Category: Blog

The new deal for RBS is pure monetary madness.

Taxpayers already own most of the bank,and have lost a packet on their shares. Now taxpayers are being made to guarantee £325 billion of bad and doubtful debts as well!

Now the government has decided to underwrite the losses in the future. RBS has to accept the first £19.5 billion of any loss, and pay £6.5 billion for the insurance. Taxpayers guarantee to pay 90% of the losses above the threshold.

So does that provide an incentive for the management to sort things out in a way which might limit taxpayer losses? Wait til you hear the rest. Taxpayers have to put up £19.5 billion of new capital in the form of B shares, and make available an addfitonal £6 billiion of equity if needed.

In other words, the so called tough deal on insurance is almost completely underwritten by new taxpayer capital; Taxpayers are offering the full amount of the losses RBS is said to “bear” itself, and £6 billion to pay the insurance premium.

I wish I could get an insurance like that on the value of my house. I would willingly pay 2% of the value of my property to the government in these markets, if they would guarantee to pay any losses on its value above a threshold. It would be especially attractive if they would give me the money to pay the premium, and give me the money to pay the first part of the loss which they refused to insure! There don’t seem to be any private sector insurers around who will do that.

Once again the government has been taken to the cleaners by the bankers. They have been out negotiated at every stage.

If you ask, what would I do instead, the answer is easy. I would not give RBS another penny. I would make them sort their own mess out. There is no immediate need to put more money in and every need to make them raise cash and cut costs for themseleves. There is plenty of scope to do both. This deal is a dreadful waste of public money. It delays the necessary action to sort the bank out by taking some of the pressure off.

AN UPDATE FROM THE CEO OF UK PLC

I am pleased to confirm record losses from our RBS banking subsidiary, and to announce losses of almost £10 billion at HBOS, where we have a substantial minority stake through the shares we hold in the Lloyds Group.

Some of you may have been disappointed to read that RBS only lost £24 billion as reported, after we had promised you losses of £28 billion. You will be relieved to know that the gross figure revealed on page 6 of the RBS financial statement is I am delighted to say £40.7billion, another new record for such a figure.

In order to consolidate our investment in these excellent loss making businesses I have decided to put more capital into RBS, and to make available guarantees to the Lloyds Group which I hope they will accept.

Our policy of “Putting the losses back into British business and banking” is going so well, that it is a good idea to double up our position. I am therefore committing up to an additional £25.5 billion of new capital into RBS, and will be guaranteeing hundreds of billions of pounds of bad and doubtful debts and investments on your behalf. The opportunities to lose money are unparalleled and it would be a pity to miss out at such a time.

It is now clear that the merger which we urged on Lloyds with HBOS has been a brilliant manoeuvre as part of our strategy, giving us the chance to have a substantial stake in a larger group which now has great scope to record losses on a material part of its business.

The way Labour and the BBC framed the debate yesterday about financial regulation was typical of the skewed view of the what is going on that now passes for public debate in this country.

The Labour spokesman on Newsnight tried yet again to blame Margaret Thatcher for the crisis for “deregulating” the banks in 1986. If that policy was so wrong why did they not reverse it in 1997? If it was so bad, why weren”t the banks in financial trouble ten years later on the eve of Labour coming to power? Did they not notice that she kept in place strong regulation of capital and cash by the Bank of England, which worked? No bank over lent and overstretched in the way they have been doing this century because they were not allowed to. As Michael Fallon rightly pointed out, it was Gordon Brown who put in a new system of regulation in 1997. It was that system of regulation which failed to control the over expansion of bank activities with too little cash and capital in some cases to support them.

Even more ridiculous was John Mc Fall’s further attempt to blame the Conservative’s Economic Policy Review for recommending “the deregulation of mortgages”. If he could be bothered to read the Report and be accurate he would have stressed how right we were to tell the government they needed to regulate the capital and cash of the mortgage banks, not the process of granting the mortgages through a useless box ticking procedure which demonstrably did not prevent the disaster which hit the mortgage market. The government designed expensive and complex new mortgage regulation which did not stop a single excessive mortgage being lent to someone who now cannot repay, and did nothing to keep Northern Rock solvent. They destroyed a regualtory system which had kept all main banks solvent for more than 100 years.

The argument should not be about light touch or heavy handed regulation.Lurching from so called light touch to heavy handed will not help. There is no susbtitute for having just a few good regulators who know how to control cash and capital for banks and near banks. The Bank of England used to do that. It is a pity it was stopped from doing so during the period of irresponsibility , 2003-6. This disaster happened in a heavily regulated industry, regulated to Labour’s standards under a new and expensive system designed by Labour in 1997.

The government’s disastrous bank share buying policy has landed them with payment of a pension of £650,000 a year to the former CEO of RBS for the rest of his life. I doubt they can do anything about it, other than pay up,. It leaves them defending the indefensible. There is no way public money should be abused like this. They should not have bought the shares and lost so much on them.

Now they wish to compound their errors by putting the taxpayer on risk for up to £600 billion of bad and doubtful debts. Why? Can we afford it? Why should we have to fork out for other people’s mistakes? What’s in it for taxpayers?

None of the banks concerned is currently at risk. The Regulator is happy for all of them to carry on trading. They all have enough capital, we are told. There is no run on the deposits.

The government says it needs to take these risks on in order to get the banks to lend more money to people. Why do they want to do that? People and businesses are short of income, short of turnover, worried about their jobs, short of profit, short of cash. They are not short of loans. The whole point of this crisis is people are too much in debt, not too little. Companies near bankruptcy for want of orders will not be kept going by burdening them with more debt. They need revenue.

So why does the government want to force the banks to lend more? And why do it by offeirng to underwrite £600 billion of debts, when they could lend money directly to people and companies if they must at less risk and much less potential expense?

They are seeing nothing clearly. They are gripped by a collective governmental madness. They are ignoring all the warnings about excessive public sector debt. They are trying to cure a problem of overlending by more borrowing, and cannot see how foolish that is. They blundered into buying bank shares “to save the banks”, simply to lose most of the money. Now they are blundering in to buying or guaranteeing bad loans and debts to “get lending going again”. The poor old taxpayer is being wiped out, and the savers mugged.

Think again, government. Do not sign this rotten deal.

On Monday we debated the “Apprenticeships, Skills, Children and learning Bill”. We were graced with a speech by the Secretary of State for Children himself, introducing this 225 page blockbuster.

It summed up all that is so wrong about the way our country is governed. The Minister inhabits a strange quango laden world. “Pupils, parents, schools, teachers” and “education” were words that rarely or never passed his lips. Instead we sat through a debate riddled with “Childrens trusts”, “Pupil Referral Units”, “The Office of Qualifications and Exams Regulation” ( a catchy one that, abbreviated to Ofqual which when spoken by some sounds like a branch of the KGB),”The Young People’s Learning Agency”, “The Chief Executive of Skills funding”, “The Qualifications and Curriculum Development Agency”, “learning on a young apprenticeship”,”the School Support Staff Negotiating body”, “sampling cohorts” nine regional “Learning and Skills Councils”, “behavioural partnerships”, “the Childrens Plan”, “work based programme led apprenticeships”, with lashings of “piloting” and co-ordinating” to get these quangos and programmes to stick together.

No wonder nothing works very well. No wonder there is such a huge gap between the governing and the governed. No wonder the money does not go very far. Just look at the huge number of these bodies that all need highly paid so called Chief Executives, PR departments to wave their own flags, campaigners to demand more public money, logo designers and slogan makers, glossy brochure authors and media script writers, training and visit programmes, grand dinners, foreign travel to see how overseas quangos claim more money and even a few people to do what Parliament has charged these bodies with doing.

If a Conservative suggests this a tad overdone, that maybe we could provide more young people with a good education if we spent less on this quangocracy, the Minister replies with menaces about “Tory cuts”. If Mr Brown talks to Mr Salmond, he hears from Scotland that even the modest efficiency gains Mr Brown knows are there for the taking are a major assault on the perfections of the public sector. Listening to his School Secretary reminded me just what a rambling and incoherent mess so much of the public sector now is, with schools, Colleges and others suffering under a huge weight of regional and national quangos, regulators and monitors. So Mr Brown, now you accept there are efficiency gains and sensible cuts to be made, have a look at this bizarre world of acronyms, initialese and obfuscations.

He spoke well, as he usually does. The main thrust of the speeech was partisan, announcing the twin spending packages for the banks and the rest of the economy again, telling us he will spend even more than he has so far told us, and reminding us why he thought they are needed. This was all wildly acclaimed by high spending Democrats, enjoying having their hands on other people’s money.

Woven into the speech was some Republican rhetoric on value for money, and the extraordinary pledge that he will halve the deficit by the end of his first term. He told us that his team have already identified $1,000,000,000,000 of cuts in the federal budget for the next ten years, or an average of $100 billion a year. That part of the speech was a little light on detail. It emerged that some tax increases on high earners and companies will also be part of that deficit reduction package.

It would be good to believe his ability to tame the deficit. The markets surely want to know that sometime the USA will come off its debt fix and earn enough to pay all the bills.. That confidence can be built by the Administration announcing cuts in programmes that do not work or are badly run or are no longer needed. For the moment it sounded a bit like the overweight person who tells us they are definitely going on a strict diet to curb their excess, but only after one more blow out on the cream cakes, as they need to stave off hunger in the short term.

The dangers of too much spin can be seen in the gyrations of Wall Street this week. On Monday the market plunged around 250 points when the authorites implied they were about to nationalise some banks, only to recover most of the lost ground on Tuesady when the authorities confirmed they would not do that. Errors like that do not build confidence or help the stability
Mr Obama tells us he wishes to create from his huge spending packages.

I am pleased to announce losses of £28 billion from our recently acquired RBS subsidiary and £1.4 billion for Northern Rock, acquired over a year ago. These losses are a pleasant surprise, as we did no due diligence before the acquisitions and were therefore unsure of just how big the loss making potential of these talented concerns might be.

We will be announcing these results to the markets at some point in the future, but our 7 by 24 news mangement requires me to write to all of you about them now they are generally known in the media, with added explanation to give them some news traction. I have decided they do not need to be the subject of an oral statement in Parliament, as our investments in subsidiaries are held at arms length.

One of the most pleasing features is the consistency of the results. UK shareholders may recall that RBS is twenty times the size of Northern Rock, and has come in with exactly twenty times the size of Northern Rock’s losses. This shows the skill of all involved in crafting these losses, despite the two banks running on very different strategies over the time period in question. I am sure you will agree we should pay bonuses to those involved. Northern was in run off, under orders to reduce its activities, whilst RBS was asked to increase lending to 2007 levels. For the coming year we are recommending both banks run on the same strategy, lending more money, which should make it easier for them to continue their welcome consistency.

The management of RBS has proposed splitting the assets they currently own into good and bad assets. The idea would then be to commit the taxpayers fully to the bad assets, and leave our experienced subsidiary to trade through the good assets that remain. I was at first concerned about this suggestion, given our corporate aim is “Nationalisation puts the losses back into British business”. However, I have been reassured by the thought that we could always change the accounting procedures to make sure we do record the losses people expect of a nationalised activity. I should also point out it is not that easy distinguishing a loss making from a profit making asset in these conditions, so even a “good bank” can end up losing money.

As we have now written off substantial sums there is always the danger of a profit appearing. We will seek to expand our lending to try to avoid this happening.

You cannot solve a crisis brought on by borrowing too much, by borrowing even more. You have to work your way through the debts, repaying some, and increasing your income relative to the interest costs.

You cannot magic away a load of bad debts and poor investments by transferring them all from the private sector to the public sector. That just undermines the credit standing of the government, and leaves the taxpayer lumbered with loads of losses they do not deserve. Most of the so called recovery plans the UK and US governments are looking at are just different ways to land the poor investments on the taxpayer.

I am amused to hear President Obama saying he is going to announce a halving of the running government deficit over his first term. How can he do that, when his government is busily taking on more and more obligations from banks and insurance companies, and when he is just beginning a big expansion of public spending financed by borrowing?

Controlling debt and cutting deficits has to start today if he wants to do that, not at some unspecified date in the future. Curing the banks entails working through all the investments and debts and saving as many as possible through intelligent banking – not shoving them off to someone else to pay the losses.

Report to Shareholders in UK PLC by the Chief Executive

This year will be difficult for your country. Our turnover (output) will continue to fall, as it has been doing for the last half year.

I have decided to use this opportunity to expand the cost base substantially. I intend to increase the numbers on the payroll and to raise their pay. I intend to pay bonuses to all employees who helped us make such large losses in the banking subsidiaries. I do feel we need to build up their morale when they have had such a setback. I rule out the conventional approach of our competitors who seek to husband cash and cut their costs at times like this.

I have also decided we need to borrow more. We will have to increase our borrowings by around 10% of our turnover in both 2008-9 and 2009-10 anyway, given my commitments to increasing our costs.

I think we need to go much further. This is a good time to take on more debt. I have decided we need to at least treble the debt. I intend to do this through two major acquisition programmes.

In the first I have been buying up banks and bank shares. This sector of the economy has been performing very badly. I do not wish to exploit their bad luck, so I will pay above the market value for some of the shares we buy. We have already bought all of Northern Rock, and the assets of Bradford and Bingley. We have a majority share in RBS and a substantial minority in Lloyds. Our own accountants think this will treble the country’s debt. Outside auditors suggest this is an understatement.

Just in case these acquisition programmes do not expand the debt enough, I have decided to accelerate the borrowing programme further by buying the worst assets off the remaining banks. I could probably expand our borrowing and liabilities by as much as an additional £400 billion by doing this. It could also be done quite quickly.

Some shareholders question the wisdom of this, pointing out that many banks got into trouble by borrowing too much in the first place. They ask how can we borrow all this money? I have taken the precaution of seeing that our interest rate setting subsidiary, the Bank of England, has taken the price of borrowing down to 400 year lows in preparation for this. Just in case there are problems I am about to sanction printing the money we need for the takeovers, to ensure we can get all the cash we may need for this ambitious programme.

It took my predecessors in this job 500 years to reach borrowings of just half a trillion pounds (£500 billion). I am proud to tell you I expect to be well above £2trillion quite soon. Our own Central bank subsidiary is showing the way by now having a balance sheet 120 times its share capital. Meanwhile I will continue to lecture everyone else on the importance of prudence.

Both American and EU capitalism are heavily regulated. Both have concentrated on a lot of detailed regulation of financial services, and both have done it badly.

The EU dreams that there is a free wheeling US system and a cleverly regulated EU system. In times of trouble when US output wobbles, they come out and assert the answer is to move from American to EU capitalism. This is all absurd.

Over recent months despite all the rhetoric the US economy has fallen less than Germany or the UK. The EU, the UK and the US economies have all messed up their banking regulations, failing to demand enough capital in the good times, and then temporarily demanding too much cpaital in the bad times. Both the UK and the US have set interest rates that were too low in the good times and too high in the run up to the bad times.

How can anyone believe Mrs Merkel regulating the detail of hedge funds or Mr Brown running the investment banks would suddenly put the world to rights? The hedge funds and the investment banks that did overdo it could have been controlled properly if only the US, UK and EU regulators had behaved sensibly over the volume of credit and capital requirements in the heady days.

The fact that they did not is no argument for more regulation of a different kind. it is an argument to try and find a few regulators who know what they are doing, to set sensible limits to credit. If hedge funds and investment banks had been able to borrow less we would not be in the current mess.