Throwing more of our money away on banks

The new deal for RBS is pure monetary madness.

Taxpayers already own most of the bank,and have lost a packet on their shares. Now taxpayers are being made to guarantee £325 billion of bad and doubtful debts as well!

Now the government has decided to underwrite the losses in the future. RBS has to accept the first £19.5 billion of any loss, and pay £6.5 billion for the insurance. Taxpayers guarantee to pay 90% of the losses above the threshold.

So does that provide an incentive for the management to sort things out in a way which might limit taxpayer losses? Wait til you hear the rest. Taxpayers have to put up £19.5 billion of new capital in the form of B shares, and make available an addfitonal £6 billiion of equity if needed.

In other words, the so called tough deal on insurance is almost completely underwritten by new taxpayer capital; Taxpayers are offering the full amount of the losses RBS is said to “bear” itself, and £6 billion to pay the insurance premium.

I wish I could get an insurance like that on the value of my house. I would willingly pay 2% of the value of my property to the government in these markets, if they would guarantee to pay any losses on its value above a threshold. It would be especially attractive if they would give me the money to pay the premium, and give me the money to pay the first part of the loss which they refused to insure! There don’t seem to be any private sector insurers around who will do that.

Once again the government has been taken to the cleaners by the bankers. They have been out negotiated at every stage.

If you ask, what would I do instead, the answer is easy. I would not give RBS another penny. I would make them sort their own mess out. There is no immediate need to put more money in and every need to make them raise cash and cut costs for themseleves. There is plenty of scope to do both. This deal is a dreadful waste of public money. It delays the necessary action to sort the bank out by taking some of the pressure off.

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9 Comments

  1. AndyC
    Posted February 27, 2009 at 9:43 am | Permalink

    Hi, all this stuff over Fred Goodwin’s pension… the government clearly seems to be obsessing over the inessential here. I hold no brief for the man, but £650k is a margin of error sum compared to the amount we appear to be spending on RBS and the rest.

    Is it because they want to keep the real story off the front pages (successfully it seems), or are they so genuinely overwhelmed by events that they no longer know what might be important? Bit of both I guess.

    • THE ESSEX BOYS
      Posted February 27, 2009 at 11:50 am | Permalink

      Andy – we understand where you’re coming from but this issue crystalises much deep resentment from the ordinary voter and is more important than just the figures – as huge as they are to most of us. We believe therefore that Goodwin’s arrangements (doesn’t that Sir Fred title simply grate?) must be pursued in a businesslike, unemotional way.

      Vince Cable just came up with such a thought.
      Begin paying the man the maximum allowable under the Pension Protection Scheme for bankrupt companies (£27,000 pa) and let Goodwin take the lead by initiating legal action.
      Apart from the common sense fairness of this proposal it would be interesting to see whether the courts regard the obligations of these bankrupt banks in the same way as those of the many companies going bust up and down the land.
      In other words if the cupboard is bare all those who were fed from it must go hungry!

      The likely outcome is that a compromise arrangement would be stuck between lawyers (not in a hurry we would hope) thereby saving the taxpayer millions!

      • alan jutson
        Posted February 28, 2009 at 10:31 am | Permalink

        Problem is the Bank did not go bust, and Lawers fees would probably cost a lot more than you would save.

        All very infortunate.

        The sad fact is a hard nosed businessman (failed or not) has run rings around a Government official who was clearly out of their depth as so many are.

  2. Ian Jones
    Posted February 27, 2009 at 10:00 am | Permalink

    I think its worse than that. Its like crashing your car into a tree and then getting out and calling the insurance company to ARRANGE insurance for the full value of the car pre hitting the tree!!!

    What sort of assets do the Govt think that RBS and Lloyds will put into the pot, the ones they know will lose money!!!!

    Utter madness, don’t the Govt have to have a vote on this? I mean who gave them permission to spend hundreds of billions on SCOTTISH banks……….

  3. Waramess
    Posted February 27, 2009 at 10:10 am | Permalink

    Spot on.

    And don’t give them any more under any circumstances.

    The governments agenda is to ensure that losses are not crystalised, but to change the ownership from the shareholders to the taxpayer to achieve this is a complete nonsense.

    We have no idea where the bottom of this pit is and to date we are looking only at current losses. Later we will experience the full effect of mortgage losses and the resulting corporate losses and certainly huge losses from overseas operations.

    Why buy this bottomless pit?

  4. Robert
    Posted February 27, 2009 at 10:21 am | Permalink

    Spot on.
    Brown and Darling have taken leave of their senses.

  5. Michael Taylor
    Posted February 27, 2009 at 2:44 pm | Permalink

    Yes, under current policies, we have all the economic pain of liquidating these banks, and none of the market clearance benefits.

    Madness, stupidity and ignorance.

  6. mike stallard
    Posted February 27, 2009 at 9:18 pm | Permalink

    Meanwhile, the National Debt is spiralling and, apparently, according to the Times, if the Labour party win the next election, there will even have to be some cuts in government expenditure…… Meanwhile, on Labour List, the letters between “Fred the Shred” and his boss about his pension are given in full to show their “arrogance”.
    Yvette Cooper on her interview was defensive and seemed not to be able to see the terrible consequences of all this incontinence or even know about it happening.
    When the government pretends (believes?) that everything in the garden is lovely when they are heading for a terrible disaster, surely we ought to do something?
    But what?

  7. Posted February 28, 2009 at 5:57 am | Permalink

    At some stage we have to ask “what’s in it for us?”

    Either RBS can trade its way out of trouble or it can’t. If it can, there would seem to be no reason for this latest transfer of risk to the taxpayer. If it can’t, the plug should be pulled now rather than increasing the degree to which the taxpayer takes a hit.

    I wonder whether Mr Brown and his spokesman, Mr Darling, are just so scared of RBS going under that they are prepared to throw-in limitless sums. We are not now far away from them taking 100% ownership and then throwing in yet more money to keep it going, just like the nationalised industries of old.

    How can they possibly think there will be a return on this money? This is getting very scary.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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