Another bad day for the banks, the government and the universe

The dreadful results from RBS more than confirmed the analysts forecasts of huge losses that I have been running on this site for sometime. As feared, RBS has lost more than the £20 billion of capital the government put in just a few weeks ago. It opens up the question again Why on earth didn’t the government make some sensible enquiries when they were buying the shares, and insist on proper disclosure of the losses at that stage? It is not good enough for them to say they had to take the action quickly. Even if you accept that debatable proposition, they could have announced they were going to the aid of the bank, and settled the terms once they had made proper enquiries into the health of its accounts.

Today we learnt that the government is planning a big insurance scheme for bad debts owned by the banks.

We also learnt that the government does not know how many bad loans will be covered by this scheme, how much they will charge the banks for the insurance or how much money the taxpayer will have at risk. They have not even settled whether the scheme applies to overseas loans by overseas banks owned by UK banks, or to financial instruments banks own other than loans.

In response to a question I put to him the Chancellor spelt out his problem clearly. If the scheme does not apply to the foreign activities of the UK bank Groups it cannot tackle enough of the bad debts to resolve the problem. If it does apply to them, UK taxpayers will be doubly cross if and when we lose money, as we are subsidising foreign businesses and competitors. The issue of whether gurantees apply to the investment banking activiities of our large banks cannot be ducked either. RBS for example has almost twice as much at risk in derivatives as it does in loans to UK people and companies.

The plunge in UK bank share prices just confirms how much UK taxpayers have lost so far from the mistaken share buying policy.

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27 Comments

  1. alan jutson
    Posted January 19, 2009 at 5:49 pm | Permalink

    John

    RBS was perhaps not as open as should have been with shareholders either, when asking for more private funds in its two rights issues.

    RBS probably do not know how much they are in debt either, all rather scary.

    What have the auditors been doing, they were probably paid millions to go through the Accounts and make a factual statement about the finances.

    FSA also responsible for letting it go on.

    Sorry to be boring, but it would seem that millions have simply been lost and know one had a clue. Or did they, and kept quiet hoping it would go away.

  2. Tim Skinner
    Posted January 19, 2009 at 5:51 pm | Permalink

    Surely insolvent banks must be allowed to fail, however painful?

    That is the only way to be shot of the bad bits, plus it conserves capital, and is the route which allows a fresh start by fresh people.

    If insolvent banks are not allowed to fail the taxpayers’ liabilities are effectively unlimited, and the financial industry will have captured the entire country, pending a final collapse.

    Meanwhile we are currently wasting huge amounts of capital supporting banks which need to fail.

  3. Brian Tomkinson
    Posted January 19, 2009 at 6:08 pm | Permalink

    Listening to Darling on the radio and in the Commons it is clear that the government is not in control of events. Their actions look like ill-thought out panic measures. Each announcement he makes creates more uncertainty and fear. Surely we cannot go on like this. We need an immediate general election and pray that you and your colleagues know how to save us all from the ruin which is inevitable with Brown and Labour in charge.

  4. rugfish
    Posted January 19, 2009 at 6:12 pm | Permalink

    According to the media, it does apply to risks on overseas investments.
    For the taxpayers to be informed they have the liability for propping up the world whilst no reciprocal arrangement applies to anything here is criminally incompetent of the government.

    We are covering WORLD DEBT !
    This place will end up like the third world through Brown’s pathetic handling of the economy.

    • Vanessa
      Posted January 19, 2009 at 11:52 pm | Permalink

      I agree with you, it really is criminal that the British taxpayer is being asked to prop up the world.

      Why didn’t the government ask where all our money had gone the first time they bailed them out, before jumping in with more money. If the patient is bleeding to death, you do not plough in with a blood transfusion until you stop the bleeding – why are they SO stupid? Just because it is not their money they think it grows on trees and is limitless!

      God help this country. Will it still be here this time next year?

  5. Acorn
    Posted January 19, 2009 at 6:15 pm | Permalink

    I think the government knew the position of RBS when they jumped in. They had to be seen to be doing something; they are politicians first and foremost. RBS is a busted flush and everybody knows it. Best just to give it to HSBC to sort out with the credit default guarantees that the government has now committed on behalf of the taxpayer.

    If I were running HSBC, I would be jumping ship tomorrow. Time to go back to where its owners are and where the money is that is backing it.

  6. Adam-
    Posted January 19, 2009 at 8:11 pm | Permalink

    Is it not now looking likely that we would have been better off just guranteeing the retail deposits and letting the rest fail?

    Surely this extra money would be better injected into newly established banks with fresh balance sheets?

  7. TomTom
    Posted January 19, 2009 at 8:29 pm | Permalink

    Why didn’t they keep the short-selling ban or even suspend bank shares altogether ? The stakes are now so high that trading should be restricted when 70% GDP is pledged to underwrite banking assets. The nation cannot engage in a secondary financing of LBOs and other corporate bonds.

    Ministers revelled in globalisation rhetoric but object when British banks have credit extended in Australia or Russia now underwritten by the UK taxpayer pledging twice the entire UK tax revenues.

    This is criminally insane

  8. David b
    Posted January 19, 2009 at 9:13 pm | Permalink

    Surely its time to call a halt to this? If the banks are bust we might as well let them go. The UK mortgages could be sold to the highest bidder – Indeed many people might be able to pay them off if they are discounted. Especially if mortgages were available from the handfull of building societies that are still well run, and which could recieve the orderly deposits we take out of the bust banks. The presumably profitable insurance company and usurer credit card operations would surely find buyers. So what are we talking? A few months to get a new system up and running?

    How much would it cost the taxpayers to cover the deposit guarantees? I suspect given the capital ratios it would cost us a dam#ed sight less than what baldrick is exposing us to now.

    Let them go bust. These bailouts are just good money being flung after bad.

  9. Lola
    Posted January 19, 2009 at 9:15 pm | Permalink

    Look, I still cannot see whilst an orderly administration is not the answer. The UK retail banking is not necesarily in trouble, and certainly in nowhere near the trouble the investment banking and overseas banking divisions are. Even excepting the potential UK housing market losses.

  10. Rob
    Posted January 19, 2009 at 9:17 pm | Permalink

    I think I’ve got the answer to downturn. Keep the banks afloat – somehow…….

    Then when every major economy has committed to increased taxes for the next 40 years we hit them with Tax competition. Suddenly we become the only place to locate jobs/finance etc.

    Despite similar levels of comparable debt Ireland have already given the game away by not following the fiscal nonsense. Their experience of reducing corporate tax in the last 10 years has served them well.

    If we don’t follow suit we will become part of the World Tax cartel, where the statists don’t have to wory about tax competition. The city of London will be no more and the “city of Dublin” will take its place.

    Even if we commit to the fiscal stimulus now it is not as huge a package as some countries. We could out compete them.

    It all depends whether you are a free market globalist or a corporatist/collectivist globalisation nut.

  11. Chrysippus
    Posted January 19, 2009 at 9:37 pm | Permalink

    Letter to the Bank.

    Dear Sirs,

    In view of what seems to be happening internationally with banks at
    the moment, I was wondering if you could advise me correctly.

    If one of my cheques is returned marked “insufficient funds,” how do I
    know whether that refers to me, or to you?

    Respectfully,

  12. Lee Floyd
    Posted January 19, 2009 at 9:38 pm | Permalink

    Being no financial expert myself, just a commmon or garden punter, I find myself sitting slack jawed with amazement as yet another ‘scheme’ is unveiled by Gordon and Alastair. Not understanding any of it of course doesn’t help, so I look to pundits who may be able to interpret the activities of our betters, who may be able to explain it all and send me to bed at night secure that my bank isn’t going to go t*ts up, and my money with it. What is going on? Is all the Government activity recently as dodgy as I suspect it is?? Should I emigrate?

  13. adam
    Posted January 19, 2009 at 10:01 pm | Permalink

    this is the end then.
    The nation insolvent for no good reason
    Cameron taking an axe to parliament, beginning the final slippery slope.
    the end of the end

    I thought we were bailing banks out to stop a collapse, not to make ourselves liable pay for it

  14. skooch
    Posted January 19, 2009 at 11:15 pm | Permalink

    John –

    Isn’t it a fact that the minute government gets involved, publicly, openly, with ‘propping things up’ – the markets sense blood, and are out to destroy?

    In the whole of my adult life, I’ve seen this happen – most particularly, movements prior to our ERM exit.

    I remember listening, recently, to the chairman of a large, quoted company, early-ish on in this ‘do’, maybe only 18mths ago – who said that, in the Eighties, during the South-American crisis (was that the Eighties?), if anyone/any banker had actually been rude enough to point out, publically, just how bad the situation was, there would have been runs, and therefore terrible troubles, for the banks.

    But they didn’t. And it didn’t happen.

    He concluded by saying, that it took them nearly 10 years to sort their balance sheets out. I never knew about that. But then I never worried about it either, not knowing about it.

    It seems to me, whilst knowing now (in theory at least) that the banking system relies entirely on confidence to conduct its transactions, it may be an interesting debate (if only from my uneducated housewife’s point of view) as to whether or not public knowledge/transparency/openess is a good thing; or whether it behoves those in charge to adopt an opposite stance in some circumstances. And how, if can be argued that case, do we account for ‘openness’, in the bigger, democratic, picture?

    It’s a funny one.

  15. Peter Brown
    Posted January 19, 2009 at 11:20 pm | Permalink

    Dear Mr Redwood,

    I think that the rot set in with the ‘rescue’ of Northern Rock. Making an example of them early in the piece might have started a run on other banks to an extent, but ameliorated what we are now seeing.

    It is inevitable that several more banks will fail. The sooner that we take this on the chin and get on with things, the better.

    You know what it’s like when you take the Tube, and they say it’s a good service before you set off and at the station, and then you have to wait fifteen minutes, and then the train’s too busy so you wait for the nest one, and that’s packed, so you wait for the next one? Why don’t they tell the truth?

    Own up. This is a depression, or at least a five-year recession. There are no unions to bust now (although there are a couple I wouldn’t mind seeing smouldering, no big bangs, nothing extraordinary to pull out of the wizard’s sleeve. You, as Conservatives, need to rebuild the country faster than others rebuild theirs, so that we come out of the blocks looking more like Hong Kong than Harare.

    A grand scheme of Conservative rebuilding over the next two elections will never come to fruition as long as there is a fomenting underclass which will always vote against you . During your next term you will need to move significant numbers away from the underclass (with which Labour has so generously endowed you through profligate benefits and immigration) and turn them into the aspiring working class, in a backdrop of embattled pensioners, a middle class finding itself suddenly deprived of work and a smirking opposition tumescent with incentives and benefits for all.

    I wish you luck. You will need it, and so will we.

  16. Ian Jones
    Posted January 19, 2009 at 11:39 pm | Permalink

    I dont think the banks really get it. I hear that Citigroup compensation and bonuses were higher in 2008 than in 2007 yet they took hundreds of billions from the US Government.

    Time the retail side of the banks was split from the investment side especially in RBS etc. I am getting nervous with my money in their accounts…..

  17. StevenL
    Posted January 19, 2009 at 11:55 pm | Permalink

    Folk might want to check out RBS’s balance sheet (if they haven’t already):

    http://finance.yahoo.com/q/bs?s=RBS&annual

    Assets as of 31/12/2007: £3,795,906,599,000
    Liabilities as of 31/12/2007: £3,689,973,801,000

    2008 accounts are due to be filed at Companies House on 31/01/2009, then we can all have a look what we are on the hook for.

    Our GDP in Q3 2008 was £319,000,000,000.

    Darth Vadera seems to have decided to go “all in” with our economy on a very dodgy hand, hoping the river card will save us.

    Reply: These figures are larger than the ones on on the official RBS site, which are around £2 trillion

    • Acorn
      Posted January 20, 2009 at 8:38 am | Permalink

      Steven, accounts are in US dollars.

    • alan jutson
      Posted January 20, 2009 at 8:43 am | Permalink

      Is this part of the problem.
      Interpretaion of figures so large that even a small difference can mean/show large actual gains or losses.
      Does anyone know the true and real picture.

    • StevenL
      Posted January 21, 2009 at 12:08 am | Permalink

      My apologies to everyone for the dodgy info! Still these are some mighty big numbers. I can’t help thinking that we could threaten to wind up this almighty mess instead of guarantee it and see if we can frighten wealthy foreigners into paying to prop it up instead.

      Kind of like financial nuclear weapons!

  18. TomTom
    Posted January 20, 2009 at 7:28 am | Permalink

    The UK mortgages could be sold to the highest bidder

    but where are they ? They have been securitised through offshore vehicles like Granite and sold as bonds around the world. How do you intend to track down every mortgage ? They are not held by the lender they have been securitised and traded – that is the problem.

    The banking crisis is caused by corporate bonds and wild lending on buyouts like £11 billion to Boots plc, or letting Vodafone buy Mannesmann, or BHS strip £1 billion in cash from its balance sheet. Overleverage at every level of the financial system gives an inverted pyramid – just taking stones out of the base makes it worse, taking stones out at the top has little effect

  19. Johnny Norfolk
    Posted January 20, 2009 at 7:37 am | Permalink

    To me it all shows how little idea Labour have on anything.
    Everything they touch ends up a mess.
    They blunder on an on and from what I can see are just making matters worse.
    They think they can control all events.

    Labour only know how to spend not earn, and that is where the problem lies.

    When will they start to cut back on spending on government.

    • rugfish
      Posted January 20, 2009 at 8:11 am | Permalink

      “Control” being the object word.
      A government cannot “control” financial markets in a free market and all his efforts will do if he continues, is to make us all suckers of the same free marketeers which caused the crisis. He should never have taken oversight from the Bank of England but he’ll never admit it. Without this level of competent general oversight, the free market becomes nothing short of a charter for marketeers to commit piracy against our nation.

  20. rugfish
    Posted January 20, 2009 at 8:05 am | Permalink

    Gordon Brown is behaving like a drunken sailor with our money. The cabinet are like 15 men on a dead man’s chest. Brown’s first incompetence of detaching the Bank of England from oversight of “the banks”, defies all sanity. “Insuring World Debt” without a reciprocal global agreement, is either utter madness or sheer lunacy, or it is criminal negligence and a waste of taxpayers money which WE, not him, nor the banks, nor the investors, will have to pay back when it fails. ( Not IF, but When it fails ). In no other walk of life would a government promise to pay the bearer of a dud note. He must let banks merge or sink or become nationalised WITHOUT those debts. He must shore up and guarantee only UK debts.
    A National Bank could pick and choose its portfolio whereas an open insurance policy for the world, cannot.

    He’s committed two wrongs and two wrongs never made a right.
    He HAS to be ousted before he sucks the UK bottle dry.

    It is obvious he has no purpose being there and he should be (defeated? -ed) by the electorate at a general Election forthwith before all our assets are completely worthless.

    • rugfish
      Posted January 20, 2009 at 9:51 am | Permalink

      Yes, of course I meant defeated Mr Redwood.
      ‘Arrested’ was purely a slip of the tongue and must have been a fraudulent slip.

  21. Adrian Peirson
    Posted January 20, 2009 at 1:48 pm | Permalink

    we are being mugged, in order for the Elites of the world to have total control over us, they must first take away our wealth, that is what Brown is doing, Enslaving us and our children to the elites, all part of the New world Order which is basically Neofuedalism.
    this is also why they have destroyed our fishing and farming. so we cannot feed ourselves but must rely on large Multinationals for the very basics of life, this is also why we are prohibited from hunting, why you now need a license to own a fishing rod.

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    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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