protect the taxpayer and ease the credit crunch. If it loses around 1% of the assets it takes on it will lose us the annual defence budget. If it loses us around 3% it has lost us a year’s NHS budget. If it is too tough on customers, it could lose us thousands of jobs as businesses go into bankruptcy.

The Treasury is currently advertising for Non Executive Directors. We are told they are to “protect and create value for the taxpayer as shareholder with due regard to the maintenance of financial stability and to act in a way which promotes competition”. That will require very talented people, who understand the complex political and economic forces which will play on this very public leviathan, and who can see a way of balancing the need to make a profit with the requirement to lend more to people and businesses currently in distress. They are looking for people with experience of fund management, retail or wholesale banking. That makes sense, but they will also need to see the wider picture and to appreciate the pressures on this unique holding company to perform in non commercial as well as commmercial ways.

Are the three objectives compatible and possible? Only with great dfficulty. To create more financial stability at the moment requires more to be lent to a range of businesses who will find meeting the interest bills difficult during the worst of the recession. Being fair to competitors means that state supported banks must not offer concessionary lending using access to cheap money from the taxpayer that other banks cannot obtain. The investments in the government portfolio might need more to be written off their balance sheets, but large write offs at the outset coulld be anti competitive, giving the state banks the edge from access to public support to allow large write offs.

I will be commenting on what they do do and what they should do as this story evolves. All those watching the day by day exchange of soundbites in the Westminster village need to keep an eye on this new collosus, as it will in no small measure determine what happens next to our housing market, our small businesses and much of the economy.

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  1. torydeb
    Posted November 30, 2008 at 12:32 pm | Permalink

    That will require very talented people, who understand the complex political and economic forces which will play on this very public leviathan, and who can see a way of balancing the need to make a profit with the requirement to lend more to people and businesses currently in distress. They are looking for people with experience of fund management, retail or wholesale banking.

    It sounds liek you are eminently qualified, Mr. Redwood.
    I hope you will be applying for the vacancy!

  2. tim bull
    Posted November 30, 2008 at 12:54 pm | Permalink

    I'm very glad to see that someone whoappreciates the enormity of this gamble (for that is what it is) is watching.
    I doubt we could say the same of our media so-called 'experts' (Peston, Davies and Robinson) – though if they do understand the extent of this, I doubt we will hear them conveying this in their reports.

    Off-thread, but I have urged my MP (Brian Binley) to consider boycotting the state opening of parliament in response to the arrest of Damian Green – with respect, I would to ask you to consider the same action.

    Reply: I intend to go to kick up a fuss about what has happened.

    • Mrs Smallprint
      Posted November 30, 2008 at 2:34 pm | Permalink

      Good for you John, they must be held to account.

  3. Adam-
    Posted November 30, 2008 at 1:24 pm | Permalink

    I too thought about urging John to apply – then realised he might wouldn't want to be made the scapegoat if these bad investments ended up being… well… bad.

    They'll almost certainly shoe-horn some Labour cronies in there anyway. Nice little sinecure for those on the verge of losing their seats. It's doomed!

  4. APL
    Posted November 30, 2008 at 1:46 pm | Permalink

    Adam: ".. wouldn’t want to be made the scapegoat if these bad investments ended up being… well… bad."

    These investments WILL turn out bad, they were made during a period of extraordinary growth in the world economy*. That growth has been arrested and is now in reverse.

    Just as a rising tide floats all boats, so too does a receding tide drop the water level.

    The real worry for the rest of us is to what extent the government will destroy the UK governments balance sheet to try to turn back the tide? A futile exercise.

    * Growth manufactured by securitizing debt and selling the debt (dressed up as something else ) to a third party. The whole edifice will collapse.

  5. mikestallard
    Posted November 30, 2008 at 6:22 pm | Permalink

    Thank you for mentioning this so very clearly and for promising to keep us informed.
    I am beginning, as a country voter who is interested in my little country and its dangers, to see that I am increasingly being left out of the loop.
    Perhaps that is because the loop is full of stuff which the government is either ashamed, or very worried about.

  6. Bazman
    Posted November 30, 2008 at 9:48 pm | Permalink

    These 'companies' ie Banks. FAILED! Got that? They have now absorbed billions of cash from the taxpayer. They are 'owned' by the taxpayer. They are not private companies anymore except in legal terms. Why should rich people support richer people who are in turn supported by the working poor? Socialist nonsense no less. Sickening.

    • mikestallard
      Posted December 1, 2008 at 6:03 pm | Permalink

      The reason is, actually, that the banks support our working poor. Lots of small companies work round where I live in the Fens. So what happens when their customers do not pay up on time? Who provides the people on our estate with mortgages? We all need cars/buses to buy food, and move around the place. So, if we need pay for this who provides "magic card"?
      The government, to do them justice, can actually see this.
      Without banks, we all go under: this is not British Aerospace or even Arthur Scargill.
      I leave aside the point about being rich. Suffice it to say that there are a LOT of extremely rich socialists and also several VERY rich socialist placemen in charge of socialist departments and qangos.

  7. Steven
    Posted January 5, 2009 at 11:19 pm | Permalink

    Thank you for the interesting blog.

    Do you happen to know if UKFI will actually own the shares in RBS, LloydsTSB/HBOS, Northern Rock and Bradford and Bingley or if it will simply manage them on behalf of the government ? You state in your blog that it will own the shares, which is certainly a reasonable inference from the Treasury press release, but the press release is not clear on this point.

    If UKFI will own the shares then it appears that there will be considerable complications arising from consolidated supervision at the level of UKFI in accordance with the EU Banking Consolidation Directive, as implemented by the FSA in the UK (since UKFI will probably be a parent financial holding company of each of the banks). I think the government would want to avoid these complications.

    If UKFI will not own the shares (so as to avoid these complications), and will simply "manage" the government's interest in the shares, then it will be all the more apparent that the purpose of setting up UKFI is to deflect criticism for losses in value away from the Treasury and onto the directors of UKFI.

    Reply: Good points. I just assumed from the Press Release. I will ask questions.

  8. Steven
    Posted January 26, 2009 at 10:52 am | Permalink

    The latest announcement suggests that UKFI does not own the shares in the banks, but merely manages them:

  • 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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