Mr Brown does not seem to know his own banks

Today was an unusual day. For the first time in years I won a PMQ in the weekly ballot for the opportunity to ask a question.

I decided to ask him what had happened to the £700 billion of assets that disappeared from the RBS balance sheet in 2009. You would have thought he might have noticed it and taken an intelligent interest in it. After all, £700 billion is more than the government spends each year, and is around half the national income. Now we own a bank on this scale, it would be nice to know the boss was in charge and knew the numbers and understood the strategy.

My purpose in asking was to highlight the conflict in current policy. The public sector is made to spend more and more to “keep the economy going”, whilst the private sector remains under an intense squeeze. RBS has been forced into collapsing its balance sheet by huge sums to meet new requirements for more cash and capital relative to the amount it lends and trades.

I am trying to find out if the government realises it is squeezing the private sector too hard and is doing it because it really does want an ever bigger public sector at all costs, or whether it does not realise that its Banking Regulator is holding back the recovery. I am none the wiser, but hope others may take up this important quesiton on the back of my PMQ. With major banks slimming this quickly it is no wonder mortgages and business credit are scarce and dear.

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25 Comments

  1. Richard
    Posted March 17, 2010 at 2:17 pm | Permalink

    I saw your question. It was quite plain from the answer that Gordon Brown didn’t have the faintest idea what you were talking about.

  2. lola
    Posted March 17, 2010 at 3:19 pm | Permalink

    Go on tell us roughly how far in you asked the question so that we can watch it without having endure the rest of ordure.

    Around 12.20 – first Conservative after Cameron and Clegg.

  3. Mark
    Posted March 17, 2010 at 3:22 pm | Permalink

    Balance sheets balance, so that means that RBS has managed to absolve itself of £700bn of liabilities. We know that the full BoE balance sheet no longer has to be published by law. We can only hope that these liabilities haven’t been transferred to the state unseen, perhaps against collateral of dubious value.

    The other day Pestowire pointed out that according to the FSA, the banks need to find £440bn in financing by 2012 to replace funding that is due to be repaid to wholesale sources (including a large portion of the £319bn that the CML says is owed to the BoE by 2014 under the Special Liquidity Scheme and the Credit Guarantee Scheme). That is 35.5% of the mortgages outstanding (now £1,238bn) need refinancing of their funding. Brown has rolled over the problem from 2007/8, but it will bite big time in 2011. Rolling over the BoE’s special financing schemes (and perhaps being forced to add to them) will see them counted as part of National Debt – with consequences for gilts yields and mortgage interest rates. It’s hard to see anything other than a mortgage famine. Already 90% of expiring deals are reverting to SVR. The silver lining is that house prices will resume their necessary correction to affordable levels, which will ultimately underpin what remains of banks. It is a perversion that Building Societies, who have tended to be much better risk managers, are under threat because of the more favourable treatment of banks under the BoE’s schemes.

    Business investment will only come in when we have reached an obvious bottom in the second part of the double dip ride on the roller-coaster.

    We still have a long way to go before the banking mess is cleared up. Facing up to it sooner rather than later would be the best approach, but Brown has run away as usual to leave behind the scorched earth.

    • Denis Cooper
      Posted March 17, 2010 at 7:43 pm | Permalink

      But the markets are already just as aware of this situation as Robert Peston, so I don't immediately see why the formal addition of these sums to the National Debt would have a major effect on gilt yields.

      • Mark
        Posted March 18, 2010 at 11:23 am | Permalink

        Moody’s made some comments about the UK’s AAA rating the other day, detailing conditions under which it would be lost:

        http://www.bloomberg.com/apps/news?pid=20601068&sid=a0a8xAghPS8I

        In essence, adding £440bn to the debt would increase the interest burden to above the 10% of GDP that would trigger an automatic downgrade. That would force many institutions to sell UK gilts, because they are required to hold AAA assets. The forced sale would give rise to a sharp increase in yields. At present, the yields merely reflect a balance of probability for the UK’s future rating. Trading at AA type yields is just an average of the chance of maintaining AAA, getting downgraded to AA or to A or even lower.

        For an investor required to hold AAA assets, getting an AA yield is highly attractive (at least so long as they feel they can get out ahead of the herd) – so demand from such investors is probably higher than normal/sensible. Without the artificial construct (and various other devices to prop gilts demand such as QE), perhaps gilts would already be trading at A.

        I have long regarded ratings agencies as rear view mirror, worthless analysts of the financial health of companies and nations. Their role as official arbiters of taste is to distort, not inform markets.

    • Stuart Fairney
      Posted March 18, 2010 at 6:42 am | Permalink

      Why would rolling over the special funding schemes see them added to the national debt if they are not already included?

      • Mark
        Posted March 18, 2010 at 10:59 am | Permalink

        At the moment they are excluded under a technicality of not being long term – just “temporary”. Once the debt gets rolled over, it would no longer qualify for exemption. The alleged basis for these schemes was simply to tide over for a couple of years until markets returned to normality. If it becomes clear that markets are not prepared to support financing mortgages based on over-inflated house valuations any more, then only the lender of last resort (the BoE) will be in a position to continue the financing.

    • Adam Collyer
      Posted March 19, 2010 at 9:39 pm | Permalink

      Mark, “It is a perversion that Building Societies, who have tended to be much better risk managers, are under threat because of the more favourable treatment of banks under the BoE’s schemes.”

      Not sure that’s true – we’ve seen a number of Building Societies get into difficulty during the credit crunch, including the Dunfermline, Cheshire, Chesham, Barnsley, Chelsea and Newcastle societies.

  4. Kenneth Morton
    Posted March 17, 2010 at 3:28 pm | Permalink

    Mr. Redwood

    I hope you manage to get some traction on this matter since nobody else seems to be following up your question at the moment except yourself. I feel that this has the potential to become very significant indeed

    I get the feeling that the Prime Minister did not understood the question. He had a nonsensical answer that he was going to give whatever you asked just because you are who you are. I think that the Treasury are, at this moment, preparing a brief with the full facts. I trust that somwhere along the way you will get a full and truthful answer. Perhaps that is too much to hope for.

    As Deepthroat told Woodward and Bernstein: Follow the money!

    Seven Hundred Billion Pounds is an unbelievably large amount that Brown and Co. must account for this side of the election

    • Kenneth Morton
      Posted March 17, 2010 at 5:58 pm | Permalink

      Having now watched yesterday's Treasury Questions and Mr Bill Cash's contribution relating to the RBS Balance Sheet, I sense that a pincer movement is under way.

      Good Luck!

  5. Shaun
    Posted March 17, 2010 at 4:49 pm | Permalink

    I knew as soon as you asked you'd get a load of flannel in reply! I wasn't wrong!

    • Stuart Fairney
      Posted March 18, 2010 at 6:50 am | Permalink

      Standard non response: That is exactly the kind of question I would expect from the honourable gentleman/lady, it is amazing that he/she has nothing to say about the recovery, this is the party that will continue to invest in jobs and the economy, the party of the many not the few like Lord Ashcroft etc

      Cue fake, empty verbosity and rowdiness from drones behind.

      I can't believe anyone is convinced by it anymore, to see who is "winning" look at the faces of the various front benchers (if you can stand it).

  6. Ian Jones
    Posted March 17, 2010 at 5:26 pm | Permalink

    The Bank of England economic policy is to print money to raise asset prices whilst they keep interest rates low in order that the debt can be paid down faster. This on the basis that when rates do rise, debt to equity is greatly reduced and the economy can then grow. This requires low new lending to prevent new debtors fouling up the plan…..

    Stagflation is the outcome and Brown is making sure the Tories get the blame but cannot cut enough to damage the socialist project now fully implemented.

  7. lola
    Posted March 17, 2010 at 7:28 pm | Permalink

    Anyway, your headline is flawed. They are not Brown's banks they're our banks.

  8. gac
    Posted March 17, 2010 at 8:25 pm | Permalink

    I asked on your previous topic what Brown had replied because I did not understand a word of what he said. From this topic it appears he did his usual trick of denying that there was a question to answer.

    He has at last been caught out lying in Public – or as it seems again answering a question with the answer to a different one which sounded plausible at the time. This is a common Labour trick.

    He DID starve the military of funds but he clearly only funded Operational Requirements because he was/is legally required so to do, but by aggregating the expenditure he sought to get away with the lie/fudge.

    So the Civil Servants and the Military were correct to diss him! Even his statement to Parliament was pathetic within which he still tried to prevaricate. I hope I am wrong but I am beginning to think that servicemen died because of his parsimony.

    I hope Conservative high command will grab him by the throat about this and continue to worry him until he is driven out of office!

    And whilst they are on this roll – how about £4m of taxpayer money given to Unite by the government (word left out)so that (they have enough money to be able to) to (help) fund the (Labour)Party. Another case of trebles all round!

  9. Duyfken
    Posted March 17, 2010 at 8:42 pm | Permalink

    As you surely surmised, and as observed by others above, there was no way that you would get an informative answer from Brown. Consequently and unfortunately, all of the excellent points you make in this post remained unsaid at PMQs. Would it be better (Speaker permitting) to couch your question with a suitable preamble and discursive asides, in order to highlight the way the astronomical loss of assets has arisen?

  10. Denis Cooper
    Posted March 17, 2010 at 8:59 pm | Permalink

    Is it a reasonable first approximation to say that if the assets of RBS have shrunk by £700 billion, then the liabilities of the rest of the financial world have shrunk by the same amount?

    And that as the liabilities of RBS have also shrunk by a similar sum, the assets of the rest of the financial world have also shrunk by that amount?

    To simplify, if A and B are the only two banks in the world and A owes X to B, but B simultaneously owes a smaller amount Y to A, then it could be said that the two banks have total debts of (X + Y).

    But the net debt is only (X – Y), A's net debt to B; and if A and B agree to pay each other Y, or to just cancel their reciprocal debt of Y, the total debt of A and B is now only (X – Y), the net debt still owed by A to B.

    However by cancelling out their mutual debt, both A and B have shrunk both their assets and their liabilities by Y.

    Is that basically the kind of thing which is going on, in effect massive cancellations of mutual debt, but of course far far more complicated because there are chains of contracts involving RBS and many other banks and companies around the world?

  11. David B
    Posted March 17, 2010 at 9:16 pm | Permalink

    I wonder if u will get any airtime on yesterday in parliment.

    A point I would like to understand is how much interest are we paying on the loans we have made to the banks and what contribution are the banks making to this interest bill.

    Robert Preston stated a few weeks ago that we might be able to sell the banks at a profit at some point in the future. I suspect this claim of profit did nor account for the interest we are paying.

    This also links to the budget deficit because we need to find the funds to pay the interest.

    I am trying to connect the dots, something the government fails to do

  12. David M
    Posted March 18, 2010 at 12:56 am | Permalink

    Frighteningly, I don't think he understood the question. It wasn't deliberate, he's just not very bright.

    Next time you get lucky in the draw, ask him something he understands – make it a bit more 'Janet and John' for him. He still won't answer the question mind.

  13. no one
    Posted March 18, 2010 at 1:28 am | Permalink

    i would have asked him something different

    off the top of my head

    "if access to doctors in the NHS is so good how comes medicentre are doing such a roaring trade offering private GP appointments to folk who travel from far and wide to see them because they just cannot get to see a doc on the NHS."

    or

    "how comes private GPs cannot issue NHS prescriptions yet private dentists can"

    or

    "why are insulin pumps given routinely to pregnant diabetic women in some parts of the country and not others"

    or

    "why are the odds stacked against folk on sink estates and inner cities so much, in a world with so much "equality" polical correctnesses how comes this persists"

    or

    "why are so many intra company transfer visas each year"

    or

    something along those lines

  14. Martin
    Posted March 18, 2010 at 7:10 am | Permalink

    I have just watched PMQs and was disappointed that no one had a go about the real unemployment figures as opposed to JSA claimant count so beloved of successive governments.

    I suspect the hidden unemployed (no benefits so not counted) tells us a lot about the economy that ties in with the awful state of the government’s tax take.

    As for RBS well the destruction of shareholder value tells us that we need activist shareholders who will really hold boards to account at AGMs rather than the glorified block vote which boards rely on at present. In the case of RBS we have ended up with a government bail out because the thing was too big to allow to fail.

    Reply: The Opposition did that in Welsh Questions before PMQs and in subsequent press releases and broadcasts.

  15. alan jutson
    Posted March 19, 2010 at 7:46 am | Permalink

    John

    Pleased you got to ask the question.

    But no surprise that Brown did not even try to answer it.

    You are one of those few Mp’s who has any real grasp of the financial markets and Government finance, and probably the last person who he would want to have a debate with over money matters.

    Given the above it seems a shame that DC is not using your talents to best advantage, to beat up this incompetent government.

    Unless of course you are loading the guns behind the scenes.

  16. moulin à paroles
    Posted March 20, 2010 at 7:15 am | Permalink
  17. Mark Winter
    Posted April 7, 2010 at 8:58 pm | Permalink

    £700,000,000,000 OMG expressed in seconds instead of £ it would be more than 22,197 years., and more than 1 million years expressed as minutes.

    So in PMQ today £600000000 in NI increase according to the PM would assure the police, NHS and schools and at the same time not jeopardise the recovery, so how many times can you spend 6 billion and why is 6 billion more of a problem than 700 billion considering how much tax payers money went into the RBS , do these people think our heads are full of cotton wool.

  18. Electric Air Pumps
    Posted May 10, 2010 at 9:32 pm | Permalink

    It’s always a good thing to find information relevant to what I am looking for. Cheers!

  • About John Redwood


    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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