Carry on losing with big banks

The government’s losing streak when punting with taxpayers money continues. We are sitting on massive losses in our RBS and LLoyds shareholdings. The sale of gold cost us a fortune. More recently the government bonds the Bank of England have bought have also fallen in value. They are now giving us an £8 billion capital loss.

The government first bought LLoyds Bank shares for 122.6p They are 57p today, under half the governent’s initial purchase price. The government’s average purchase price is 74p after the rights issue shares it bought more cheaply. The government paid 65.5p for its main shareholding in RBS. Those shares today are worth just 37p. That means they have lost more than £12 billion on the two main banks they bought into. Coupled with the bonds, that makes around a £20 billion loss.

Why did they act so foolishly? They say the bonds will bring other benefits. So far that just means higher bank profits and higher banker bonuses, with the private sector banks seeming to be much better at it than the ones the taxpayers own shares in. They point out they have had some income on the bonds, but when all the interest payments have to be borrowed as well that is small comfort for the taxpayer who is picking up the tab.

The nub of their argument to justify all this ruinously expensive interventions is it was necessary to “save the world” or rescue the banks. This was never true. They should have lent on tough terms for short periods, to give the banks a breathing space to raise the extra capital they needed. They could have done so by selling assets, cutting loan books, cutting costs especially of employment and attracting in new investors. Instead the government let them off the hook, inviting RBS and LLoyds to carry on with their bad old ways of charging too much, paying too much to their top employees and failing to compete in a way which helps the small enterprise sector in the UK.

Within the two large banks the taxpayer owns are a host of smaller banks waiting to get out. RBS owns Nat West, Royal Bank of Scotland, Ulster Bank, Coutts, Williams and Glynn and Drummonds. Lloyds own HBOS, and TSB. There’s nine banking licences, banking names and banking brands that could service the High Streets and help the entrepreneurs on their own once more. Why on earth don’t they get on with splitting up these unsuccesful monoliths? Why don’t they see the urgent need for smaller more innovative banks that could do a better job servicing the UK loan and financial service markets?

That could also be the way to get the taxpayers money back more quickly. It would certainly be the way to cut the ridiculously high pay and bonuses of the top executives of these organisations. They can only claim these mega salaries because their banks are so large. The Competition authorities guided by the government made a mistake in allowing these mega banks to be created through merger. They should at least have the courtesy to help put it right, by demanding their break up whilst they are still largely state owned.


  1. Stuart Fairney
    January 17, 2010

    Once more it’s one rule for the government another for everyone else. I seem to recall a few years ago the monopolies and mergers commission blocked the merger of two high street video stores (if a business ever needed to rationalise it is high street video rental) and a host of other businesses, yet mega banking mergers were apparently okay.

    This is very serious because if a government isn’t bound by the laws it expects us to obey, it ceases to be accountable and the whole moral justification of law breaks down, thus we have efffective rule by fiat, masquerading as something else.

  2. Mike Stallard
    January 17, 2010

    This blog is at its very best when dealing with banks and the economy: you talked us through without putting a foot wrong.
    If I can see what is needed and you can see what is needed, then why isn't it being dealt with?
    Instead of selling off the banks urgently (£20 billion compares with the £40 billion we spend on defence), dealing with the toxic debts out in the open, separating off casino banking and dealing with the complicated and ineffective government regulating machinery, the government is sitting on its hands.
    Could the reason be the very effective and preposterously rich lobby which the bankers have in parliament by any chance?
    Or is it just down to the brooding Scottish Genius yet again?

  3. Kevin Lohse
    January 17, 2010

    Dear John. Whatever Gordon's reasons for Massive State intervention and part-ownership of the banks, I am certain that the golden opportunity to reinstate Clause 4 by stealth never entered his mind.

  4. Richard Roney
    January 17, 2010

    Here, here (or is it hear, hear – I never know). Anyway I agree with you entirely.

    1. Martyn
      January 18, 2010

      Hear hear! is a shortened version of the old way of showing appreciation of something someone has just said, which was “hear him! hear him!”.
      Apologies for introducing this useless piece of information of no relevance to John’s admirable blog……

  5. Brian Tomkinson
    January 17, 2010

    The performance of this government is like a “Carry On” film. Unfortunately, the consequences aren’t funny but disastrous.

  6. Michael Lewis
    January 17, 2010

    Its interesting to note how RBS bankers have gone on to greater things. There is the outrage of Fred Goodwin, though his consultancy seems a little modest. And, spare a thought for , Meldex, the AIM listed (or rather delisted) pharma company, how could it have gone wrong with a Mr. Ibbetson (formely of RBS according to Investors Chronicle) on the renumeration committee (according to Investors Chronicle). The FT reported on ‘Another one for the AIM Hall of Shame’ recently. (Google FT Alphaville, Another one for the AIM Hall of Shame, Meldex)

    I agree withe the post, in RBS you have: Sempra the commodities business and Hoare Govett as another two companies that could be hived off as standalone (good) companies, that we could sell.

    As shareholders, the government could lead the way (institutional shareholders are poor at holding companies to account) , and start insisting on rapid change.

  7. Ian Jones
    January 17, 2010

    That would mean Brown having to admit his policies led to the disaster in the first place. It started in America remember!!!!

  8. Richard
    January 17, 2010

    Excellent point. Pls persuade the Conservative leadership to be much more forthright on this issue, it will be an election winner. It is nonsense, as you say, either that Brown’s bank bailout ‘saved the world’ or that it was ‘right’ (and any opposition to it ‘wrong’). The Conservatives should announce that these state owned banks will be broken up along the lines you suggest, further that new legislation will be brought in to ensure that bank depositors will in future have priority in a winding up (perhaps even setting a 100% reserve requirement on deposits) but that other creditors of financial institutions will have no protection from the state. In any future bank collapse a bank will have to work out a deal with its creditors like any other business. We will then have: 1) a free market in banking to the benefit of the economy; 2) no enormous liability for taxpayers; and 3) a total debunking and revelation for what it is of Gordon Brown’s catastophic economic management as Chancellor and Prime Minister.

  9. John Moss
    January 17, 2010


    Within HBOS lie Bank of Scotland, Halifax, Birmingham Midshires – and probably more.

    I'm sure those nine "licences" could easily be as many as twenty if you dig further!

  10. Brian Tomkinson
    January 17, 2010

    Doesn’t the following quote from Peter Watt’s book in today’s Daily Mail have an ominously familiar ring?

    “After escaping bankruptcy in 2006, we stopped spending money we did not have with such casual indifference. Our very own credit crunch did not affect everyone in the party equally, however.

    Before becoming Prime Minister, Gordon went to some lengths to insulate himself and the Treasury from our financial troubles, setting up his own personal pot of cash at party HQ. This was money we could not dip into, since it was set aside for the Chancellor’s own projects.”

    Whether it is his own party, or the country’s economy, Brown spends other people’s money with reckless abandon.

    1. Citizen Responsible
      January 17, 2010

      Peter Watt’s book serialised in the Mail on Sunday and his interview on Andrew Marr this morning, must make the top honchos in the Labour party very uncomfortable with just 4 months to go before a general election.
      And yes, your quote shows one thing Gordon Brown has always been good at. Redistributing the wealth that others create.

  11. BillyB
    January 17, 2010

    “They can only claim these mega salaries because their banks are so large. ”

    Good point and one that could play very well in an election campaign. Would a new Tory actually government split them up as you propose?

  12. Stronghold Barricades
    January 17, 2010

    If we admit that the way the government did the bank bail out was wrong, then that is what needs to be corrected.

    I am not in favour of the asset strippers now getting the good and profitable parts of these zombie banks at a fraction of their actual value because of the incompetence of the government and the the Treasury

    If the banks had been allowed to fail then the administrators would have already separated out all the banking licences for the good companies and they would already be trading

    A wave of sell off’s to rival Brown’s selling of gold at the bottom of the market would only compound the current feeling that the banking authorities and the regulators have privatised the profits, but nationalised the debts

    I think that with your greater knowledge of the banking industry you could come up with a much more profitable and innovative solution which requires less state intervention

  13. Ex Liverpool rioter
    January 17, 2010

    Looks like Gordon GOT AWAY WITH IT……….No £ collaspe on his watch, bad form John………as i said, DC is fighting his 2nd election now!

    He win the May 6th, but can he hold power while we sort 10 years of insane Brown policy?…….

    1. Mark
      January 17, 2010

      “Alice: Good advice. If I listened earlier, I wouldn’t be here. But that’s just the trouble with me. I give myself very good advice, but I very seldom follow it.”

      Lewis Carroll: Alice in Wonderland

      “The market can stay irrational longer than you can remain solvent.”

      John Maynard Keynes

      Of course, the banks are all insolvent,(not so -ed – all are regulated and said by their regulators to be solvent) and the Carollian consequence is that the markets must remain irrational, averting their eyes to the reality.

      To some extent I agree with John East below who points out that the largely hidden from view losses won’t magically disappear by shifting the arrangement of assets and institutions like deckchairs on the Titanic.

      Alice: Would you tell me, please, which way I ought to go from here?
      The Cat: That depends a good deal on where you want to get to
      Alice: I don’t much care where.
      The Cat: Then it doesn’t much matter which way you go.
      Alice: …so long as I get somewhere.
      The Cat: Oh, you’re sure to do that, if only you walk long enough.

      We can, however, do a bit better than Alice. I’m not yet convinced by George Osborne’s latest idea of an insurance pool funded by the banks: to my mind better regulation would be a much cheaper option. Besides, any insurance pool can still become exhausted, forcing reliance on the banker of last resort – the taxpayer.

      At the moment we remain with suspension of market reality – most particularly in the UK where Brown has instructed that the bank insolvencies should be ignored, while bubbles should be re-inflated, with rising mortgage lending and house prices, rising stock markets, rising prices, a falling pound and rocketing unfunded government expenditure and yet a stagnant economy that is already sharply depressed. Any path out of this must recognise that end points will see house prices revert to a normal relationship to incomes and other asset bubbles also deflated, inflation stabilised, and government spending brought under control. All of these points will place strains on the banking industry, which is why it is very questionable when they distribute funds in the form of bonuses made from markets rigged to permit them to earn supernormal profits to allow them to re-capitalise and cover their hidden losses.

      Perhaps they should be taken through bankruptcy, so the boards and employees are engaged by the new entities that replace them on less lavish terms – this would certainly be better than taxing bonuses or liabilities. Another way of achieving much the same thing is to do as JR is suggesting here, and break the banks up. That would force new employment contracts, as well as creating a foundation for a more competitive banking industry to replace the present oligopoly. Similar tactics will apply to dealing with some government departments and quangos.

      1. Mark
        January 18, 2010

        JR: Prof. Nouriel Roubini sees through the regulators’ Nelsonian telescopes:

        Perhaps you are making the point that the regulators “see no ships”?

        Reply: Most banks are not insolvent. Their assets exceed their liabilities at current prices, and they would remain solvent even if asset prices fell a bit from here. Most banks take a liquidity risk – they lend for longer than they borrow – because all the time there is confidence they can renew their sources of finance – e.g. on call deposits from the public.

  14. John East
    January 17, 2010

    No matter how you chop and dice the big banks, their failing loan books, their massive debts, their derivatives exposures etc., etc. will not disappear. It’s true that breaking them up now would free up some viable businesses, but it would also leave indebted bankrupt rumps with the taxpayer left to pay a for a total loss.
    Much as it pains me to support the current status quo, we are where we are, and have no choice but to soldier on. I would have voted for no bailouts and the resulting severe, and relatively short depression that would have resulted. However, as the whole of the world is now set on a path of recapitalisation and a multi-decade recession, it’s probably too late to do anything else now.
    Whatever the outcome, I fear tough times are ahead later this year once the ridiculous notion that we can increase our debts to buy ourselves out of debt has run its course. I suggest to all that reducing your personal debt loads asap, and putting some cash in gold where the politicians can’t get their sticky fingers on it should be your immediate priority.

    1. Kevin Peat
      January 17, 2010

      “I suggest to all that reducing your personal debt loads asap, and putting some cash in gold where the politicians can’t get their sticky fingers on it should be your immediate priority.”

      My pay/debt ratio is perfectly manageable – that’s if I keep my job. If I lose my job (a real possibility) the wheels come off my wagon. To tell you the truth I can’t see that having zero debt would do much for my position either, considering the cost of living. And what average person can afford to invest in gold ?

      Without taking on debt my standard of living would actually be lower than that of the benefit dependants I know. My wife and I don’t work a combined 60 hour week (she part-time) to be insulted so. So a life of debt it is. In Brown’s Britain having a middle-income job doesn’t make one wealthy – it just qualifies one to borrow money.

      I just live for today now. That’s not how I wanted it to be – that’s how they’ve made me.

  15. Citizen Responsible
    January 17, 2010

    Every month that this government and Gordon Brown are in charge, the more damaged the country becomes. The markets are waiting for a Conservative victory in the coming election in the hope they will take action to tackle the deficit and reinstate fiscal responsibility. If Labour wins, sterling will suffer. Rating agencies will downgrade the UK government from its AAA-rating and the value of sterling will drop. I just hope the good upstanding citizens of this country understand the dire economic situation this government has presided over, and vote accordingly.

  16. Javelin
    January 17, 2010

    Retails banks don’t really make huge profits. They are really just there to act as hoovers for their investment banks. There is alot of pressure to make retail banking free and loans cheap and capital high and profits high. Realism is required but not as you say.

    I believe the failure of the credit crisis lies firmly with the regulators. This crisis is due to misselling by retail sales people. Selling loans to people who are risky. This crisis is the opposite problem as the endowment misselling – again by staff who generally get paid by commission.

    How those products are funded by investment banks is also an issue. After the dodgy loans are packaged up and sold on more salesmen in the investment bank aggregate the dodgy loans and sell them on.

    In both the endowment misselling and credit crunch retail salespeople sold dodgy loans and sales people in the investment bank supported them. For the endowment pension crisis loans were funded by over estimates of fund growth. For the credit crisis loans were funded by underestimates of the lenders credibility.

    There are only so many ways to skin a cat. If the risk of the lender is properly assessed and the risk of the mortgage fund is properly assessed then banks need not bend over and touch their toes.

    If mortgages are guaranteed to be paid and the mortgage fund is guaranteed not to fall then the mortgage should get paid off.

    Once you deviate from that path in the pursuit of profit then you take risks.

    1. Tony
      January 18, 2010

      You are correct the single largest factor which caused the melt down was property. However, your comments about securitisation and regulation are not.

      1. The buyers of securitised mortgages where not innocent bystanders. They where professional investors who understood what they where buying. While there was a limited amount of dodgy issues these where few and far between and would have been avoided by most market professionals.

      2. The problem was not the dodgy assets but the bog standard securitisation of standard mortgages which are owned by all of us.

      The problem was that for 10 years there was an inflationary boom in house prices. A boom caused as always by interest rates which where to low. When it seemed interest rates might rise when general inflation returned, the boom became a bust as it always does and house prices fell and any one with any type of securitised mortgage bond base want to sell. No matter how good the mortgages backing it might be.

      I find it hard to see how regulators could stop banks lending to the property market during the boom period with out a major beach with a Government who’s finances where linked to the boom.

      1. DBC Reed
        January 19, 2010

        Quite a lot of banking disasters have been caused by lending for property.Lehman bros became just a speculative builder with some dodgy land out in Bakersfield.
        Mr Redwood calls for "smaller more innovative banks" .More innovation is just what we don't need if it is directed towards the mortgage market . Mortgage finance in the Uk was once taken care of by the building societies whose privileged status was kiboshed by Thatcherites for not being innovative enough to provide credit for people without the long-term career structures to support mortgages previously required, the assumption being that once chained down by a mortgage , the suddenly middle-class would augment the owner-occupier bloc vote that determines elections .

        1. Mark
          January 19, 2010

          Mortgage lending growth was actually quite modest and stable during the Major years – around 5%p.a. increase in the value of mortgages outstanding, which was actually below the rate of inflation in some years. The BoE data show a ramping up as soon as Labour came to power, peaking at 15%p.a. during 2002/04, but not dropping below 10% until after the bubble had already burst on Northern Rock in 2007.

          I believe Shirley Williams complained as a director of a Building Society that the regulatory regime as amended by Brown did not give them a level playing field against banks such as Lehmans, and that she commented that she found it hard to see how they would turn a profit. She was of course right on both counts.

  17. Lindsay McDougall
    January 17, 2010

    There is a very simple instruction that could be issued to the CEOs of RBS and Lloyds/HBOS: “No bonuses may be paid to any staff until the share price reattains the average price that HM government paid for their shares.”

    That would concentrate their minds wonderfully and I wager that would make the two banks behave as you wish them to behave.

    1. DBC Reed
      January 20, 2010

      (This is actually a reply to Mark above whose contribution has no reply tag.)
      I was a bit disobliging about Thatcherites I agree: the truth is (always a hazardous remark) that since the sixties all the political parties have pandered to the owner-occupier vote with tax free capital gains in houses as a thinly disguised bribe. Prior to 1963 house prices were taxed out of income by Schedule A taxation.All the parties clambered aboard this sure-fire way of garnering votes,including the Liberals who have a long history of property taxation (last glimpsed in Vince Cable’s mansion tax). When the time came for a sudden injection of money into the economy with Tony Barber’s giveaway budget in the early 70’s all the cheap money rushed into the sharpest property spike of all time in the UK.
      I still believe banks should be kept out of the housing market and that the political cartel of Home-Ownerist parties should be suppressed.

      1. Mark
        January 22, 2010

        I’m not sure that JR’s blog is the place for a complete review of the history of the housing market and the various taxation and subsidies. However, it is worth pointing out that Schedule A permitted the offsetting of mortgage interest and repairs against imputed rents, which were based on valuations dating from the 1930s. The effect was quite similar to the economics of Buy to Let today, and in the absence of restrictions on income multiples and LTV it could have fuelled a housing boom in the same way.

        The CGT exemption for main residences reflected an idea that people should not be taxed on general inflation, and that in any event rollover relief would be needed for those who had to move e.g. for a new job, or simply because of a growing family. This exemption was clawed back through Estate Duty.

        Whilst the Barber boom produced the fastest rate of increase of house prices in real terms, the peak was completely eclipsed in real terms by the withdrawal of double MIRAS peak in 1989 (which was particularly regional), and it looks like a mere molehill alongside Labour’s boom. The early 70s peak was fuelled by the baby boomers becoming adults, adding greatly to demand at a time when fewer were dying because of the carnage of the First World War having killed so many of that generation, and improving longevity.

  18. Albert M. Bankment
    January 18, 2010

    Why are the Conservatives not making more of the fact that Lloyds was only reduced to investment rubble by being crowbarred by the government into taking on the poisoned chalice that was the (Halifax) Bank of Scotland?

    Lloyds had been a superbly run business, which got through and grew by studiously avoiding all the risks inherent in the racy financial instruments so beloved of the 2 big Jock banks. Lloyds had proposed the takeover of Northern Rock, under terms that the government had deemed unacceptable since they would have involved Treasury loans. As a belated sop, the government then ‘allowed’ Lloyds to bail out HBOS but did not allow time for a proper assessment of its financial position.

    As a consequence of trying to do the right thing, Lloyds has been pilloried as a basket-case, the splendid Sir Victor Blank was vilified and forced out while Eric Daniels has had his reputation trashed as a reckless banker. None of this is right. The recent history of Lloyds is almost entirely the government’s fault, but the Conservatives appear to be fighting shy of making this obvious case. It is a great big stick with which to beat them, but the Tories have gone all girly about using it.

    I’m not a Lloyds customer, shareholder, employee, pensioner or anything. I am simply disgusted by the was the bank has been lumped in by association with all the admittedly perverse behaviour of the other global scoundrels, and depressed by the Tories’ wetness.

  19. John East
    January 18, 2010

    “So a life of debt it is. In Brown’s Britain having a middle-income job doesn’t make one wealthy – it just qualifies one to borrow money. I just live for today now. That’s not how I wanted it to be – that’s how they’ve made me.”

    Kevin, you’re getting close to the truth. Indebtedness and dependency is exactly where the banks and the governments want you to be. Debt slavery is their aim for us all.

    I was in your situation ten years ago. Big mortgage, £2k permanently outstanding on my credit card, and no hope for any change. However, once I came to realise what a scam the whole system is, I decided not to accept my slavery status. I don’t know your situation, maybe you are locked in due to your circumstances, but I found that one doesn’t have to be rich the throw off the yolk. I was only on average national wage, but I adopted the standard of living you decry, lower than that of a benefit dependant for three years, and I’m proud to say that I now have no debts or mortgage on my house, and I can live well on an income well below average wage as a result which includes foreign holidays, two cars etc.

    As for owning gold, again you don’t have to be rich, just take a look on eBay where you will find plenty of reputable coin dealers.

    I’ll bet many people could jump off the teadmill if they only opened their eyes and realised how they are being exploited in our “free” society today.

  20. Tony
    January 18, 2010

    Mr Redwood. Your analysis I am afraid misses two major points when you discuss the current position of RBS and Lloyds. While you are correct that the current share prices stand some way below the price at which state support was provided the reasons for this fall should be consider along side that of the share support offered to major US banks which now stand in a profit.

    The loss on Lloyds and RBS is due to 2 major factors:
    1. The intervention of the EU with regard to banks who have received state support which requires banks to sell off branches and business at a time when it is clear values will be at there lowest. Lloyds may avoid the implications but only by making 2 major rights issues at deep discounts which have reduced the share price.
    2. The banks problems where caused by concerns over there exposure to UK property. While prices have stopped falling and may even be rising, this still reflects very low interest rates. Until the inflation bubble which was UK house prices is resolved the banks share price will remain deeply discounted.

  21. Tony
    January 18, 2010

    Mr Redwood. Apologies for posting again but I do regard you as one of the intelligent thinkers in Conservative party so do hope to make you rethink your comments above.

    Your suggestion that the support for RBS and Lloyds should have been limited to short term finance ignores the problem. This was the solution tried with Northern Rock which failed because the bank simply could not sell assets or refinance itself. In the end the BOE had lent it so much it effectively owned it anyway.

    RBS and Lloyds are much larger. The option when the funding of these two banks hit critical levels was either to inject capital of £76bn equivalent to 4% of the assets of the banks or provide short term liquidity for many months. Assuming 70% of the banks debts would due for repayable in a year the support could have amounted to loans of another $600bn on top of the support already provided. The Government simply did not have the ability to provide this level of funding.

    Further it is naïve to suggest that either bank would be able to sell assets or businesses in a major down turn for banking at anything but nominal values. Losses on the sales would have wiped out shareholders and the funds lend by the Government. The share support was cheaper and less costly than trying to fund the banks.

    As for splitting the banks up into there old names this is a nice idea but I question whether it was or is practical. The banks may use several trade names but I suggest that behind the name you are dealing with the same systems, credit and regulatory processes, the same accounting and billing functions. Breaking up a bank requires developing the entire infrastructure which is complex and expensive. That why there are not new banks being set up, because the market knows the set up costs are to high to make any economic return.

    The only split that could have been made was HBOS and Lloyds which would have made the rescue even more difficult.

    Reply: We disagree. It is always possible to sell assets and to raise money. The crisis was made worse by the authorities stating the banks had insuifficient capital. If they had not said this, but had asked them in private to take some action, it would have been cheaper.

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