As I did not get a satisfactory answer yesterday, let me have a go firstly at an answer the PM could have given, and then at a fuller answer to the problem I was highlighting.
Question: “The balance sheet of RBS shows £700 billion less in loans and other assets at end December 2009 compared to a year earlier. Where has the £700 billion gone?”
Possible PM answer ” The Rt Hon gentleman should understand that when we took over RBS it had a very overextended balance sheet. Management is currently working to shrink the size of the balance sheet by selling off trading and other assets, reducing liabilities at the same time. I am very keen that they should not allow this process to impede levels of lending to persons and companies in the UK and will take further action as shareholder to ensure they do not restrict their supply of credit in a damaging way”
I wished to highlight two related questions. The first is the actions and attitudes of the Banking Regulator, at a time when we need an economic recovery. The Regulator has chosen this time to demand higher levels of cash and capital from banks than they were required to hold during the boom. This means that at the weakest point in the cycle they are forced to reduce their lending and other risky activities, as a bank like RBS has no easy way to raise further large sums of capital to sustain its former balance sheet. Why is the Regulator behaving in a way which aggravates the cycle rather than smoothing it? Many now say they believe in the counter cyclical regulation I have been advocating, so why aren’t they putting it into effect?
The second is shareholder value. Taxpayers have been made to buy 84% of RBS at an average price higher than today’s share price. Taxpayers would like to get their money back with profit, and will want to know what impact such a rapid reduction in the overall size of the bank will have on the future value of their shares. There has been no guidance from the government as shareholder’s representative on this important matter.
I think it is wrong that these huge sums of money at risk for taxpayers are neither properly reported nor debated in the House of Commons. As I keep explaining to the government, they have got us into a situation where the state is the best part of a couple of large banks with a medium sized government attached. The sums at risk in our bank ownership far exceed annual public spending. Ministers should take a more serious interest in what is happening in these large state owned and influenced banks, and report it to us. Ministers should also be able to answer questions on the main strategic thrust of what they are doing with them in our name.
March 18, 2010
So where did 700 billion pounds go?
Are these loan and other write downs or are they asset sales matched by reduced liabilities?
Were the assets grossly overstated in the first place?
Is this a deliberate misrepresentation of asset values on the underside so that management can get the Bank into private hands by restoring the true asset value and thereby staging a "massive recovery" and "return to profitability"?
Keep digging please.
March 18, 2010
NickW: "So where did 700 billion pounds go?"
Look at the Bank of England balance sheet.
The real question, if the BOE has bought these 'assets' in order to assist RBS, what are the assets worth if marked to market?
By the way, a Cartel is not a Market.
March 18, 2010
The scheme of things, the banks are small.
Take the civil service pension scheme. Even after an FOI request they aren’t releasing the size of the liabilities. A reasonable estimate based on the last figure is 1.1 to 1.2 trillion
Nick
March 18, 2010
yep the BT pension fund has at least a 11 billion deficit backed by a state guarantee
lots of hidden liabilities like this on the UK books
March 18, 2010
Yes I agree with this. I think this is one of the weakest links of this Government and could trigger a Gilt market crash. The Conservatives need to start asking about off balance sheet liabilities.
March 18, 2010
Sorry to again, but have a look at this link.
http://www.bankofengland.co.uk/markets/balanceshe…
Do you know what it means. It looks pretty scarey.
Reply: It just shows the Bank has ballooned its balance sheet as part of Quantitative Easing.
March 18, 2010
Do we not also have a serious problem with the media ignoring this issue?
If this was on the BBC or Channel 4 news yesterday, it was given a very low profile and I missed it.
March 18, 2010
I agree with you that the media is ignoring the issue. Now that we have discovered that the Government appears to be the political arm of Unite, which is also bankrolling the Labour Party and many of its candidates, the lack of policy or explanation on the banks is very surprising. The key issues are:
1. How does the Government intend to persuade its banks to lend to those who need and deserve loans?
2. How should banks be configured to maximise customer service?
3. The design of the road map which will take them to privatisation.
4. The game plan on toxic assets.
5. The game plan for selling the banks at a profit.
Isn't is strange that we are only weeks away from an election and don't know the answer to any of these questions?
JR: Keep up the good work of holding Labour's feet to the fire.
Team Cameron: Where do you stand on these issues?
Unite: what instructions do you intend to give to your client Party on the subject of the banks?
March 18, 2010
im a RBS customer, their customer service has fallen off a cliff face, they dont answer my routine questions
id move somewhere else but all the banks on the high street are state owned by the looks of it
state ownership is driving quality of service for the customers down
March 18, 2010
You are right to demand answers to these questions. Didn't Lehman frequently reduce their balance sheet to make it look less risky by utilising an accounting 'trick' called Repo 105 before they finally went bust? We must know what is going on. The House of Commons Library appears to be able to answer questions truthfully, unlike the Prime Minister. Can they answer your questions?
March 23, 2010
Repo 105 was a very short term dodge, nothing like the ‘special liquidity scheme’ that removes all the dodgy assets for years at a time.
March 18, 2010
Of course you’re right that MPs should be given full and accurate reports at frequent intervals, and it’s yet another symptom of our democratic malaise that a majority of MPs are either too apathetic to want proper reports, or prefer not to embarrass the government by insisting on having them.
On the shrinkage of balance sheets, I presume that this is a general phenomenon across the world as banks gradually extricate themselves from the web of speculative contracts (aka “bets”) that they made with each other.
On whether taxpayers will ever get their money back, in the autumn of 2008 sections of the US and UK media were repeatedly claiming that US taxpayers had made a nice profit from their government’s intervention in the previous Savings & Loans debacle, when the truth is that they suffered huge losses – around $124 billion, according to this:
http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf
but possibly as high as $500 billion spread over 30 years, taking into account the extra interest which had to be paid on the government bonds needed to finance the bail-outs.
So I won’t be surprised if likewise UK taxpayers suffer huge losses on this occasion, but the mass media agree to cover that up and pretend that they made a profit.
March 18, 2010
Economic ability really isn't Brown's forte. Look around.
March 18, 2010
Mr Redwood, did you seriously expect there to be an answer? I watch PM's Questions every week and wait in vain every week for something vaguely resembling intelligence, maturity and respect for the electorate. The whole circus show is a shameful disgrace, in marked contrast to debates I've seen in the US and French parliaments. Will it change with a new parliament? Doubtful.
March 18, 2010
There will be a great opportunity for some "kitchen sinking", so we may for a while get a lot more truth than we've been used to. If subsequent events are reasonably close to plan or better that may well continue. The tough issue will be if things turn out to be more difficult than expected.
March 18, 2010
The first question you ask I really couldn't care less about as it is all above my head and my pay grade but for the good of the country I recognise it is vital someone is asking these types of things.
It's the second part that worries me. Ever since I heard about this I was worried that the government was either a) dumping toxic assets at pennies in the pound landing us with massive losses on what we paid or b) selling non-toxic assets and leaving us with the rubbish with no chance of recouping our investment.
I know it's not as clear cut as that but at the very least what is happening at RBS should be available for anyone to look at in detail, especially bearing in mind the state the bank was in before Mr Brown stepped up to save the world waving his/our HMRC chequebook triumphantly above his head and proclaiming world financial stability for our time.
March 18, 2010
JR, while you are searching for the £700 billion at RBS, it may be worth having a look in the drawer marked Asset Purchase Facility / Special Liquidity Scheme at the BOE. I reckon half of it is in there.
Also, as the BOE has come up with graphics on its web-site; (see following; particularly "Other operations: Quantitative Easing" and the bits that are off balance sheet). Please could you publish a list of the "other assets". OK, I know it would be longer than War and Peace, but I would like to find the bit of the MBS Bond that I am financing and send my condolences to those concerned; I do not expect my tranche of it to survive past the summer.
http://www.bankofengland.co.uk/markets/balanceshe…
Meanwhile, we are still underwater on the taxpayers' investments at UKFI Ltd.
http://www.ukfi.gov.uk/images/dynamicImages/UKFI%…
BTW; I have found some spare cash, about £55 billion, it is with the Commissioners for the Reduction of the National Debt at the DMO. Sneaky buggers kept that quite.
March 18, 2010
I doubt that it's the Asset Purchase Facility, as that's almost entirely gilts:
http://www.bankofengland.co.uk/markets/apf/result…
March 19, 2010
Denis. The last time I posted this link, JR edited it out. So I will have a second go. It is not political or derogatory to our host but it is enlightening on how these toxic assets are being flogged off at fire sale prices.
http://www.npr.org/templates/story/story.php?stor…
You may be aware that a certain Swiss Bank issued toxic assets as bonus payments recently on the basis that their wiz-kids invented the things, now they get to own them. (Sort of up-yours smarty pants). The staff are up 72% year on year on their toxics.
I expect somebody will come up with an ETF (Exchange Traded Fund) based on toxics for those who like banzai gambling on securities that will most likely suffer premature death.
March 20, 2010
My point is only that if some arm of the state has purchased “toxic assets”, it hasn’t been done by the Bank through the APF. In fact right at the start Darling told them that they could only use it to buy high quality assets. His letters are here:
http://www.bankofengland.co.uk/monetarypolicy/qe/keydocs.htm
March 18, 2010
There is a bit more info at the DMO site – although I must admit that the extension of the drawdown period of the Credit Guarantee Scheme to 28 February 2010 – announced just before Christmas had escaped my notice. The limit for the CGS is now £250bn compared with the £185bn drawn down initially – although there is no information on whether any extra has been used.
http://www.dmo.gov.uk/documentview.aspx?docname=cgs/press/pr20091217.pdf&page=
There is also provision to roll over one third of outstandings as far as April 2014.
The CRND money is not what it seems – most of it is supposedly a cash reserve for paying out benefits. In fact, it could be a further backdoor way to warehouse some more gilts issued as “NILO” – see the description here:
http://www.dmo.gov.uk/index.aspx?page=CRND/CRND_Functions2
It would be worth keeping an eye on the use of this arcane area, but I don’t think it is being exploited heavily yet. What is already clear is that in addition to the Treasury Bills issued in support of the CGS, there has been a significant increase in ordinary Treasury Bills in issue. Pre-credit crunch, they totalled around £16-17bn. At the end of Feb, the total was £55bn. You can see that here:
http://www.dmo.gov.uk/reportView.aspx?rptCode=D2.2G&rptName=59774550&reportpage=tbills/Portfolio_Composition
March 18, 2010
The £700 bn was given to Lord Ashcroft as a modernisation grant but which in a feeling of unity he gave to The Tory party.
Nothing wrong there – just do not tell the BBC or Mr N Robinson.
Only joking – I think.
March 18, 2010
At first it appears the regulators and politicians are telling the banks to turn left and right at the same time.
It appears the politicians are saying lend more [of your reserves], the regulators saying hold more reserves.
It appears the regulators and politicians either need to be better. So it appears.
However, the message from Brown at the start of the crisis was to tell the banks to lend more. But then he stopped !!
You simply don't hear Brown telling the banks to lend more. You don't hear Brown talking about growth in the private sector. Now this could be because he hates the private sector, or it could be because he would be contradicting the regulators.
What I think is happening is Brown is not telling the banks to lend more because he can't. He can't contradict the regulators. Also because that would highlight his failings in the UK banks. It is obvious to me that Brown was directly responsible for loosening up the lending criteria in banks. Brown turned on the cheap money taps – and now he's paying the price. This is Brown's weakness. He turned on the cheap money taps and he doesn't want to highlight his failings.
March 19, 2010
“You simply don’t hear Brown telling the banks to lend more. ”
Not should he.
March 18, 2010
Greenspan, just published a report recommending pushing up capital reserves to 14% (up from 10%) – ouch – less money to lend.
March 18, 2010
I think a key difference is between a credit cycle, and a South Sea Bubble/Tulip/Brown Ponzi scheme style boom and bust. Under a normal credit cycle, counter-cyclical capital ratio requirements act as a stabiliser, just as you advocate. When banks become as overstretched as they have done due to failure to have the appropriate restraints in place, the antidote no longer can work. Businesses do not want to invest because demand is already well below capacity to supply it. Consumers in debt are extremely vulnerable to even modest increases in interest rates because their debt is so large.
Wholesale banking markets remain essentially shut, because there is no confidence that assets are being held at fair value. Such markets will only re-open freely once asset prices are SEEN to have (over)corrected. Until that happens, banks know that they are vulnerable to losses, especially on mortgage debt issued at high LTV ratios. First time buyers for houses have evaporated because they can see they would lose their deposit nest egg and be caught in a negative equity trap, having overpaid for a house. The banking crisis won’t be over until houses are affordable again relative to incomes.
March 19, 2010
” to impede levels of lending to persons and companies in the UK ”
why force a company to lend when it may not wish to, surely we should be weaning people off debt? Painful though that may be,
you can’t on the one hand suggest fiscal prudence and on the
other go back to allowing debt to proper up asset values that
need to fall.
March 20, 2010
There are some very odd things happening in the labour market at the moment, which I believe are in some way related to the ease with which the government is able to borrow money and the contraction of RBS's balance sheet.
Recently the number of JSA claiments and the number of unemployed have been falling but:
– The number out of work for more than a year continues to rise.
– The number of people in employment fell until July 2009 and has been broadly flat since. There has until recently been an increase in the portion of employed people that work part time.
– The number of private sector workers has been falling, with manufacturing, construction, transport, distribution, hotels and restaurants hard hit.
– The number of public sector workers is still rising, albeit gently.
– The total number of economically inactive people of working age is still rising rapidly, and is now 8.16 million. The rise is mainly comprised of people who have decided to go to
University and people who have despaired of finding work.
March 20, 2010
Don't forget mothers (and a smaller number of fathers) who are looking after their families. They may work very hard doing that, but because their work is unpaid they're insulted by being classed as "economically inactive".
One alternative would to pass a law so that the moment a woman had dropped her baby it would be put into a state nursery, and she would be expected back at work within 24 hours unless she had a medical certificate saying that she was not yet fit to resume her duties.
Another alternative would be for the state to recognise the contribution of mothers by paying them salaries for looking after their children, subject of course to rigorous qualifying tests and regular inspections.
Or, we could just decide that bringing up children is an important job, in most cases more important than any paid job that the mother had been doing, and get that recognised in the official statistics.
March 20, 2010
You have a point but I’m not sure that I want to get the state involved in anything more than it must. Try an alternative. Nigel Lawson once floated the idea that a married woman should have her own income tax allowance which she could transfer to her husband if she chose not to work. We could introduce that but restrict it to married women with children. We could restrict it further by saying that the transferrable allowance would only apply if the woman had children and the husband was on his first marriage – but that would be social engineering and that would never do.
However, modern society is based on the assumption that men are not to be trusted. We live in a kind of Liverpool Lullaby world (“The b_g_e_ drinks it all away, and leaves me without any.”).