We now know that the strategy behind Northern Rock was to wind much of it up at taxpayers expense. Their mortgage outstanding lending is falling rapidly.The government probably wants to have something left for the General Election, and is telling North Eastern MPs and their constituents that the nationalised company will still make payments to the North East in the meantime. I have never understood why they wanted to manage this run down, and have always felt it would cost taxpayers substantial sums. I do not expect to see our £3 billion of share capital back.
RBS is a very different matter. The Labour party rightly sees this as a going concern. There is now an argument about what to do with it.
In the capitalist corner are those who say the government should help the bank get back into healthy profit as quickly as possible, and then sell the shares on to the private sector, making a profit for taxpayers. They favour changing the terms of the current offer, to make it easier for RBS management to pay for the capital, and easier for them to make good profits. They accept the City argument that 12% interest on the Prefs is too high in the current climate.They believe the goverment should not appoint Directors, and should stay at arms length.
In the socialist corner, they take a very different view. They see nationalisation as an opportunity to change banking, curbing the excesses of the private sector. They favour government Directors. They want the government to limit salaries and bonuses for senior people, urge increasing certain kinds of lending that they think are needed in the economy and propose lower fees, charges and interest rates for preferred account holders and borrowers like people on low incomes and small businesses. They favour banking with a conscience or a social purpose.
Both groups share the heroic assumption that the nationalised banks have been through the worst. They are discussing how to share or spend the proceeds of success following cheap purchase of the shares.
The market is offering a different warning. RBS shares trade well below the government’s proposed purchase price. If the market thought the government capitalists were right and would prevail, investors would be buying the shares at least up to the goverment price so they could enjoy the ride and profit alongside taxpayers. Either they think the government will require too many social policies from its bank, or they fear that the underlying financial position of the bank is worse than the government optimists believe.
What could go wrong for the goverment capitalists? The banks have admitted substantial losses on mortgage lending, but house prices are still falling and mortgage lending experience could deteriorate further. As more lose their jobs so more people will find it difficult to pay the mortgage. The banks have not yet written much off their corporate lending. This winter will see a big deterioration in the financial position of many companies. More bank write offs here are likely. The security banks have taken for many loans, based on property or shares, is being undermined by the day. Any prudent buyer of bank shares would do a lot of due diligence on loan books before commitment, and would apply a discount to the current assets to allow for more hostile conditions ahead. The government has done none of this.
Nor should we assume the capitalists in the government will have it all their own way. Whilst PM and Chancellor are mainly in the capitalist camp along with other Treasury Ministers, they are politicians wanting to do well in an election. They may seek behind the scenes to get the nationalised banks to lend more, to go easy on certain fees and charges, and take certain social matters into account. There will be limits to how much pain these politicians will take in the case of defending well paid bankers saying No to too many people and businesses.
The more I look at it, the more I conclude the government in its own political interest, let alone the country’s economic interest, should renegotiate its package of bank support. It needs to stand behind the main banks, but it does not need to buy such large shareholdigs at the proposed prices. The risks are simply too great. The banking crisis did not end with the announcement of government cash for shares. It simply entered a new and worrying phase, where the taxpayer is too much on risk, and the government faces nasty political dilemmas aout how to run these huge organisations. It is cheaper and less risky to support banks by short term loans and guarantees for which the banks pay a fee or charge.