Category: Blog

TAXPAYERS BANKS

GROSS LIABILITIES (Balance sheet size)
100% owned

Northern Rock £99 billion
Bradford and Bingley £52 billion

Likely Majority owned

RBS £2000 billion

Possible Substantial minority shareholding

HBOS £680 billion
Lloyds £368 billion

TOTAL £ 3200 BILLION
TOTAL OF SUBSIDIARIES £ 2150 BILLION

LOSSES TO DATE

Northern Rock 1st half 2008 loss of £585 million. £3 billion of new equity capital

RBS 1st half 2008 loss of £692 million

HBOS announced writes offs of £5.2 billion

The government has decided to set up a holding company, UK Financial Investments Ltd, to own and manage all the shares in banks and building societies the government is accumulating at enormous expense to the taxpayer.

This conglomerate is designed to give Ministers a buffer between their decisions, and the actions of all the banks in the portfolio. They hope that as the avalanche of letters and emails comes in complaining about repossessions, foreclosures, cancelled loans, higher fees and charges, interest rates well above market rates and reduced company and individual overdrafts, Ministers will be able to claim it is someone else’s fault. The Chairman of UKFI Ltd will need to spend some of his salary on a flak jacket.

Why doesn’t the government just say they will hold the shares direct but leave the management of each bank to get on with it without Ministerial involvement? I guess they have ruled that option out for two reasons. Firstly, they do want to intervene, but need an intermediary or conduit to do it quietly. What better than a well paid quango company acting as the buffer and the prod to the banks? Secondly, they probably reckon the left in their party would not put up with a policy of complete non intervention. What is the point of a nationalised bank, the left would correctly ask, if it does the same things, imposes the same charges, withdraws the same facilities and pays the same bonuses as a private sector bank? UKFI allows some flexibility when answering the left’s criticisms behind closed doors. The plan is to have studied ambiguity, so the left can travel in hope, whilst markets are reassured.

The government has already had to modify three of its proposed interventions. It stated at the time of the original deals with RBS, HBOS and Lloyds that there would be no dividends, no big bonuses and maintained lending at 2007 levels. Now we learn there can be dividends once the Preference chares are repaid – a lower threshold to jump. There can be bonuses to senior people not on the Board – a good reason for some to resign directorships or to refuse them. There seems to be some retreat from the idea of artificially boosting lending to the levels of the boom, when there could be a shortage of takers for new loans on offer.

All this augurs badly for the experiment in nationalised banking. Still there is no proper audit of the risks and liabilities the taxpayer is being asked to take on. Parliament has been presented with no balance sheet, no accountants report, no revaluation of assets, before it makes its £37 billion commitment to the famous three, nor its £18 billion commitment to Bradford and Bingley. The most basic things that any private sector buyer would require do not appear to have entered the heads of our Ministers. They behaved recently as if they were in the rush of the first day of the January sales with the chance of mega bargains. They plunged into bank buying with a careless ferocity that will come to haunt them.

We have seen how we as taxpayers have already lost £580 million in half a year on small Northern Rock (c.£100 billion of assets) and had to put an additional £3 billion of equity in. How much could we lose in a full year on the £3 trillion of assets at RBS, Lloyds and HBOS combined and the £120 billion at Northern/Bradford? How big should the write downs be to establish safe values on the taxpayers balance sheet? What assessment has been made of recent and prospective loan loss rates? Can Ministers give us an assurance that all their new banks will be profitable from here, and hold assets that do not have to be written down any more? Maybe the government thinks with a portfolio the profitable ones will offset the loss makers. It would still be wise to undertake some audits and do some sums first.

To those who say there was no alternative, I say fiddlesticks. Of course the government and Bank of England needed to lend money and to make cash available. That is their role in the banking system. The government did not need to put up more capital. That is something the banks could have done for themselves, one way or another. The fact that three did not bother to, shows the terms for the taxpayer were not tough enough on the banks.

The government has created a political problem, as well as an economic one. It will have to find a way of answering its many critics, as the banks in public ownership upset customers and make judgements that individuals and companies dispute.

Months ago I urged the authorities to override the Bank of England’s MPC and slash interest rates to head off recession. At last the cries are coming from all parts of the spectrum to do just that, months too late.

I have also urged a sharp reduction in UK spending on bank shares and bank nationalisation. You cannot do the one without the other safely. If they press on with both interest rate cuts and with massive spending on bank shares, expect more strain to be taken on the exchange rate and in due course on the government debt markets.

It means still dearer imports. less spending power and more risk. Why can’t these people in authority understand the large numbers they are playing with, and see they are putting too big a burden onto taxpayers?

I raised a few eyebrows when in the early days of the US Presidential election process I praised Mr Obama’s rhetoric and campaigning ability. It has carried him a long way, and may propel him into the White House in tomorrow’s poll.

Most people in the UK – and the rest of Europe – are keen that he wins. I do not share the excitement of so many, as I do not see in either candidate a new approach to the world economic crisis that offers us hope.

The worst moment of the whole process was when the two Presidential rivals turned up in the Oval office and meekly endorsed the Paulson/Bush plan to squander billions on stressed banks. The plan fell at the first political hurdle in Congress despite the support of the President and both challengers. It has now failed to bring rapid improvement to damaged Amercian markets, but is beginning to impose a huge strain on US finances.

I would like change. I want quicker change in the US/UK approach to the Middle east than we are being offered. Above all I want change in the way the authorities handle the financial crisis – change to a policy which recognises there are distinct limits to what taxpayers can afford. Mr Obama shows no sign of understanding that.

Well done to Lewis – a great champion. He never put a word wrong during a difficult season, and drove brilliantly often enough to emerge the victor. It is especially sweet to see him win after disgraceful racial abuse from so called fans of the sport.

Most of you have written in in favour of the abolition of the Licence fee. Many of you deny there is a special type of broadcasting called “public service” broadcasting. There are still no defences of edgy comedy.

One of my critics seems to think offering top BBC executives the same salaries as Cabinet Ministers is another example of my fabled generosity to the public sector. I promise him it would represent a huge pay cut for the top executives we have been reading about.

I would like to hear more about whether anyone out there thinks there is something good and distinctive in parts of the BBC’s output that could be said to be “public service”. What does that mean and how does it differ from ITV and commercial radio? If there is then we can discuss how this could be preserved. It does not have to be paid for by a TV Poll Tax.

Ed Balls is playing to the left wing gallery again. He wishes to give them the impression that he is against selection, determined to write fairness into dishing out school places. Maybe he should take stock of just how much selection there is in English education, before asking himself the important question Is all selection wrong?

Many Labour figures regard selection by academic ability as especially pernicious. They dislike the grammars which used to give many a child from a modest background a better chance in life, including many of the Labour politicians themselves. Yet they happily preside over a system which uses academic ability as the main criterion for selection at 17, to allocate the scarcer places in College and University. They allow academic ability to be a criterion for selection at 11 and 13 in the private sector.

The government accepts selection based on ability when it comes to sport, music, and dance. Young people with an aptitude and passion for elite sport, dance and music are selected on ability, sometimes at young ages, to be given a superior training in these fields by the best teachers.

Labour mainly prefers selection by the income of parents. The children of the richest can obtain places in independent schools, which include the most prestigious, most academically successful and best resourced schools in the country. If your parents are poor and live in a low income borough or district, you will be sent to a comprehensive nearby. If your parents are better off and live in one of the more affluent areas, you will be sent to a neighbourhood comprehensive there. The gap between the achievement levels of comprehensives in the leafy suburbs and in the concrete jungles remains stubbornly large in favour of the richer areas, despite much larger sums of public money being spent on the poorer districts.

Labour also allows selection by religion of the parents. There are many flourishing faith schools in the state sector, offering a choice to people of various faiths. Whilst it is true that the government has sought to prevent discrimination against people of no religion or differing religions to that of the school, in practise people of religious faith in a local religious community have some choice in many cases.

It is time Mr Balls used some of the intelligence he is said to possess to give us an honest account of how our education system works. I would like to hear him explain why he thinks it is better to select children mainly on the basis of their parents income, rather than mainly on the basis of their own aptitudes and capacity for hard work.

Within limits I do not think young people are born natural sportsmen and women or natural academics. It is mainly what they choose to do and how much effort they put in, allied to how well they are taught and inspired. Yes, some people are brighter than others, and some people have larger feet (good for swimming) or longer legs (probably good for distance running). However, the biggest difference between a good sports person and the rest of us is the amount of training they do. The biggest difference between a good academic and the rest of us is the amount of reading they do.

Mr Balls needs to address the injustice that selection by parents income creates. I would not myself do that by banning good schools for rich people – that would just drive them offshore or to find some other way round the rules. What we need instead is a fair way of choosing and motivating children who do not have rich parents, so they too can shoot for the stars. That has to include selection, whether by competitive exam and specialised academies or through setting and streaming.

I am glad that the sick joke of Mr Ross has a good outcome – both Labour and the Conservatives now think pay is out of control at the BBC. This state pensioner needs to gain some financial discipline quickly, so the licence payer gets better value for the money we are forced to pay.

The large numbers of layers of ineffective management, all on very high salaries, would be a good starting place for cuts. One of the most interesting things to come out of the Ross saga was how many highly paid people above him were involved but failed to show any judgement. Let’s have fewer, and let’s pay them less. Their task is no more difficult than a Cabinet Minsiters, and they show no more competence, so let’s pay them at that sort of level.

It would also be a good idea to look at how many channels are truly “public service” deserving of subsidy, and how many should be commercial and required to compete for funds and audience in the usual way. Surely no one can argue that what Mr Ross does is “public service”. If you want to pay such a huge sum to someone to do what as he does, then it should be from the pockets of those who enjoy that sort of thing, financed through adverts or subscription or sponsorship.Many people do like much of his output so they would pay.

I would like to hear from people on what they think “public service boardcasting” is and should be. I have heard three conventional explanaitons

It is unbiased news – that would be good, but is clearly not what the BBC delivers, as it nearly always delivers news from the standpoint of someone who thinks more government is the answer and never the problem.

It is high class drama – but the BBC has no monopoloy on costume dramas. Some are good, and yes there may be a case for subsidy to such arts.

It is high class documentaries. Yes some of those are good, but there is too a tendency for them to be biased towards conventional wisdom. Today they may well make a good documentary about the excesses of the banks, but they are unlikely to make one about the follies of the regulator or the Bank of England, and never make one saying there is a different way to sort out the Banks from the public shareholding route chosen by the politicians so far.

So what would a public service broasdcaster look like in this multi media age? And how much are we prepared to pay for it? Should we carry on paying for it with a poll tax, or in some other way?

Let debate be joined.

We have seen a £2.7billion emergency package to deal with the problems of Labour’s tax reforms, and the announcement of new aircraft carriers. This time round there is the £37 billion financing package for RBS, HBOS and its possible new partner, Lloyds.

The government will tell you that these spending items are unconnected to by-elections. I do notice, however, that some are keen keen to spin that the bail out of Scottish banks by English and Scottish taxpayers shows Scotland would be too small to go it alone.

The reaction to Barclays has told us a lot about the agenda of Vince Cable and some Labour figures. They clearly want the taxpayer to end up owning more banks. Their anger that Barclays have paid more to keep their freedom, tells us the UK taxpayer is getting a rotten deal from the proposed share purchses the government wishes to make. The way Vince Cable was allowed so much BBC airtime to front run nationalisation, without any Labour slap downs, tells us it was a policy they favoured. He was a useful front man to avoid accusations that Old Labour had been rehabilitated. Meanwhile, all sensible proposals to avoid state owned banks were studiously kept off the airwaves to avoid complicating the argument.

It all worked so well. The Regulator demanded more capital at a time when it was difficult to raise it quickly. Someone leaked the talks to the media, driving the share prices of the affected banks down, making it even more difficult to raise the money from the market. Then the banks were presented with a take or take it offer which three accepted. The government meanwhile was busy nationalising the assets of Bradford and Bingley, but never told the media directly that that meant taxpayers borrowing £18 billion to send to Santander to take on the deposits.

Taxpayers will rue the days that the government was so liberal with their money in the banking sector. All these banks had a future without state equity, if the Bank of England did its job as lender of last resort, and if the Regulator worked quietly behind the scenes on a timetable for strengthening their capital. Assurances that the government stood behind the weaker banks was a good idea. Loans were helpful. There was no need to add state equity, which will prove to be a bad idea for taxpayers. Just look at the firest half results for Northern Rock – large losses – and get ready for the next results from state banks. The treat is on you.