Waiting for Obama’s packages

On both sides of the Atlantic we are waiting for the next plans to save the banks and reflate the economies. The US market has rallied a little in expectation of agreement on the Obama reflationary package, as the Senate debates the balance between tax cuts and spending increases, and its overall magnitude. In addition the money markets actions are beginning to have some effect. In the UK we are awaiting the detail on the revised banking package, to see how much insurance is going to be offered for bad loans held by banks, and what it will cost..

The authorities both sides of the Atlantic are committing large sums to the tasks of assisting the banks and reflating the economy. There have been differences of view on how to do it, but each side has now been influenced by the other – or by similar ideas – to the point where there are common strands to the actions. The US has injected some new capital into banks, the UK is now looking at purchasing or underwriting bad assets. The US did nationalise a couple of mortgage banks, as did the UK. The only difference has been the UK’s decision to take a substantial stake in RBS as well. This difference could turn out to be important, as it has placed a large sum of taxpayers money at risk in the UK and posed big management questions for the government over how far should it intervene and what should it try to do with its large bank?

The publication of Barclays results in the UK highlighted the contrast between their performance in 2008 and that of RBS. Barclays announced a profit of £6.1 billion, with write offs at a manageable level, where RBS is suggesting total write offs and losses of £28 billion. This leads people to ask how could two large UK registered global banks end up with such a different performance.

There are two possible explanations. The first is that RBS was badly managed, complicated by their decisions to acquire a large number of overseas assets near the top of the market, whilst Barclays has been better managed. The second is that RBS’s new management have decided to take a very pessimistic view of their banks assets at the beginning of their regime, to make recovery easier. I would hope that auditors and the government as owners would ensure the figures are realistic and in line with current understanding of potential bank losses, so this rules this explanation out.

The most likely explanation is that RBS was less well managed, and took on too much in its acquisitions which have cost its shareholders dear. It remains surprising that the government did not undertake proper investigations of their likely 2008 results before finalising the purchase of the shares. I remain to be convinced that things were so desperate they needed to finalise everything in a single week-end. It subsequently took a long time to get round to buying the shares and putting the money in, time which could have been used for due diligence followed by changing the terms of the deal in the light of the discoveries. That would have protected the taxpayer interest more.

As Barclays points out in their 2008 results, it was the Regulator’s demand for higher capital requirements at such a sensitive time which has led to Barclays not paying a dividend. That call to increase the demands at that worst of all possible times was the background to the panic share buying by the government. It did not help the banks re-establish confidence, and it left the taxpayer stranded with some shares which soon dropped in price.

Could it work from here? Yes it could. That will depend less on the reflationary package of the President, and more on the actions of the main world authorities in money and bond markets. On both sides of the Atlantic there have been signs of second thoughts in bond markets about just how much governments need to raise, with some fall in Treasury bond prices. It should urge western governments to greater caution in their spending, so they do not try the patience of the markets too far and cause long term interest rates to rise too much.

Last night Yvette Cooper, Chief Secretary to the Treasury, put pay to any idea that the government would remain at arms length to RBS and leave them to make their own decisions. She told us they had people going over all the detail of the bonuses and remuneration of the staff of the bank. It’s a strange way to avoid intervening. It’s also an ineffective way to stop bonus payments. All they had to do was to say “No”, at least to all the non contractual ones. Instead of a simple policy, she told us we will be paying the salaries of more people second guessing the management view of pay and bonuses at RBS. Wouldn’t it have been cheaper and fairer just to give them a bonus policy, now we own it?

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

16 Comments

  1. Brian Tomkinson
    Posted February 10, 2009 at 9:44 am | Permalink

    Barclays has announced profits of £6.1 billion but can we be sure that they and their auditors have prudently written down all the “toxic debt” on their books?

    What do you make of Mrs Balls’s husband’s view that this is the worst financial crisis for a hundred years? Didn’t Darling tell us in November that we would be coming out of it in the second half of this year?

  2. Ian Jones
    Posted February 10, 2009 at 10:41 am | Permalink

    It was always my understanding that investors purchased Govt debt when times were bad as a safe haven.

    If the Govt succeeds in getting the economy moving by spending huge amounts it will actually result in investors moving out of Govt debt into shares. This will mean the Govt cannot sell the required debt to finance the spending without causing interest rates to rise which would obviously choke off the recovery!!! Bit of a paradox!

    Regarding the recent fall in debt prices (rise in yields) are we seeing the first signs of recovery or is it the first signs of selling before the forthcoming oversupply causes the price to crash? Either way Govt spending on the never never will not result on recovery, just lots of stop, start!

    My money is on the Germans, they know their economics!!

    • mike stallard
      Posted February 10, 2009 at 11:27 pm | Permalink

      Here in Australia, where they seem to have entered the recession with a surplus, there are few signs of economic panic. I went into Sydney yesterday, and also read the local newspapers. All the news, of course, is about the terrible death toll in Melbourne. The economy gets little or no mention. So much for Mr Brown’s “World Crash”.

  3. Kit
    Posted February 10, 2009 at 12:09 pm | Permalink

    “Regulator’s demand for higher capital requirement”

    FSA’s demand for higher capital requirement was a deliberate attempt by the government to force the banks into nationalization. Thankfully Barclays and HSBC resisted but at a huge cost to their shareholders.

  4. Acorn
    Posted February 10, 2009 at 12:14 pm | Permalink

    Some good stuff on Reason TV at the moment. Have a look at the three videos under “rough cut video blog”.

    http://reason.tv/

    Then “dissatisfaction guaranteed”; how to make 70% RoE by repackaging government guaranteed loans.

    http://www.reason.com/news/show/131412.html

  5. no one
    Posted February 10, 2009 at 12:15 pm | Permalink
  6. Waramess
    Posted February 10, 2009 at 1:54 pm | Permalink

    Please tell me to wake up. This is all a dream, isn’t it? This is all madness. Obama wants to spend another 350 billion and if that doesn’t work (which it won’t) then he will want to spend more (and that won’t work either).

    This side of the pond they all want to spend more and if that doesn’t work, they too will want to spend more (which won’t work either)

    They want to curtail banks bonuses and have the bankers say sorry to the very people who caused the problem in the first place.

    And the chief typist (sorry secretary) to the treasury is going through the banks’ employment contracts with “a fine tooth-comb.

    Come on guys tell me this is a Monty Python sketch and I will join in the laughing

  7. Adrian Peirson
    Posted February 10, 2009 at 4:51 pm | Permalink
  8. Geoff
    Posted February 10, 2009 at 7:06 pm | Permalink

    Labour is not working and has not since May 1997

    http://www.statistics.gov.uk/pdfdir/trd0209.pdf

  9. Graham Eardley
    Posted February 10, 2009 at 9:22 pm | Permalink

    John you say that “Wouldn’t it have been cheaper and fairer just to give them a bonus policy, now we own it?”

    This is too much like common sense for this Labour government to comprehend. In fact when have we had anything like a coherent policy from the government on the banking crisis ! All we seem to have is a series on “knee jerk” reactions. Brought about by panic.

    The dithering over nationalisation of Northern Rock which was one example.
    Followed by the dithering over the bank bail outs another.

  10. Adam Collyer
    Posted February 10, 2009 at 10:54 pm | Permalink

    The IMF is apparently threatening not to provide the second tranche of its loan to Ukraine, because the Ukrainian government is refusing to cut its deficit from 3% of GDP to 2%. So at least at the IMF sanity seems to be prevailing.

    Wonder what they’d make of Brown’s 8%. Maybe soon we’ll find out.

  11. mike stallard
    Posted February 10, 2009 at 11:37 pm | Permalink

    Yvette Cooper has a good academic background, yes. But just look at her c.v.before going into parliament!
    “She began her career as an economics researcher to the shadow Chancellor of the Exchequer John Smith MP in 1990 before becoming a domestic policy specialist, working in Arkansas, for the United States Democratic Party presidential candidate Bill Clinton in 1992. Later in the year she became a policy advisor to the new Shadow Chief Secretary to The Treasury (Harriet Harman MP) who was deputy to the new Shadow Chancellor of the Exchequer Gordon Brown MP and in 1994 found herself working as a research associate for the Centre for Economic Performance. In 1995 she became the economic correspondent with The Independent until her election to Westminster.” (Wikipedia)
    I do not think this would get her a job as the head of any national or international bank. Yet, here she is controlling the RBS!
    Meanwhile, we learn (above) that parliament is being kept completely in the dark about the whole thing.
    Not very encouraging at all.

    PS. I admire our host very much for forecasting deflation and explaining how it worked long before it happened. He also firmly resisted inflation which didn’t. Now, he forecasts inflation when everyone else is still talking about deflation. And that is worrying.

    [edit]

  12. Adrian Peirson
    Posted February 10, 2009 at 11:44 pm | Permalink

    …….article 61 is a security clause, a clause to allow the people to enter into lawful rebellion against tyranny, miss governance and most importantly slavery, rebellion and not revolution for article 61 allows for ‘NO’ violence to be offered against anyone at any time, this is why it was called the security clause.

    Article 61; Lawful Rebellion is a ‘LAWFUL ACTION’ under the common law and can be invoked by anyone who resides in this country. This article does not give precedence to where you were born it gives’s precedence to where you live and if you live in this country then you can use it. This article is for all the people without exception and allows for lawfully;

    1. To hinder the people of miss governance in anyway – strictly without the use of violence.

    Imagine if our country was a ‘car’. Who would be the engine? And what happens to the car if the engine stops working?

    Everything in this country is operated by the people of this country, everything is in ‘OUR’ control; every mode of transport, every mode of communication, every watt of electricity and every mode of essential service, EVERYTHING is in the control of the people and everything can ‘STOP’ at the will of the people.

    Who really has control of this country; the government or the people?

    We the working people of this country are treated like a unwanted necessity by those who misgovern us, they don’t want us, but they need us and at a whim we could apply a strangle hold upon this country, the likes that has never been seen before and it can be done completely lawfully…..

    http://www.tpuc.org/node/389

  13. TomTom
    Posted February 11, 2009 at 7:01 am | Permalink

    Surely Barclays and RBS differ in that one of them bagged ABN-AMRO ? The USA has also nationalised an insurer – AIG – which seems to be propping up a lot of European banks and presumably PFI deals in the UK.

    It would appear there was an appetite for risk because it was not priced or assessed – typical of speculative mania – seemingly governments advised by bankers have now moved to the gaming tables to stake gamblers to win it all back on the roulette wheel.

    In another year we shall se Brown, Balls & Co. Purveyors of Dodgy Deals to Taxpayers – move off into the sunlit uplands of Non-Executive Sinecures ….

  14. Matthew Reynolds
    Posted February 11, 2009 at 7:28 pm | Permalink

    My solution is to get the Bank of England to print £22 billion and spend the money on £1,000 rebate cheques for basic rate taxpayers. They would kick in from April 2009 onwards to get the economy going while from 2010-11 onwards public spending could be frozen until the budget was balanced. You could get away with a big stimulus if there was a plan to reduce public debt in the longer term. The VAT rate could be 22.5% from April 2010 to help reduce public borrowing.

    A hike in consumption taxation and cuts in the £100 billion p/a of waste as highlighted by the Tax Payers Alliance could prevent the crazy tax hikes on those with incomes exceeding £100,000 p/a or £150,000 p/a not to mention the unfair NI hike that hits job creation and those on low incomes.

    The VAT cut should be knocked on the head with the basic tax rate cut by 2p to 18p instead. Taxing consumption is wiser than income as the Thatcher experience of the 1980’s proved.

    As we also learned during that glorious decade building up the VAT revenue base & controlling public spending means that vital direct taxation changes can be brought in. I do hope that George Osborne learns from the great Tory Peers Lords Howe & Lawson….

  15. Adrian Peirson
    Posted February 13, 2009 at 3:36 am | Permalink

    Ron Paul’s Campaign for Liberty.
    Plenty of financial information from a US perspective much of which applies here, afetr all it;s the same Bankers that own us all.

    http://www.youtube.com/user/campaignforliberty

  • 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.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page