So the banks could lose us a packet after all

When I was a lonely Parliamentary voice saying do not nationalise big banks because the taxpayer could lose too much money, the government told us they would make money on the transaction. I said lend them as little as you could get away with for as much security as possible and make them cut costs and raise capital.

Now we learn the Treasury thinks the two they bought could lose £77,000,000,000. That’s twice the annual defence budget, more than the education budget. That money would be lost by us, taxpayers, as we own a majority of the shares of the banks that might lose it.

That’s money we cannot afford to lose. With a deficit like the present government one, the last thing we need is banking losses on top. What a disaster if they lose anything like that much. The banks should be made to cut costs and sort their businesses out more quickly to stop that happening.

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30 Comments

  1. Posted July 23, 2009 at 6:29 am | Permalink

    I was here when you said it.
    £77 billion is a lot of money. Do you remember that bloggers were actually talking of trillions or liabilities at the time?
    We are currently, apparently, in debt to the tune of £800 billion already. So how can we carry bankrupt, inefficient banks?

    Big question: you said that we ought to sell off the banks, bit by bit ASAP. Is this what the Conservatives plan to do when, and if, they get power?

  2. Stuart Fairney
    Posted July 23, 2009 at 6:31 am | Permalink

    Wow, nationalised industries losing taxpayers money? Who would have thought it, if only there was some kind of obvious and extensive historical precedent in the 1970’s we could learned from. This is truly the road to ruin.

    I am reminded of a quote from Ayn Rand

    “Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper.”

    Are we perhap seeing the destruction of Sterling, and with it, much of our remaining freedom?

  3. alan jutson
    Posted July 23, 2009 at 6:36 am | Permalink

    John you were applying simple logic to the crisis.

    Get as much cover in assets as you can, for any loan granted, is in fact what the Banks do to their customers.

    Go to the Bank and ask for a business loan, and usually the first thing they want is a note on your property. Reason, you will try hard to do almost anything to pay back the loan rather than loose your house.

    Your suggestion was on exactly the same lines, give them as little as they need to survive, with as much cover as possible to mitigate any possible loss.

    It would have also concentrated their minds on paying bonuses.

    The difference between you and most other MP’s. You have financial and business experience, as opposed to teachers, students, civil servants, and career politicians.

    Thus you usually think like a businessman, they do not, that is why they are more likely to be hoodwinked by consultants, they have no experience from which to draw to compare.

    Let us hope that the situation is not as bad as it seems it will be and that things will improve in the longer term.

    Meanwhile we all suffer, as these losses should be in any calculation made to balance the books when the Budget is forthcoming even if they are to be written off/amortised over a number of years.

  4. Acorn
    Posted July 23, 2009 at 7:24 am | Permalink

    JR, the following is from a Times article:-

    ” — the Treasury accounts revealed that it had spent £24 billion bailing out banks last autumn without parliamentary approval. Lloyds Bank and Royal Bank of Scotland had bad loans guaranteed under the asset protection scheme to stave off a banking meltdown. A Treasury spokesman claimed there was no time to ask MPs; …”

    Do I take it that the “executive” can spend whatever it likes without parliamentary permission. I assumed it needed a “supply” order or something? Or, are these the equivalent of a retrospective planning application?

    http://www.timesonline.co.uk/tol/news/politics/article6721120.ece

  5. Waramess
    Posted July 23, 2009 at 7:37 am | Permalink

    They spend with gay abandon and with no thought for the future because they are resigned to the fact that, for them there is no future.

    For us the future will be rampant inflation and the Conservatives will shoulder the blame unless they start seriously robustly and fearlessly challenging the policies of this government.

    When inflation breaks it will be up to the Conservatives to reverse the effects of QE to the cries from the other side that they are stalling the recovery.

    When inflation takes a hold the other side will blame Conservative policies.

    The socialists have nothing to lose, and they well know it so, another five hundred billion here and another five hundred billion there, whose counting?

  6. Posted July 23, 2009 at 9:32 am | Permalink

    “When I was a lonely Parliamentary voice saying do not nationalise big banks”

    Maybe in Parliament a lonely voice. In the blog world the disaster now overwhelming us was predicted way back in 2001 when that election was bought. As for the banks, their collapse will still arise as they cling to values and structures hopelessly out of date. After their collapse small, local institutions will arise. Places where bankers are known by their customers personally. If Bankers then fail, it is their assets and homes taken over, not their customers. Overly simple? It will happen in the next 15 to 20 years. The pain along the way will be horrendous. It may even affect the upper strata of failed politicians.
    Banking has to return to a point they never lend more than they can afford to lose from profits, not deposits.

    • Posted July 23, 2009 at 10:47 am | Permalink

      All the more reason to plan to ultimately break up the monolithic structures of the likes of RBS and LLoyd-HBOS. Selling off the resultant parts would then be a far easier strategy when it comes to generating cash and profits for the taxpayer as asset strippers have demonstrated for decades past. All it takes is a government with the nous and determination to do so.

    • jean baker
      Posted July 23, 2009 at 12:56 pm | Permalink

      How do you define a ‘failed politician’ ?

    • Adam Collyer
      Posted July 23, 2009 at 6:10 pm | Permalink

      oldrightie, you said “Banking has to return to a point they never lend more than they can afford to lose from profits, not deposits.” Unfortunately that’s what banks do. They take deposits on which they pay interest, they lend the money to others and charge higher interest, and the difference is their profit. If they “only lent from profits” then they would have no need of deposits and they wouldn’t be banks. They would in fact be private equity companies!

      • Waramess
        Posted July 24, 2009 at 7:43 am | Permalink

        The problem with banks lending out depositors money is that they take short term deposits and lend it long term. This leads to an illiquid banking sector whilst the Bank of England clearly does not necessarily provide the liquidity when needed.

        As observed by many in the past, the present system is just one gigantic fraud, and when your bank takes a six month deposit from you it knows at the outset it cannot guarantee repayment at maturity

        We have all been spoon fed to believe that our existing model of banking, whilst operating with smoke and mirrors actually works. Well we can now see how fundamentally unsound it is..

        We have to let the markets re-invent the model without the interferance of politicians who will forever refuse to move from the present comfortable paper based, Bank of England/FSA controlled model.

        • Adam Collyer
          Posted July 25, 2009 at 6:52 am | Permalink

          Waramess, banks taking short term deposits and lending long term is what banks do. This is NOT a new development, and it is NOT a gigantic fraud. Do you want the banks to stop paying interest on deposits and stop providing loans?

          It’s all very well saying you want “the markets to re-invent the model” but the markets invented the current banking model. It would take interference from politicians to stop it and move to some other not-yet-invented model.

          What’s more, it was not the short term retail deposits that led to the credit crunch. The problem was the investments that banks and other institutions made in packaged securities made up of dodgy loans and stamped with an AAA rating by the rating agencies.

          If you want culprits/ scapegoats for the current problems, turn your attention to the credit rating agencies who failed to understand the nature of systemic risk when they awarded rock solid ratings to toxic debts. They were much more at fault than the banks.

        • Waramess
          Posted July 27, 2009 at 8:30 am | Permalink

          Adam,”

          banks taking short term deposits and lending long term is what banks do. This is NOT a new development”

          borrowing money when it is clear at the time of borrowing that you may not have the funds to repay is fraud and the banks commit it in a gigantic way

          “It’s all very well saying you want “the markets to re-invent the model” but the markets invented the current banking model.”

          Not true. The banks in all countries invented the current system with the connivance of their Central Banks and with the implied protection of their Central Banks. Not exactly a market driven solution.

          Some good bed-time reading is The Mystery of Banking by Murray J Rothbard. If you are curious it is to be found on the Mises web-site http://www.mises.org down-loadable and free.

  7. Posted July 23, 2009 at 11:14 am | Permalink

    I have to admit I disagreed here with you first time round thinking there was some truth to the government’s claim they would get it back with interest

  8. Robert K, Oxford
    Posted July 23, 2009 at 11:34 am | Permalink

    Nationalising the banks was socialist insanity. They should have been wound up, with shareholders and bondholders carrying the can. Depositors would have been guaranteed up to the limit of the compensation scheme that was in place. A more fragmented banking sector would have improved competitiveness and made the banks tailor risk and reward more competently. Instead, we have the bizarre situation of the government, which represents the majority shareholder, the taxpayer, refusing to interfere with the running of the banks. Instead, this miserable relic of an administration sits on the sidelines carping about how its passive role is appropriate because to take direct action would be to distort the free market. Pah!
    By the way, can anyone explain why it is that the State is best placed to set capital adequacy ratios for banks? If a company is so incompetent that it can’t figure out a safe level of gearing then it deserves to go out of business. When the commercial property sector collapsed in the late 1980s no-one suggested (rightly) the State should determined particular levels of financial leverage for properrty companies. Investors who enjoyed super returns from high-risk developers and speculators lost their investment when these entities went bust. Similarly, during the dotcom boom no-one suggested (rightly) that the State should somehow bail out the investors in business that imploded. This is how it should be. (And yes, I do see the connnections between the government-inspired credit-fuelled booms in property in the 80s, dotcom in the 90s and subprime in the 00s)
    Rather than increasing banking regulation the government should make it clear to shareholders, bondholders and particularly depositors that they must take responsibility for the running of the businesses they invest in. If you want your money to be safe, invest in Safebank Plc who will charge you a fee for looking after it. Safebank will run on the basis of 100% liquidity so that depositors can be paid out in full at any time. If you want to earn interest on your money then you have to accept the attendant risks – the higher the return the higher the risk. At the Icelandic banks, despositors were earning 7.5%, which was delightful right up to the day they blew up. What a shame, but that’s the risk you take. However, these happy gamblers didn’t lose their shirts because they were bailed out by more prudent citizens who were earning half that rate of return from less risky investments. That isn’t saving the financial system, it’s just plain immoral.
    Of course the government won’t encourage a more prudent, self-regulated, banking system because it needs pliant state-sponsored banks to feed on and distribute the money it prints. Just look at quantitative easing to see that process laid bare. It would also involve short-term economic contraction as the excess credit in the system works its way out. However, if the free market were allowed to create a sound monetary base then all our futures will be much more secure.

    • StevenL
      Posted July 23, 2009 at 11:11 pm | Permalink

      “By the way, can anyone explain why it is that the State is best placed to set capital adequacy ratios for banks?”

      The state is (supposed to be) the representative of the people, people who don’t want 25% unemployment leading to economic meltdown, leading to uncontrollable riots, leading to the lights going out finally leading to having to get the military on the streets AKA civil war.

      If the entire banking system collapsed this could happen. Whilst in a capitalist system it is desirable that businesses who make bad decisions go under, the economic and social consequences of the entire banking system going under dictate that we need effective regulation to stop it from happening.

      There are some countries out there that don’t have any regulation (Somalia springs to mind) and you’re free to go and live there if you hate regulation that much.

      • Robert K, Oxford
        Posted July 24, 2009 at 1:15 pm | Permalink

        When my wife’s aunt was asked for directions once, she paused before answering: “Well, I wouldn’t start from here.” I am not saying that no harm would be done if insolvent banks were wound up. However, the aspect of the current meltdown that I find most striking is that the banking sector has been for a long time one of the most highly regulated of business segments. The question I keep coming back to is how such a collapse has been possible given the existence of internationally recognised capital adequacy requirements (Basel I and II) and highly empowered regulators in every major economy. Your conclusion, if I read it correctly, seems rational enough: that the regulators have failed and thus a better, tougher, regulatory system is required. This is the conclusion that the governments of the UK and US have come to, so you are not alone. But I disagree. First, it is self-evident that our elected representatives are ill-equipped to order businesses how to organise themselves. Second, I believe that the regulatory regime distorted the market by creating a false sense of security in the banking system. The banks suspected, rightly, that their errors would be paid for by the state, and it was this that encouraged their recklessness. Thus the regulatory system is part of the problem, not the solution And the banks haven’t changed. On the front page of the FT last week a US banker was quoted as saying that whatever system emerged from the wreckage it was inevitable that the state would have to stand behind the banks.
        So the question I would pose to you is this: a highly regulated banking system that is relied upon by national governments to create the fiat currencies they need to fund their election promises has fallen apart, threatening to take the world’s economy with it: why would you want to preserve a system that has such destructive potential?

        • StevenL
          Posted July 25, 2009 at 10:11 pm | Permalink

          You can change ‘the system’ but you can’t change human nature. These speculative asset price bubbles have happened throughout history. Just like the participant in a pyramid scheme becomes too irrational to do basic maths, people stupidly thought that we could all get richer to infinity by borrowing ever increasing sums of money and selling our houses to each other. This state of affairs suited the money-lenders’ annual bonuses as much as it did the politicans’ lust for popularity.

          If you remove central banking and allow ‘the free market to create a sound monetary base’ the fundamental flaws in human nature that cause these bouts of irrational behaviour will remain. There is no evidence to suggest that an economy free from central banking, monetary policy and capital adequacy regulation will become free from inflation, recession or even financial crises.

    • Posted July 24, 2009 at 6:54 am | Permalink

      I am a bit doubtful about this. If the banks had been forced simply to close their doors and allow runs (Northern Rock) then, after a month or two, we would have had soup kitchens and people sleeping rough. OK if that is “them” sleeping rough. But, actually it could well be “us”. This happened in the depression when all sorts of respectable people like you and me lost everything suddenly and without warning. Do you really want that? I don’t.

      • Robert K, Oxford
        Posted July 24, 2009 at 1:21 pm | Permalink

        Well, not necessarily. There is a well established mechanism to wind up failed companies called Administration. Northern Rock and the other banks could have been put into this process, under the auspices of the Bank of England. Depositors would have been guaranteed under the comensation scheme that was running at the time (up to £35,000). The business itself would have been broken up and absorbed by other financial services players.

        • alan jutson
          Posted July 25, 2009 at 9:36 am | Permalink

          Robert

          The problem is that business acounts have no such guarantee.

          If a Bank goes bust, then that business which has money deposited within it looses that money, and thus the business is at risk as well.

          Aware of commercial risk etc, etc, but the worry factor was the speed at which these Banks “seemed to get into trouble”

          No I am not in favour of a bottomless pit of money to bail out Banks, probably far better if all deposits were guaranteed by the Bank of England, then they (the Banks) could have gone broke without puulling down the rest of the ecconomy.

          The Bank of England is surely the one to monitor the financial strength of any Bank on a regular basis.

          The FSA has failed the insurance industry, and now has failed Banking, why is it still in existance ?

    • Waramess
      Posted July 24, 2009 at 7:28 am | Permalink

      Couldn’t agree more. Everything you say is spot on.

      Politicians have shown themselves totally incompetent in managing Fiat money. When I was young I used to go buy a leg of lamb for my parents and it cost eight shillings (40p) and the ONLY reason it now costs around £14 pounds is because of the appalling (mis) managment of paper money.

      Inflation, caused by governmental expansion of the money supply, is a wicked and unecessary shift of wealth from the poor to the rich.

      A gold based currency is not a panacea but is at least a good discipline for profligate politicians

      • Robert K, Oxford
        Posted July 24, 2009 at 1:23 pm | Permalink

        Exactly – if our economy was growing successfully then our money surely would be worth more, not less. The State has three ways to take money from its citizens: taxation, borrowing and inflation. De-basing the money supply is its stock in trade.

  9. jean baker
    Posted July 23, 2009 at 12:31 pm | Permalink

    John,

    Money has been made in the transaction – bank bonuses and executives continue to be duly paid.

    The collapse, due to regulation abolition, ‘state’ ownership and mismanagement is wholly beneficial to the EU’s recently reported proposals for Brussels’ regulation diktat and financial control.

    It seems the EU envisages upending London as a ‘finance centre’ amid it’s aims for a Federal State.

  10. Posted July 23, 2009 at 12:43 pm | Permalink

    This wasn’t an accident waiting to happen, it was a disaster that was always going to happen. Few seem to have any idea of the true price that will have to be paid.

  11. Brian Tomkinson
    Posted July 23, 2009 at 5:54 pm | Permalink

    What is clear is that the banks, encouraged by government and regulators, acted totally irresponsibly and lost vast amounts of money. They are now in the process of retrieving those massive losses from those who were prudent, again aided and abetted by the government.

  12. Adrian Peirson
    Posted July 23, 2009 at 6:40 pm | Permalink

    We should have let the Banks fail and govt should havesaid to everyone, all your credit card debts, loans, Mortgages held by these banks are null and void,
    happy shopping.

    I think that would have stimulated the economy far better than Mr Browns plan.

    New banks would have sorung up to handle all the newfound wealth people had.

  13. Ken Hyde
    Posted July 23, 2009 at 6:56 pm | Permalink

    Thank you for your enlightening blog and erudite comments.
    I’m hoping that your party leader and his shadow chancellor are regularly taking time out to talk, listen and learn from you and if not, that they are at least reading your blog.
    I fear that the present conservative soundbites and will o’ the whisp economic policy are going to be found wanting very quickly if and when they form the next government.

    You know, and we know, that whatever it is that needs to be done, to remedy the dire fiscal situation, is going to be very painful indeed. I for one would feel a little more confident in a successful outcome, if you had some input to the formation of that strategy and responsbility for ensuring it is carried out.
    Please keep telling us the truth, so few are at present.

  14. Brian E.
    Posted July 23, 2009 at 7:59 pm | Permalink

    The problem was that the British banks had become “Too big to be allowed to fail”
    Surely, the duty of the government now is to split up the banks into a number of smaller banks which are NOT to big to be allowed to fail. This should also apply to any other companies which might also be considered to big to fail. The monopolies commission should consider likely failure in assessing whether a company is a monopoly.
    No company should be saved by the state unless it provides a service or product which the state considers essential, and where there is no other supplier.
    Knowing that they would not get state help under any circumstances might, hopefully, make Directors take the future of the company more seriously.

  15. Posted July 23, 2009 at 8:04 pm | Permalink

    I note that the Long Gilt Future fell 1.13 today, continuing its losing streak. The government’s irresponsible largesse will destroy this country’s ability raise finance.

  16. Javelin
    Posted July 26, 2009 at 4:40 pm | Permalink

    John, I know this is a little late, but I look after credit derivatives IT at a tier one bank that came out of this crisis well. CDS are basically bankruptcy insurance. As such I think they would be better audited by actuaries rather than accountants. Accountants in my experience tend to work best when the future is well known, actuaries on the otherhand would take a more approriate view as auditors of these products.

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    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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