I was the only MP to tell the Commons I thought the share purchases in banks were an expensive mistake and were unlikely to solve the Credit Crunch. I went on to explain how the banks could be kept going with less taxpayer money at less taxpayer risk. The government seemed unaware when it nationalised RBS of how big it was relative to tax revenue, and how little of the banks’ assets were loans to UK people and companies. The government is rightly concerned to see more lending within the UK. Buying more shares in RBS is one of the dearest and clumsiest ways of trying to achieve that.
The whole Conservative party spoke against and voted against the nationalisation of Northern Rock. One of our criticisms was that it meant a large UK mortgage bank would no longer be able to make new loans. There were other ways of keeping the Rock in business, short of taxpayers taking over all the shares. Today we learn that the government now recognises that it was a mistake to stop the Rock lending, so now we have a state owned bank back in the mortgage market. The good news is that will relieve a little of the difficulty facing people who want to buy a home. The bad news is taxpayers have to pay the bill for mistakes with that lending.
The terms of the underwriting and new capital for the banks are what matters. We will not know until we see the small print just how much taxpayer money will be at risk. It may take a little while to find out whether the government has been too generous with the banks , leading to huge taxpayer losses, or very tough, leading to less use of the scheme.
In the meantime we need to know why the government put £20 billion into RBS without due diligence, and without understanding the risks? Have they lost the lot already? Some City forecasts and press reports suggest losses in the second half of 2008 for RBS at around the £20 billion. This morning more authoritative briefing suggests RBS will announce losses of over £6 billion, or one third of the government capital. This will leave some asking if they have written them down enough.
Someone quipped recently that a large modern bank was a public utility attached to a casino. Now we have a government that wants to play the tables of the banking world with large sums of our money. Why don’t they instead concentrate on saving and isolating the UK utility part of these banks, instead of standing behind the whole thing? The derivatives book at RBS is twice the size of the UK loan book. Why do we as taxpayers have to support that? What are the government’s plans for it, as they tighten their hold on this organisation?
The government is now risking huge sums of money. Of course I hope they get the terms of the scheme right and that credit starts to flow again. Even if that were it happen, I will still worry about the high risk and very expensive route they are using to achieve this. They could achieve it for less money and at less risk, with sensible guarantees and loans for the banking businesses that matter directly to the UK economy, without buying shares.
I was pleased to hear George Osborne this morning asking for an independent audit of any dodgy loans the taxpayer is asked to guarantee. We need to avoid a too generous scheme which improves the banks, at the expense of wrecking the government’s finances. At the moment we have an overborrowed government seeking to bail out heavily overextended banks. We need to avoid financial collapse in both by showing careful judgement from here about the balance of risks and the pace of sorting out the past banking problems.