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.