The LLoyds disaster and too few banks, too many losses

Far from saving the world, this government’s banking policy has been a disaster. First they bungled their monetary and regulatory policy allowing the uncontrolled boom. Then they helped bankrupt some of the leading players. Now we have too few banks, too little credit and too many losses from nationalised banks they should never have bought. It is difficult to think of an error they did not make.

Today we hear that LLoyds in just six months has had to write off another £13,400,000,000 of bad debts from its loan book. Why didn’t the government insist on proper write offs when they were negotiating purchase of the shares in the first place? As much of this came from HBOS, why on earth did they want to encourage one of the worst mergers in the UK corporate history, and make a relatively good bank, LLoyds, a state pensioner as well? The taxpayer ends up with a huge shareholding in a heavily loss making bank. We have to pay for the losses, and are currently being invited to take over all the worst debts as well!

The Vince Cable/Alastair Darling strategy of owning these mega loss makers was always crazy. It is bad news for taxpayers and bad news for bank customers as well. There was an alternative. They should have blocked the LLoyds/HBOS merger, so LLoyds needed no government help. They should have offered minimum necessary support as loans to HBOS to make them sort themselves out and ensure their shareholders and counterparties took the hit, whilst protecting the smaller retail depositor. That would have been a much much cheaper solution.

Today we have politicians playing politics with banks. The government likes talking about banks, because they have found in some bankers people thought to be greedier and less reliable than politicians, so they make perfect whipping boys. The present policy is based on two public strands. The first is to use the FSA to insist on the banks lending huge sums to the government so it can carry on its crazy over spending with little visiible signs of credit distress. They call this raising the liquidity of banks, liquidity which has to be held in the form of loans to the government. This means there is little money left to lend to anyone else. Then the government can grandstand by blaming the banks for failing to go the aid of small business and first time home buyers, allowing them the moral luxury of taking the popular line.

The private strands behind this absurd policy are even more damaging. The taxpayer is taking the hit for past bank mistakes twice over. First, there are the visible and large losses the naitonalised banks are now revealing. These undermine the share values of what we have bought, and the government needs to act as guarantor that whatever they lose the taxpayer will bail them out. Second, the taxpayer is being asked to take over massive bad debts so that in due course the government can sell what remains back to the private sector claiming some kind of “success”

I am glad that more people are now coming round to my long held view that there is insufficient competition in the UK banking market, partly because there are too few banks. The government has made it worse by flagging through the mega mergers that made RBS and LLoyds the huge creatures they are today. We have been too poorly served for too long. At the time of the Conservative Economic Policy Review I argued that even then before the LLoyds/HBOS merger and disappearance of an independent Bradford and Bingley and Alliance and Leicester we had too little banking choice. We called in the review for new kinds of banks in the UK to offer better service to small business.

It is vital for the future health of the UK economy that the next government is pledged to return these banks to the private sector as quickly as possible, split up so they create more banks. I also hope other new players will come in from the retail and other worlds. We need more and better banks quickly. Current levels of fees, charges and bank imposed interest rates are too high and credit is scarce for reasonable new borrowers. That is the direct result of the manic banking policies followed in recent years.

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39 Comments

  1. Simon D
    Posted August 5, 2009 at 6:56 am | Permalink

    The other factor is customer service. The party took place at Head Office. Meanwhile, in the sticks (the provincial high street) customer service standards fell. The service standards offered to the average customer are unimpressive. High Street customer contact staff are not well paid and I have never seen anybody over 30 working at my own high street branch in West London.

    Some of this has been mitigated by technology but, occasionally, you have no option but to enter your branch and talk to the staff. Often, it is not an inspiring experience because they clearly lack proper training.

    Bank bosses are strong on creating millionaires at head office and weak on delivering a decent service to the public.

    Roll on the day when each of the supermarkets has a bank in every store. Bank bosses need to feel the cool wind of competition.

    • Paul
      Posted August 5, 2009 at 2:34 pm | Permalink

      Simon

      You are so right about this, my bank are atrocious and they are now cutting staff making it even worse.

  2. no one
    Posted August 5, 2009 at 8:30 am | Permalink

    another industry where much of the back office has been shipped to the 3rd world, and much of the work in the UK is done by 3rd world nationals here on inter company transfer visas and then subcontracted to the bank, and poor customer satisfaction and results due to this

    needs splitting up the same as BT needs splitting up and so much more

    and fair use of 3rd world staff, not just used to keep european wages down

  3. Acorn
    Posted August 5, 2009 at 8:32 am | Permalink

    You have to feel sorry for poor old Merv King at the BoE. His balance sheet has increased by about £165 billion in three years. I can’t wait to see how he is going to get shut of all the crap he has bought in the name of the taxpayer, duff banks, government IOUs, guarantees on crap derivatives that will be worth pennies in the pound … etc, … etc.

    Still, the pound is going up! Who is buying all these pounds I wonder. Brits selling overseas assets and bringing the cash home to pay debts off? Ruskies buying property in the UK? Foreigners just buying anything priced in pounds sterling, even government IOUs?

    Redwoodians at their wits end, may want to peruse the following, just in case; know what I mean.

    http://www.britishexpat.com/Expat-World.170.0.html

    • Stuart Fairney
      Posted August 5, 2009 at 2:36 pm | Permalink

      Americans and others holding dollars dumping it in the mistaken belief we are not headed down the same rat-hole methinks

  4. Brian Tomkinson
    Posted August 5, 2009 at 9:28 am | Permalink

    There was no proper due diligence carried out when Lloyds, encouraged by Brown, took over HBOS. This, together with subsequent ill-thought out schemes by this dreadful government, has resulted in the taxpayer being saddled with these enormous liabilities. This was more than just sloppy thinking this was wilful negligence. Losing the next election will be insufficient punishment for Brown; the man deserves to be behind bars.

  5. DominicJ
    Posted August 5, 2009 at 9:38 am | Permalink

    ” I also hope other new players will come in from the retail and other worlds. ”

    For what possible reason would anyone open a UK bank?

    A sector in which the rules are rewritten on a whim and a fag packet, ownership is iron clad, until the government deems it isnt, success is met with abuse and a demand to buy more government debt.

    I’d rather buy farmland in Cuba.

    • Stuart Fairney
      Posted August 5, 2009 at 2:39 pm | Permalink

      Well said indeed. How the Beeboids in particular sought to atttack Barclays for actaully making money and paying taxes rather than demanding money from the government was sickening to watch.

      Never mind, speed up the printing presses. Someone gave me a twenty million dollar Zimbabwe note last year, what’s the betting we see the £100 and £500 note within three years?

      • DominicJ
        Posted August 6, 2009 at 7:13 am | Permalink

        My Fixed rate ends Aug 2012, so I’d rather like £500’s to be going round like £5’s by then.
        I had been hoping to pay off my mortgage with a piece of moldy cheese, but if its 6 months wages, I suppose I cant complain.

        • Stuart Fairney
          Posted August 6, 2009 at 10:43 am | Permalink

          Indeed, individuals with debts in an inflationary environment benefit because the fixed cash value of the debt decreases and so debt repayment becomes easier.

          The government can no longer effectively service the debt they have run up (failed gilt auctions, forcing banks to lend to the government and printing money in the form of QE to redeem bonds is the evidence along with the doubling in the cost of insuring UK sovereign debt).

          So you may have stumbled upon the crypto-strategy to get out of the hole. Of course anyone who has saved or behaved as people should to have a successfdul economy will be destroyed just as the middle classes were in Weimar Germany.

          That didn’t really end well.

          Set aside the national humiliation and complete inability to travel abroad or buy foreign assets as the currency collapses.

  6. Mark M
    Posted August 5, 2009 at 10:28 am | Permalink

    There’s a fairly good way of telling whether the government’s response was the correct one.

    Compare actual growth figures to the forecast figures (independent and government). We saw last quarter that GDP shrank 0.8%, far worse than the 0%-0.3% shrink that was forecast. Before that we had the biggest shrinking of the economy in decades, and again noone dared to forecast that things might be that bad.

    When your actions are not working as well as you or others expect, it is a sure fire sign that you’re doing the wrong thing.

  7. Demetrius
    Posted August 5, 2009 at 10:38 am | Permalink

    At the risk of being immodest, on Friday 13th March, perhaps exactly the right kind of date, I predicted this. It comes packed with a simple explanation of systemic risk and how not to deal with it. You are quite right, it is a disaster, and the long term effect could be to cripple any government economic policy for years to come.

    • Waramess
      Posted August 5, 2009 at 12:45 pm | Permalink

      Well, where do we find it?

      • Demetrius
        Posted August 5, 2009 at 2:17 pm | Permalink

        Click on Demetrius, this should bring up thecynicaltendency.blogspot.com then click on March and scroll down to Systemic Risk And The Circus, Friday 13 March, the Lloyds/HBOS bit comes towards the end.

        • Waramess
          Posted August 6, 2009 at 8:35 am | Permalink

          I have read it Dimitris but it is about jugglers and not about banks.

          You might just as well try to apply the juggling scenario to a major corporate bankruptcy where all the trade creditors lose their money and so cannot pay their own creditors and so on and so forth; but it does not happen that way.

          There are many huge international bankruptcies happening as we speak and they are often not even hitting the news. Look for example at the once mighty Northern Telecom of Canada.

          There has never been a case of systemic bankruptcy to my knowledge in the history of time; just a twinkle in the eye of central bankers; but please enlighten me if you can find an example

          There is in my view absolutely no reason we should not allow and indeed prepare for the orderly liquidation of a bank and no reason why a systemic failure should result.

          Remember that on each occasion a bank failure has occured in the UK, the markets knew about it at least a year in advance; and the markets are the same people who lend to these banks.

        • Waramess
          Posted August 6, 2009 at 8:47 am | Permalink

          Dimitris, I apologise, you did indeed predict that the Lloyds HBOS merger would not succeed. I lost the thread.

  8. Sir Norfolk Passmore
    Posted August 5, 2009 at 12:46 pm | Permalink

    Contrary to your assertion, Cable opposed the Lloyds/HBOS merger for the reasons you indicate – that once the bail-out was proposed, going ahead just meant Lloyds could acquire HBOS cheaply AND call on funds. He said so at the time (rather than six months later):

    http://www.yorkshirepost.co.uk/opinion/Vince-Cable-We-should-think.4674729.jp

    reply: Mr Cable consistently proposed nationalisation and oodles of taxpayers money for these rotten banks.

  9. alan jutson
    Posted August 5, 2009 at 1:17 pm | Permalink

    I sense you are angry again John, and with good reason.

    We seem to be in the grip of numpties, where they see no possible reaction to their own actions and decisions.

    It is a problem we have had with many Governments over the years, but this one is by far the worst.

    I have trouble thinking of one positive step they have taken in the last 12 years, which has made life better for the majority of citizens of this Country.

    More Tax
    More Regulation
    More Government Control
    More Government Debt
    More Paperwork
    More confusing Laws
    More power to Europe
    Less control of Immigration
    Less Freedom and freedom of speech
    Less encouragement to be financially independent.

    In short one of the most spied upon nations in the World, not by our enemies, but by our own Government and Police Departments.

    In short more like a Communist State of old, than the Democracy we claim to be.

  10. DBC Reed
    Posted August 5, 2009 at 2:07 pm | Permalink

    Sorry to be a Johnny one note but I cannot see why there should be any competition at all in banking. Internal competition for bonuses and inter-bank competition has created some incredibly dud business plus derivatives. A boringly uniform system has a lot going for it.

    • APL
      Posted August 6, 2009 at 12:29 am | Permalink

      DBC Reed: “A boringly uniform system has a lot going for it.”

      No it hasn’t.

      What we have had is essentially a monoculture in finance for the last twelve years. The repulsive Blair and the obnoxious Brown couldn’t go further out of their way to smooze the bankers. A nod and a wink is how this rotten crew operated and that was just the politicians.

      We are mow suffering not from the fruits of competition, nor the fruits of under-regulation but the fruits of Socialism, AKA fascism, AKA Totalitarianism^.

      * Despite the protestations of the lefty luvvies, Communism, Socialism and Fascism are functionally identical. Suppression of individuality and fostering of a stinking foetid State approved uniformity.

  11. TomTom
    Posted August 5, 2009 at 4:03 pm | Permalink

    The City rather than take its lumps on HBOS shares being worthless jumped into bed with Victor Blank and agreed to this stupid merger….thus destroying the 6th safest bank in the world.

    It shows just how stupid fund managers are that they
    destroyed a bank which could have picked up bits of HBOS and run a good bank – just as it was denied the right to buy Northern Rock a year earlier – and Britain would then have had a solid domestic bank….it currently does not.

    It has a Spanish bank dominant, a ‘British-Arab’ bank heavily into Wall Street, and Hong Kong banks soaring away like Standard Chartered and HSBC

  12. Mike Stallard
    Posted August 5, 2009 at 4:35 pm | Permalink

    The Labour Tale is that the Genius of No 10 saved the entire banking system when it was about to crash. He brilliantly nationalised the banks, bringing a lot of potential earnings to really assist the economy. By quiet diplomacy, he saved Lloyds and other banks, from gong bankrupt. This saved the British from melt-down. He also protected the small investors from losing their all, because, as a Labour Man through and through, he really cares for the poor.

    I have just been trawling Labour List. One person alone seems to have swallowed this stuff and the thread that followed his remarks was not that encouraging from a Labour point of view…..
    The really remarkable thing is that the economy doesn’t seem to raise that much interest.

    Meanwhile, I think it can be said that if just one bank …. goes under, we cannot possibly pay out all the investors. So how can we still guarantee all the banks in England? I really do not know if we are also underwriting stuff like RBS in Bangkok, Thailand, or Barclays, Cayman Is. Are we?

    Reply: Yes we underwrite the nationalsied banks

  13. TCD
    Posted August 5, 2009 at 5:56 pm | Permalink

    An excellent article as usual! I found it particularly enlightening to hear that the ‘liquidity’ of the banks is in fact in the form of government loans. Much security that provides! More competition and smaller banks is obviously the answer. I hope you can persuade Osborne to implement this.

  14. Adrian Peirson
    Posted August 5, 2009 at 8:04 pm | Permalink

    The reason why most people do not understand what is going on is because they believe all enemies of Britain are foreigners and a hostile attack on us would involve Bombs and Bullets, neither of which is true in this case.

    This country and its people are deliberately being brought to our Knees.

  15. Brian E.
    Posted August 5, 2009 at 8:44 pm | Permalink

    I have never understood why it is necessary to pay huge bonuses in the financial industry to “attract and retain staff”. No other major industry does this. As an engineer I never heard of any company paying out bonuses like this – the best that might have happened was that you had some particular expertise and you might have been able to move to a company requiring that expertise and get a small salary increase. The company that one was leaving wouldn’t care less – their attitude would be the same as if the employee had dropped dead – “well we’ll have to get on with the project using his deputy”.
    Why should it be so different in the financial world?

    • DominicJ
      Posted August 6, 2009 at 7:22 am | Permalink

      “I have never understood why it is necessary to pay huge bonuses in the financial industry to “attract and retain staff”. ”

      Because if you dont pay the bonus, staff leave and go to the competitor that does pay the bonus.
      You cant say, get the deputy to take over, because he left as well, and sheila who answers the phones doesnt know what a structured investment vehicle is, she thought it was a posh name for an Aston Martin.

      An Engineer cant walk into the building across the street one day, sit down at a computer, and start making profit, an investment banker can.
      He can do exactly what he did the day before, just for a different employer, again, unlike an engineer.

      At the end of the day, the banks who are still standing are the ones who paid and continue to make big bonus payments.
      Why is irrelevent.

      • Brian E.
        Posted August 6, 2009 at 8:06 am | Permalink

        The fallacy of your argument is that it assumes that the competitor requires an infinite number of staff. One can only go to the company across the road if the company there wants staff, and even at the hight of the boom this was unlikely to be true all the time. By some devious manipulation, these people seem to have managed to convince the world that the law of supply and demand doesn’t apply to the finance industry, and I suspect that this is largely because they could put up their charges without the customer really noticing, unlike most other businesses.
        And as for “structured investment vehicles”, it seems that 99% of those in the industry didn’t know what hey were, judging by the mess they’ve got us into. If the major banks can’t yet tell the true extent of their losses, one just wonders exactly what they actually do know and how much of this “expertise” is totally illusionary. I’m not a socialist by any means, but if anything would make me go that way, it would be the financial services industry.

      • Waramess
        Posted August 6, 2009 at 9:04 am | Permalink

        You are right. Too little credit is given these days to the entrepreneur.

        Politicians know how to run banks rather better than the incumbents and they can see the future rather better than entrepreneurs. After all how difficult can it be to run a bank and how easy is it to predict the future? Pretty damned easy if you have none of your own money invested

        Bonuses in banks are generally paid to people who could probably go off and do it themselves and the entrepreneurs who run the banks also have to manage change; this means they must accurately see the future.

        No system is perfect and there are those who reach the highest levels of managment that possess neither skill but they are found out, hopefully before disaster strikes, and replaced.

        Politicians would do well to remember the skills of the entrepreneur because it is they who will eventually pull us out of this mess, not the politicians

  16. Stronghold Barricades
    Posted August 5, 2009 at 9:35 pm | Permalink

    I thought with all these news rules brought in by this government that it takes a minimum of 18 months to actually go through all the regulatory paperwork and be able to set up a bank

    How many businesses do you know that can have no income for 18 months without substantial backing (from a bank) and yet employ top legal bods to ensure that every “i” is dotted and every “t” crossed so that they never have to be overseen by a regulator again?

  17. Bill Quango mp
    Posted August 5, 2009 at 9:42 pm | Permalink

    Postbank
    Promised in October last year as an alternative to investment banking. A safe if unspectacular place to keep your savings.

    Not a word since.

  18. Adam Collyer
    Posted August 5, 2009 at 10:35 pm | Permalink

    “They should have offered minimum necessary support as loans to HBOS to make them sort themselves out and ensure their shareholders and counterparties took the hit, whilst protecting the smaller retail depositor. That would have been a much much cheaper solution.” An even cheaper one would have been to put HBOS into receivership, with the government standing behind retail depositors. With every day that passes it is becoming clearer not only that the government was wrong to nationalise, but that this business NEEDED to fail. That wouldm have allowed the problems to be sorted out more quickly and more transparently. Right now the sick parts are poisoning the rest, as well as weakening their shotgun marriage partners at Lloyds.

    I noticed that one of the factors in Barclays good results recently was the contribution from the parts of Lehman Bros that they picked up from the receiver. Which illustrates neatly why the government bailout “solution” to the crisis was the wrong one. Lehman was allowed to go bust – and the good parts are now thriving under new ownership. HBOS and RBS were not allowed to fail – and the good parts of HBOS and RBS are still struggling in the mire.

    • alan jutson
      Posted August 6, 2009 at 6:47 am | Permalink

      Adam
      Certainly agree with you with regard to protecting depositors money whilst allowing receivership, far less costly to the taxpayer and would have protected business customers as well.

      It seems such a simple solution, rather than standing by Billions of liabilities.

  19. That's News
    Posted August 6, 2009 at 12:36 am | Permalink

    I think it perhaps wrong to say Brown “encouraged” the merger between the two banks.

    That would be like saying that the father of the bride who forced his future son-in-law to marry his daughter at gunpoint was “offering his encouragement” to the groom!

    • alan jutson
      Posted August 6, 2009 at 6:49 am | Permalink

      Perhaps he would be if she was pregnant.

      Suggest Brown did so because of debt and pending Bank failure was an embarressment.

  20. Bill Slater
    Posted August 6, 2009 at 7:48 am | Permalink

    I agree with you,their is not enough competion in the banking sector. The banks have been allowed to get far too big. This of course means that if they do run into trouble, a major crisis is caused.

    It seems at present that in good times the banks make huge profits, and in bad times, the tax payer takes all the risk.

    Banks should be made to separate their retail operations from investment banking.

    I hope a future Conservative government will split up the Lloyds TSB Group and RBS.

    BILL SLATER
    Attleborough
    Norfolk

  21. Steve Hemingway
    Posted August 6, 2009 at 9:05 pm | Permalink

    There are huge barriers to trade in financial services blocking real competition in the UK. APACS is a closed shop, and many banks cannot do their own clearing even after operating in the UK for years. Money transfer systems such as Nochex, PayPal, e-gold are regulated to death. Disintermediating lending systems such as Prosper.com and Zopa find it very difficult to operate, under the weight of money-laundering, consumer credit, banking and other regulation.

    The problem with banking in the world is regulatory capture. Bankers love regulation, because it raises barriers to entry. If you have to employ an army of compliance officers you cannot start up in competition to Barclays when you operate from a rented garage.

    Innovation in banking is anathema to retail bankers. It still takes three days to move money electronically between accounts in different clearing banks. So-called ‘Faster Payments’ have been under development since before Google was a gleam in the eye of Larry Page, but why speed up BACS when you can charge 30 pounds for CHAPS, or, as most banks still call it, a ‘telegraphic transfer’.

    Just imagine if banking could experience the kind of pace of innovation that we can see in Silicon Valley!

  22. Andrew Gately
    Posted August 6, 2009 at 10:49 pm | Permalink

    I never really saw how merging a bank with liquidity problems with a bank that was barely keeping it’s head above water solved the problem.

  23. Lola
    Posted August 8, 2009 at 9:42 am | Permalink

    “I am glad that more people are now coming round to my long held view that there is insufficient competition in the UK banking market, partly because there are too few banks”.

    I bet I can beat you by a few years in coming to that view!

    Just to repeat, for emphasis, my view. The UK retail banking sector is an out of control cartelised supplier of a monopoly product. It is not a ‘market’ at all. It is corporatists and monopolistic. It shafts its customers and many of its staff, whilst at the higher echelons it vastly overrewards people whose sole talent is to know how to work the system.

  24. Atlas shrugged
    Posted August 8, 2009 at 9:38 pm | Permalink

    I note lots of why this, and why that John.

    What we want is answers, not questions from a man that has ambitions to be a future Chancellor.

    I am sure that you know the REAL reasons why Gordon Brown was FORCED to do what he did in fact do.

    You must surly know WHY this country has to bail out its own establishments banking system. If not then please make the effort to find out ASAP.

    You should not just be finding out WHY. (Allegations about Mr Brown left out -ed)
    Have you any idea how easy it is to lose countless millions, lending money to people who never did have a chance in hell of paying ANY of it back. ESPECIALLY when you know with a 100% certainty in advance, that someone else is going to pay for cleaning up the mess, when the proverbial inevitably hits the fan?

    If not here is the answer.

    So unbelievably easy….(etc).

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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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