The government doubles its risky bet

I was the only MP to tell the Commons I thought the share purchases in banks were an expensive mistake and were unlikely to solve the Credit Crunch. I went on to explain how the banks could be kept going with less taxpayer money at less taxpayer risk. The government seemed unaware when it nationalised RBS of how big it was relative to tax revenue, and how little of the banks’ assets were loans to UK people and companies. The government is rightly concerned to see more lending within the UK. Buying more shares in RBS is one of the dearest and clumsiest ways of trying to achieve that.

The whole Conservative party spoke against and voted against the nationalisation of Northern Rock. One of our criticisms was that it meant a large UK mortgage bank would no longer be able to make new loans. There were other ways of keeping the Rock in business, short of taxpayers taking over all the shares. Today we learn that the government now recognises that it was a mistake to stop the Rock lending, so now we have a state owned bank back in the mortgage market. The good news is that will relieve a little of the difficulty facing people who want to buy a home. The bad news is taxpayers have to pay the bill for mistakes with that lending.

The terms of the underwriting and new capital for the banks are what matters. We will not know until we see the small print just how much taxpayer money will be at risk. It may take a little while to find out whether the government has been too generous with the banks , leading to huge taxpayer losses, or very tough, leading to less use of the scheme.

In the meantime we need to know why the government put £20 billion into RBS without due diligence, and without understanding the risks? Have they lost the lot already? Some City forecasts and press reports suggest losses in the second half of 2008 for RBS at around the £20 billion. This morning more authoritative briefing suggests RBS will announce losses of over £6 billion, or one third of the government capital. This will leave some asking if they have written them down enough.

Someone quipped recently that a large modern bank was a public utility attached to a casino. Now we have a government that wants to play the tables of the banking world with large sums of our money. Why don’t they instead concentrate on saving and isolating the UK utility part of these banks, instead of standing behind the whole thing? The derivatives book at RBS is twice the size of the UK loan book. Why do we as taxpayers have to support that? What are the government’s plans for it, as they tighten their hold on this organisation?

The government is now risking huge sums of money. Of course I hope they get the terms of the scheme right and that credit starts to flow again. Even if that were it happen, I will still worry about the high risk and very expensive route they are using to achieve this. They could achieve it for less money and at less risk, with sensible guarantees and loans for the banking businesses that matter directly to the UK economy, without buying shares.

I was pleased to hear George Osborne this morning asking for an independent audit of any dodgy loans the taxpayer is asked to guarantee. We need to avoid a too generous scheme which improves the banks, at the expense of wrecking the government’s finances. At the moment we have an overborrowed government seeking to bail out heavily overextended banks. We need to avoid financial collapse in both by showing careful judgement from here about the balance of risks and the pace of sorting out the past banking problems.

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32 Comments

  1. Acorn
    Posted January 19, 2009 at 7:44 am | Permalink

    It’s official! Redwood is “… an old warhorse of the right … “. (06:40; BBC R4, today). Surely some mistake, you’re not “old”.

  2. Patrick
    Posted January 19, 2009 at 8:05 am | Permalink

    John,

    I don’t want to see an argument over policies – but politically what are your views on bringing Ken Clarke back in? Will this help push the dying administration over the cliff?

    Reply: I trust he will oppose Mr M with vigour and intelligence.

    • Vanessa
      Posted January 20, 2009 at 12:01 am | Permalink

      The trouble is they are both of the same colour – the sun shines out of the EU. If we lose the pound and adopt the euro we will be mincemeat – we might as well swim to another continent!

  3. Ian Jones
    Posted January 19, 2009 at 8:24 am | Permalink

    From reading this blog amongst others it would appear that the survival of these banks is not in this Governments hands just the cost of it failing!

    It sounds like RBS and the other banks have most of their business outside of the UK and therefore they are totally reliant on that country/company/individual not going bust. It matters not what Brown and Darling do, the UK is just a side show! If the debts of the bank are in a foreign currency, we cannot even print our way out! Default is the only way!

    Brown and Darling have to rely on the fed printing money to try to save the US economy from literally collapsing, inflation is a future problem but something they will deal with later as if the ecnoomy is still alive to face inflation then they will have succeeded in preventing the banks collapsing.

    Lets hope Northern Rock can assess who is a good customer from now on! l

  4. david
    Posted January 19, 2009 at 9:07 am | Permalink

    I do hope that in future John you will be clearing all of your posts with Clarke, he won’t be happy wiith any anti-Euro opinions will he.

    Anything on the 3rd runway yet?

    Reply: You should read the statement on EU policy made today by the leadership. I have no need to clear anything with Ken.

  5. Colin D.
    Posted January 19, 2009 at 9:10 am | Permalink

    Unbelievable sums of money are being forked out which may or may not yield results. Of two things we can be sure – much of the money will be wasted and the already well paid bankers will come out of it just fine.
    Much of the historical problem has resulted from a corrupting bonus structure
    Surely one condition should now be attached, namely, banks get no more taxpayers’ money until they agree that no bonuses shall exceed 10% of salary. This condition to apply until such time as all taxpayers’ money is repaid, plus interest.

  6. Dave Williams
    Posted January 19, 2009 at 9:34 am | Permalink

    John,

    The Economy looks like it’s suffering from a form of addiction habit. In the same wy that an addict will keep coming back for more, it seems that no matter how much money the government poors in, more is always going to be needed. Isn’t the answer to stop feeding the habit?

  7. Quentin
    Posted January 19, 2009 at 9:45 am | Permalink

    So we got into this mess by banks ‘factoring’ their loans. Thus they could lend to anyone who was breathing, so many defaulted on the loans because they did not have the finance to repay. But the banks weren’t really worried because someone else copped the default.

    So what is different about this Labour solution?

  8. Lola
    Posted January 19, 2009 at 10:27 am | Permalink

    Serious question Mr Redwood, why don’t we just put RBS into administration? Someone would turn up to buy the UK retail banking, insurance operation and possibly ABN Amro. I think I understand that this would catalyse the losses in its international investment banking operations, and I can see that it might have systemis ramifications? But why not just kill it off?

    Reply: Because of the potential disruption as Lehmans shnowed.

    • Lola
      Posted January 19, 2009 at 3:39 pm | Permalink

      ‘Potential’ disruption? Wouldn’t the experience of Lehman’s have taught the Great and Good how to do it without causing disruption?

    • Tim Skinner
      Posted January 19, 2009 at 5:22 pm | Permalink

      The potential disruption of the banks going bust in a controlled fashion is as nothing to the potential disruption which would be caused by a national default and the destruction of sterling, the possible result of hitching the country’s fortunes to the banks as they charge into the the buffers.

      I suspect the administration process might need to be modified to enable the expeditious handling of one or more clearing banks: and that is something to which Parliament might usefully direct its attention.

      But the risk taxpayers take on if they are forced to underwrite the banks’ losses as they crystallise is immense. Far better to let the losses fall on those around the world who originally took the risk.

      If banks were allowed to go bust, the remnants of the financial system could then pick itself up, purged of the debt and potential iiabilities which dog it now. Failure would not be rewarded, and people could use their capital rationally and profitably instead of having the government take it and pour it into a bottomless pit, which seems to be the way things are going now.

  9. david
    Posted January 19, 2009 at 10:55 am | Permalink

    The Bruges Group comment:-

    Barry Legg, Co-Chairman of the Thatcherite Bruges Group, commented that;
    “This effectively means the end of David Cameron’s promise to hold a referendum on the EU Constitution. The Liberal Democrat and Labour parties are opposed to such a referendum and it is now clear that Mr Cameron does not have the will to carry the necessary legislation through the House of Commons if the Conservative Party were elected to office. Mr Clarke and his supporters within the Conservative Party have been given carte blanch to oppose the policy.

    “The so-called ‘big beast’ has trampled all over Mr Cameron as the price of his return to the Conservative front bench.”

    Do you agree john?

    Reply: No, I don’t. Mr Cameron has made it very clear that our anti Euro anti Lisbon stance, demanding powers back from brusssels, is not up for change.

  10. Adrian Peirson
    Posted January 19, 2009 at 11:22 am | Permalink

    Maybe you should start a British Version of Ron Pauls Campaign for Liberty as he Opposes Corporate Fascist Banker Takeover of the US and their own version of the EU, the North American Union.

    http://www.campaignforliberty.com/

  11. Disillusioned
    Posted January 19, 2009 at 12:04 pm | Permalink

    This bank bailout is heading for disaster. I quite agree with Peter Oborne in this morning’s Mail that we are on the brink of bankruptcy.

    Once you couple these idiotic injections of cash into these failed banks with any further “stimulus spending” or tax cuts that the government are considering then I fear that currency collapse is just around the corner. Thank you Gordon for putting Britain’s finances in such great shape.

  12. Posted January 19, 2009 at 12:22 pm | Permalink

    Is it not a little late for northern Rock to start lending again. Have most of the offices & personell not gone. I would suspect that any key personellwhose job had been assessing lending & who were actually any good would have gone elswhere leaving only those who liked doing nothing for a year.

  13. Mike Strang
    Posted January 19, 2009 at 12:25 pm | Permalink

    I couldn’t agree more!

  14. Adam Collyer
    Posted January 19, 2009 at 1:02 pm | Permalink

    We also need the government to stop pretending all the banks are in a mess. Barclays and HSBC for example are both doing rather well even now. Of course it suits our dear Prime Minister to pretend there is a generalised “banking crisis” so he can be the saviour of them all, and to provide cover for him to increase the State’s role in the banking system.

    Don’t forget he’s actually a Socialist. Socialists have dreamed for decades of taking over the banks. Don’t we as Conservatives need to defend the sound private sector banks?

    • Vanessa
      Posted January 20, 2009 at 12:06 am | Permalink

      The sad thing is that this government is nationalising banks of all things, when they should be nationalising things that matter like railways, energy and such like. But BANKS ????

  15. Gannet
    Posted January 19, 2009 at 1:12 pm | Permalink

    The government has as much chance of making this leaden footed overloaded scheme work effectively as I have have of playing rugger for England and taking the kicks. I am nearly 73 and have dodgy knees.

  16. Jason
    Posted January 19, 2009 at 2:17 pm | Permalink

    As feared, the taxpayer gets robbed yet again…the govt is playing a reckless hand with nothing to back it up but the patience of the UK population to tolerate such an assault that is unheard of in history. When will they realise that this is a losing game and the market will take them to task until we are utterly broken and smashed on the rocks. Look at Ireland, they are at least slashing spending and cutting public sector salaries across the board. At least some attempt to narrow the gap…though there it still won’t be enough likely. Sterling weaker today…not surprising with the GDP growth forecast downgrade from -1% to -2.8% for 2009. This of course throws the public finances further out into the abyss and coupled with the additional losses from this most ridiculous foray can only present a view that the govt is in utter chaos and out of control. Its time to ramp up the criticism…at least there should be some cuts in spending announced to at least show that the govt recognises its grievious errors and that they cannot have it all. Else the markets will take that decision for them and then it will be too late.

  17. Deborah
    Posted January 19, 2009 at 2:24 pm | Permalink

    Maybe we need a new sign at Dover: “Abandon hope all ye who enter here.”
    Mine has pretty much gone already.

    When will the Conservative front bench say something of substance?

  18. Jason
    Posted January 19, 2009 at 2:29 pm | Permalink

    A second point in all of this is the intervention in the market also leaves relatively good banks such as HSBC in an awkward position viz funding…and deposit security. They are clearly at a disadvantage as their debt and deposits are not back by the taxpayer, yet (other than blanket deposit insurance). How long will it be before depositors vote with their feet and cause a crisis for a relatively ‘good’ institution…its is this subsidy of the incompetent by the competent that is most terrible…of course this extends in general to the incompetent reckless borrowers and competent conservative savers – a large transfer of wealth is occuring and few are talking seriously about alternatives.

  19. David
    Posted January 19, 2009 at 2:49 pm | Permalink

    John

    Isn’t it a criminal offence to trade while insolvent or doesn’t this apply to banks?

    I really cannot see why the government thinks that pumping money into an allegedly “insolvent” bank will increase lending. Surely the answer is for the B of E to lend money directly to companies using the back office of say Northern Wreck (we paid enough for it we just as well use it for something).

    have you noticed a common thread in this disaster.
    Royal Bank of Scotland, Bank of Scotland, MP for Edinburgh South West and MP for Kirkaldy and Cowdenbeath.

    Reply: It is against the law to trade whilst insolvent. The Directors of the banks now in taxpayer control would claim they were solvent, and that access to Bank of England money meant they could continue trading.

  20. Brian Tomkinson
    Posted January 19, 2009 at 3:06 pm | Permalink

    I thought that both you and Vince Cable addressed the financial and economic issues in well and in a non-political way on “The World at One” today. Unfortunately, Lord Myners for the government was unable to give me any reassurance that they know what they are doing. Are they trying to kill us all off from extreme stress and anxiety?

  21. mikestallard
    Posted January 19, 2009 at 3:52 pm | Permalink

    Allow me to repeat for the second time again that the Government is the last organisation to deal with finance.
    1. It reacts far too slowly (cp interest rates).
    2. It issues orders and then contradicts them. Northern Rock was told not to let out mortgages, now it is told to issue them. Even worse, the government seems to consist of three agencies (at least) each of which has an equal role in decision making.
    3. This government is dodgy with numbers. So, allow me to ask: How much, exactly, do the banks which it now controls owe in pounds sterling a. in GB. b. abroad? How much do the other banks, which the BBC says may soon be nationalised, actually owe in pounds sterling? Does anyone know? Can anyone know?
    4. Which banks, exactly, are about to be nationalised? Will Nationwide, which is a Building Society, be nationalised too?
    There seem to be three possibilities: a. Brooding genius Mr Brown knows exactly what he is doing and we have not got the economic know how to understand his thought processes: so we just trust and obey. b. The government has absolutely no idea at all what is going on, so it isn’t doing even the things it ought to be doing. It is just hoping that something will turn up. c. It is doing the right things, but too little too late.
    At the moment, I am hovering between c. and b.
    Why I like this blog is that it takes the third point of view and dissects it clearly.

    • Tim Skinner
      Posted January 19, 2009 at 6:26 pm | Permalink

      Mike,

      The government is desperately trying to avoid reality, like someone who carries on spending as before when they have lost their job. So they borrow to make up the difference. Of course, they were borrowing heavily before, so now it’s even worse.

      Most of the opposition seem reluctant to call time too.

      But one day we will have to stop spending more than we earn, and the longer we leave it the more painful the adjustment will be.

      The Bank of England publishes some statistics on bank deposits and liabilities, although not broken down as you asked for.

      At the end of Q3 2008 UK banks had £2146 bn in deposits from UK residents, and had lent £2575 bn to the same.

      http://www.bankofengland.co.uk/statistics/abl/2008/sep/tableb.pdf

      At the same time UK banks had $6201 bn in claims (e.g. loans) outside the UK, with $6980 bn in liabilities (e.g. deposits) abroad.

      http://www.bankofengland.co.uk/statistics/ebb/current/index.htm

      I don’t think the figures above include derivatives liabilities, which run to £trillions.

      Clearly when government bank cash injections and guarantees head towards £1000 bn they represent a significant amount, and a large chunk of GDP. I suspect we are near the limit of what the UK can credibly commit, and are likely to beggar ourselves if actually called on to honour many of the guarantees.

      But whether even £1000 bn is enough to sustain the current banking system is an open question.

      • mikestallard
        Posted January 20, 2009 at 8:33 pm | Permalink

        Thank you for digging up those extremely interesting figures. As I suspected, we are talking trillions: the government thinks in billions.
        I am now going regularly on the Labour website to see what is going on there. They really do seem to think that by putting in a couple of billion here and there, the banks, which think in trillions, will suddenly go back to the way they were before the crash.
        Your figures show, quite clearly, how very wrong they are.

  22. APL
    Posted January 19, 2009 at 5:15 pm | Permalink

    http://www.guardian.co.uk/politics/2009/jan/19/kenneth-clarke-conservatives2

    “‘Delighted’ Ken Clarke returns to Tory frontbench with promise not to oppose Cameron on Europe”

    The promise if any such exists is the most disingenuous statement ever.

    Clarke does not have to oppose Cameron on Europe, because Cameron and Clarke are one on Europe.

    (and more of the same)

    Reply: Not so – Mr Cameron is against the Euro, against Lisbon and in favour of repatriation of powers.

  23. APL
    Posted January 19, 2009 at 5:18 pm | Permalink

    “on Europe”

    The very term ‘on Europe’ illustrates the lie, there is no opposition on ‘Europe’ who could oppose a continent?

    The opposition is the European Union, which both Cameron and Clarke support.

  24. david
    Posted January 19, 2009 at 5:31 pm | Permalink

    Perhaps you’ll agree with Ken on this John?

    19/01/2009
    Clarke’s first hiccup – attacking Maggie?

    Next month Hansard publishes a selection of Commons speeches to mark the centenary of its official reports (ie the daily report of who has said what in the Commons).

    Guess which major political figure chose Geoffrey Howe’s resignation speech as his favourite of all time?

    Yup, Kenneth Clarke decided that the former Chancellor’s savage attack on Margaret Thatcher, which many believe led to her downfall, was the finest oratory of all. Wonder what the Tory backbenches, let alone activists, will think of that

    Paul Waugh in the standard.

  25. A_Mullinder
    Posted January 20, 2009 at 9:40 am | Permalink

    The tax payer is not being robbed. This isn’t the action of a closet communist. And all those here who think we shouldn’t bail out these institutions are very, very wrong.

    We tried letting them go bankrupt between 1929 and 1932, and it led to the Great Depression. We then dabbled with it again a few months ago with Lehman Brothers and the world financial system had a heart attack.

    Can I suggest then, that that leaves non-masochists only two options: bailout or nationalization.

    I think that nationalization is by far the best bet. It punishes the shareholders and management, as well as giving the taxpayer at least some chance of selling the concern on at a profit at some stage in the future

    http://parallaxbrief.wordpress.com/2009/01/20/time-for-rbs-hsbc-and-lloydstsb-hbos-to-become-british-sberbanks/

  26. THE ESSEX BOYS
    Posted January 20, 2009 at 1:14 pm | Permalink

    We have always wondered why, automatically, ‘Global is Good’?

    Doesn’t seem to have done us all much good of late.

    Did it ever or is it a concept that the intelligensia have adopted without considering the benefits of the alternatives?

    We ask ‘cos we just dunno…

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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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