Britain and America’s banking policies compared (briefly)

The US and UK both allowed or encouraged excess credit up to 2007. Both slammed on the brakes too abruptly in 2007-8 and failed to see the impact of their actions on the general economy and the solvency of the banks.

Thereafter, they diverged. The US offered short term financial help, and has now succeeded in gaining full repayment with interest. The UK government chose to own two large banks. They sit at the taxpayers expense, with their share prices well below the price the government paid. As reported here, the US actions were the more sensible.

Owning the banks means it would be even dafter for the UK to impose the kind of levy the President is now inventing – it would be taxing ourselves, and lowering the value of the government’s shares further. UK taxpayers will have to pay Obama’s levy in part – because we own US banks through our ownership of RBS and LLoyds. What a pity they did not got on with selling those overseas banks off earlier, as recommended on this site.

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20 Comments

  1. Ian Jones
    Posted January 15, 2010 at 9:23 am | Permalink

    You have to wonder what the Govt has seen in the books of RBS and to some extent HBOS to go with the model they did.

    Also discovered that RBS counts its £30bn of losses as capital assets as it can offset them against its future tax. If the Govt stops this, RBS would need to raise another £30bn……

  2. Mike Spilligan
    Posted January 15, 2010 at 9:40 am | Permalink

    I'm sure that the government we've got would never do anything as shrewd and intelligent as you suggested; but particularly not as it was you who suggested it.

  3. Posted January 15, 2010 at 9:44 am | Permalink

    Whilst I agree that Labour policy is ridiculous, ineffective and short sighted I don't agree that US banks have repaid the loans they were given. Some money has been returned but the number of new loans, guarantees, tax breaks and other back door subsidies given since mean theUS taxpayer has still been robbed of hundreds of billions. This is not surprising since Obama has put the same Wall St stooges in place that Bush did.
    The real situation is that in the UK the government owns the banks, in the US the banks own the government.

    • Denis Cooper
      Posted January 15, 2010 at 12:53 pm | Permalink

      I suspect you're right, and maybe in ten or twenty years time there'll be a full and final account of the net cost to the US taxpayer.

      There are still uncertainties about the total cost of the Savings & Loans debacle in the late 1980's – $124 billion according to this:
      http://www.fdic.gov/bank/analytical/banking/2000d

      despite the media myth that the US taxpayer made a profit.

  4. Lola
    Posted January 15, 2010 at 11:00 am | Permalink

    There are only three sorts of people in the world. People you like. People you don't like. And wankers. So into which category do Brown and New Labour fit?

  5. David B
    Posted January 15, 2010 at 11:22 am | Permalink

    I think you hit the key issue at the end. We own the banks, therefore we not only tax ourselves, we make it more difficult for the banks to repay the loans, making our ownership of the banks longer.

    The government need to stop thinking about how their actions will play in the polls and start to make the decisions that will result in the loans being repaid as fast as possible. After all these loans are very costly to the UK tax payer as we are paying interest on the money we borrowed to give to the banks

  6. alan jutson
    Posted January 15, 2010 at 12:33 pm | Permalink

    So Mr Brown made the wrong choices at the time, and has complicated the situation, so it will cost us more money to resolve, sometime into the future, by someone else.

    WHATS NEW.

    Its the story of the last 12 years

  7. Norman
    Posted January 15, 2010 at 12:47 pm | Permalink

    I'm not intimately aware of how banker's bonuses are calculated so I may be completely wrong here – I imagine that a trader has written into his contract that he can receive x% of the profits he makes for clients as well as a discretionary bonus on top.

    If this is the case, how is our 'bankers tax' substationally different from Obama's tax? Unless the government has introduced some legislative measure to stop them, what is to stop a bank who had set aside £10bn as bonuses and £40bn as dividend payments to shift the balance so that £20bn are now allocated as bonuses and £30bn as dividends. Or set aside £30bn for dividends this year and leave £10bn on account to distribute next year. Or 100 other wheezes but the end result always ends up as the shareholder carrying the can.

    I can't really see how, in practice, taxing bonuses is very different from taxing profits.

    • Mark
      Posted January 16, 2010 at 3:07 am | Permalink

      It isn't very different. Indeed, Jamie Dimon (CEO of JP Morgan) said “Using tax policy to punish people is a bad idea. All businesses tend to pass their costs on to customers.” Of course, the corollary is that a better punishment (where punishment is due) is loss of office, or jail, and unlike the Enron fiasco there has been little of either in the UK or the US: perhaps there should have been rather more "pour encourager les autres".

      Some have observed that to avoid Obama's bank tax, banks need to split up into smaller banks with balance sheets of no more than $50bn (JP Morgan's balance sheet for example is of the order of $2,000bn). That really is very small – it would mean we would need about 40 banks just to provide our domestic housing mortgages in the UK before they lent a penny to industry and business. Besides, at that size banks would have to syndicate or otherwise share out the risk and money raising on even quite modest business projects.

      Banks need to re-capitalise, which will have the bonus of reducing their extremely risky gearing ratios. They have a long way to go to complete the process, because much of their losses are hidden away via off balance sheet vehicles, mark to model and mark to myth valuations and other accounting devices. That applies even to the supposedly profitable ones, because they are owed money by others who would in normal times be considered bankrupt.

      Banks that claim to be making money through clever trading, rather than the rigged markets that allow them enormous margins, should perhaps try selling those trading operations off. That would have the advantage of raising capital, and freeing the traders to demonstrate their abilities and be remunerated accordingly. Few are willing to take those risks, although Citigroup did sell off its Phibro commodity arm on the insistence of Andy Hall, the longtime Phibro CEO who earned a $100m bonus through energy market trading, precisely because Citigroup felt not able to indulge such payouts.

  8. Stronghold Barricade
    Posted January 15, 2010 at 12:51 pm | Permalink

    I am a little confused by this:

    There is a lot of noise over this $117 billion, but nothing about the length of time for payment. I understand it is 10 years, and is a drop in the ocean of the money that the banks swallowed

    Also, it seems to me as an outsider that this "insurance" will have to be discussed by the boards of these companies and they will have to set their policies accordingly

    I do not buy the "it will stop wholesale markets", unless of course the banks are saying that their risks are over extended

    I think the politics of envy which radiate from our government do little to influence company policy, and seek to punitively tax those who operate within the policies and contracts set by their company, they do little to challenge the failed triumvirate or reset bank business interests to less risky and more understandable options

  9. JimF
    Posted January 15, 2010 at 1:57 pm | Permalink

    It would be good to hear from you a forensic account of whether taking the same action here as in the US would have actually been sufficient, or should RBS and HBOS been liquidated with deposits guaranteed?
    If Conco could map out a viable alternative path, then the UK CEO might not look so self-satisfied next time he saves the world.

  10. Michael Lewis
    Posted January 15, 2010 at 4:43 pm | Permalink

    RBS – the British Leyland of Banking. I'm just amazed we own this disaster zone. There should be a stated policy of breaking up that bank, and winding down any business that can't be sold off.

    • Michael Lewis
      Posted January 15, 2010 at 6:56 pm | Permalink

      Just read on the internet that the US authorities are possibly planning an Argentine style raid: no not an attempt to take the Fawkland Islands, but stealing money out of 401K (equivalent to our SIPP).

      Doing this, by 'requiring' people to purchase US treasuries. Holding some of the fund Not sure how sensible/reliable this story is, but it would be a bit like how the US/UK have forced banks to hold safe (ha ha ha) Treasuries/Gilts. Could imagine G. Brown and Co. looking at suggesting its only prudent for SIPP holders to have a minimum gilt allocation….

      • Mark
        Posted January 16, 2010 at 10:41 pm | Permalink

        Gordon got there a long time ago, requiring pension funds to invest in gilts or be taxed. SIPP holders are required to convert to an annuity which has a very high proportion of gilts. THe US is just copying his idea.

  11. Brigham
    Posted January 15, 2010 at 6:39 pm | Permalink

    No matter what mistakes have been made, by this incompetent fool of a Prime Minister, everything he does will still be lauded as a triumph, and a part of his "saving the world" by him. I have written to the Speaker to ask him to make the PM answer the questions at PMQ's, and he said he would, " try to do better." but he hasn't yet done so. Would it be possible for MP's to demand that the Speaker do something to stop the electoral broadcast that passes for answers?

  12. Posted January 15, 2010 at 6:58 pm | Permalink

    OK, we have been looking at the conjuror's hands. Now let's look behind his back:
    1. Where are the toxic debts caused by government interference in USA over sub prime mortgages? How much are they now? Does anyone actually have a clue?
    2. The Roosevelt administration separated casino banking from other banking. When is this separation going to be restored so that we don't have to underwrite so much outrageous risk?
    3. What happens if just one of the British Banks goes bust?
    The sheer lack of urgency astounds me.

  13. Lindsay McDougall
    Posted January 16, 2010 at 1:10 am | Permalink

    Why are the share prices of Lloyds and RBS below what we paid for them? Let us list a few alternatives:

    (1) These banks are being badly run and failing to control their costs (e.g. bonuses). Do we need to change the boards again?

    (2) At the time the banks approached HM government with their begging bowls, they failed to disclose their liabilities and toxic assets fully. Isn't that fraud?

    (3) There was full disclosure but HM government were charitably minded and decided to temper the wind to the shorn lamb. Gordon and Alistair, when are you going to realise that giving away other peoples' money is not charity? it is theft.

    To be honest, none of these alternatives gives me a warm feeling, and I can't think of a fourth alternative.

  14. chefdave
    Posted January 16, 2010 at 12:43 pm | Permalink

    John, I thought you were a free marketier?

    If this is the case then how could you have 'excess credit' when the market demands only what it needs.

    Are you saying the free market is wrong so it should be controlled by the state?

    If so, this is a gaping hole in your Conservative ideology and one that needs to be explored further.

    Reply: All the time you have monopoly money with a single state issuer – and there are good arguments for doing that – you do need to regulate its supply by controlling the actions of the Central bank and Treasury sensibly.

    • chefdave
      Posted January 16, 2010 at 4:12 pm | Permalink

      But the economy broke because we allowed house prices to get out of control. The bailouts were a consequence of that, not the cause.

      It just seem strange that the housing market reacts so violently to cheap credit when all others markets, such as for consumer goods for example don't. It makes me think that the problem is with the nature of housing rather than anything to do with the currency.

  15. Adrian Peirson
    Posted January 19, 2010 at 6:02 pm | Permalink

    I don't know any of the details, I don't need to, I can gaurantee that none of what is going on is in the interests of the general public.
    Ultimately it is about CONTROL, how do you get control, through impoverishment.

  • 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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