Month: February 2009

The government has encouraged the myth that banking was unregulated following the “Thatcher” reforms and this caused the problems of recent years. This begged the question of why the government left such a sorry state of affairs in being for more than a decade if it had been true, but like so much in the “explanations” of this crisis it was false.

The truth is simpler. They inherited a system of banking regulation which did control solvency and liquidity, demanding higher levels of share capital and cash than the present government required on its watch. This government transferred the successful banking regulation they inherited from the Bank of England to the tripartite structure they set up in 1997 under the control of the Chancellor.

We now learn that the FSA did its job and understood that the HBOS model was too risky. Why then under the new government’s structure did they not have the powers to require the bank to change its model? Why didn’t the Chancellor intervene or give them the powers to do the job? Or if he thinks they had the powers, why didn’t he enocurage them to use them?

It is a sign of times disfigured by spin that the former heads of banks make headlines, whilst the current heads who could solve our problems or make them worse will doubtless attract far less interest.

The questions we need the current management of RBS to answer include:

1. Will you trade at a profit this year, after last year’s huge losses?
2. What action are you taking to cut the costs of your expensive bank?
3. Will you cancel all descretionary bonuses for 2008 given the large losses?
4. Will you ask all senior executives to forgo contractual bonuses for 2008 given the large losses, to instil some sense of collective responsibility?
5. Which assets and trading businesses are you planning to sell this year, to reduce risks to the taxpayer and bring in some cash?
6. How long will it take you to net out your positions in sophisticated financial instruments, and reduce the capital at risk in such activities?
7.What interest rates are you going to offer savers to encourage more UK deposits?
8. What are your plans for new UK lending in 2009?

Yesterday the media’s attention was on the Treasury Committee’s cross examination of the failed bankers, men who have lost their job because they lost their shareholders and now taxpayers so much money. It was never going to be a very informative session. Their apologies will not pay any of the bills.

Meanwhile in the Commons chamber itself something far more important was happening. The government sought approval for unlimited sums of money to be spent on propping up or nationalising any bank or similar financial institution they choose.

We were given just 45 minutes of time to discuss this item, which was not nearly enough. I did manage to speak, but under time pressure because other colleagues wished to talk as well. The Minister introducing it said very little in his introduction. It was a Money resolution, but he gave us no figures at all of how much money might be involved or what we might be buying for it.

I pointed out to the House that if you added up all the loans, guarantees, share purchases and other financial provisions the government has made or promised in recent months to banks, it comes to around £1 trillion of cash and guarantees (£1,000,000,000,000). It was the largest sum ever sought from Parliament. It is larger than the government’s version of total current liabilities of the UK government.

The Minister did not deny it could be £1 trillion. He did not leap to his feet with an official figure, or even suggest I was exaggerating when he came to sum up the debate. Once again I might have been too prudent in my calculation!

Worse still, the measure confirmed this government’s belief in nationalising very large banks. I reminded the House that we now preside over a large bank with a medium sized government attached. The government’s version of the state’s balance sheet has it that total state liabilities are under £1 trillion. The share purchases at RBS add a whopping £2 trillion to the liabilities on that balance sheet (and we hope they add to the assets a similar amount). RBS puts at risk more than three times the annual tax revenue of the state. As we saw last year, it can in a single year lose almost as much as the annual defence budget.

My colleagues Richard Shepherd and William Cash called a division on this spending. It went through with a minority of MPs voting for the government.

The Commons needs to sharpen its act on holding the government to account on spending. Each item under the banking packages should be given proper time for debate and a vote if MPs wish. The government would do better if these issues were scrutinised more. It is a disgrace that I am prevented from tabling many of the sensible questions we need to ask on the risks and costs of running RBS. Now the government itself says it is crawling all over the remuneration and bonuses of that bank, it is high time they agreed to answer some questions on it. After all, we now have more money at risk in RBS than in the state’s annual budget. It is high time we were able to hold them to account for it.

President Obama chastised Wall Street yesterday, for daring to fall 4.5% following the announcement of his “rescue” packages. He sounded like a cross parent when a young child receives a very expensive present and honestly explains it is not what he wanted and he has no intention of playing with it.

The President should do what he said he would do when campaigning – listen, and try to build consensus. He has now had two warnings concerning his economic policy – the refusal of most Republicans to vote for it, and the immediate reactions of markets over his first month in office.

He should remind himself that this was a crisis born of borrowing too much, and should go on to ask whether borrowing lots more is the best way to resolve a debt crisis. He does need to help mend broken banks, but should so so in the least risky and expensive way for taxpayers.

Most of us know that if we try to walk on water we get wet.

On both sides of the Atlantic we are waiting for the next plans to save the banks and reflate the economies. The US market has rallied a little in expectation of agreement on the Obama reflationary package, as the Senate debates the balance between tax cuts and spending increases, and its overall magnitude. In addition the money markets actions are beginning to have some effect. In the UK we are awaiting the detail on the revised banking package, to see how much insurance is going to be offered for bad loans held by banks, and what it will cost..

The authorities both sides of the Atlantic are committing large sums to the tasks of assisting the banks and reflating the economy. There have been differences of view on how to do it, but each side has now been influenced by the other – or by similar ideas – to the point where there are common strands to the actions. The US has injected some new capital into banks, the UK is now looking at purchasing or underwriting bad assets. The US did nationalise a couple of mortgage banks, as did the UK. The only difference has been the UK’s decision to take a substantial stake in RBS as well. This difference could turn out to be important, as it has placed a large sum of taxpayers money at risk in the UK and posed big management questions for the government over how far should it intervene and what should it try to do with its large bank?

The publication of Barclays results in the UK highlighted the contrast between their performance in 2008 and that of RBS. Barclays announced a profit of £6.1 billion, with write offs at a manageable level, where RBS is suggesting total write offs and losses of £28 billion. This leads people to ask how could two large UK registered global banks end up with such a different performance.

There are two possible explanations. The first is that RBS was badly managed, complicated by their decisions to acquire a large number of overseas assets near the top of the market, whilst Barclays has been better managed. The second is that RBS’s new management have decided to take a very pessimistic view of their banks assets at the beginning of their regime, to make recovery easier. I would hope that auditors and the government as owners would ensure the figures are realistic and in line with current understanding of potential bank losses, so this rules this explanation out.

The most likely explanation is that RBS was less well managed, and took on too much in its acquisitions which have cost its shareholders dear. It remains surprising that the government did not undertake proper investigations of their likely 2008 results before finalising the purchase of the shares. I remain to be convinced that things were so desperate they needed to finalise everything in a single week-end. It subsequently took a long time to get round to buying the shares and putting the money in, time which could have been used for due diligence followed by changing the terms of the deal in the light of the discoveries. That would have protected the taxpayer interest more.

As Barclays points out in their 2008 results, it was the Regulator’s demand for higher capital requirements at such a sensitive time which has led to Barclays not paying a dividend. That call to increase the demands at that worst of all possible times was the background to the panic share buying by the government. It did not help the banks re-establish confidence, and it left the taxpayer stranded with some shares which soon dropped in price.

Could it work from here? Yes it could. That will depend less on the reflationary package of the President, and more on the actions of the main world authorities in money and bond markets. On both sides of the Atlantic there have been signs of second thoughts in bond markets about just how much governments need to raise, with some fall in Treasury bond prices. It should urge western governments to greater caution in their spending, so they do not try the patience of the markets too far and cause long term interest rates to rise too much.

Last night Yvette Cooper, Chief Secretary to the Treasury, put pay to any idea that the government would remain at arms length to RBS and leave them to make their own decisions. She told us they had people going over all the detail of the bonuses and remuneration of the staff of the bank. It’s a strange way to avoid intervening. It’s also an ineffective way to stop bonus payments. All they had to do was to say “No”, at least to all the non contractual ones. Instead of a simple policy, she told us we will be paying the salaries of more people second guessing the management view of pay and bonuses at RBS. Wouldn’t it have been cheaper and fairer just to give them a bonus policy, now we own it?

This morning I awoke to hear that the government line on RBS bonuses is they do not want to run the bank, and have to allow the management to incentivise the staff. What nonsense! If you own a business you are responsible for appointing the management, for deciding how to remunerate them, and setting them objectives. As the taxpayers representatives the government has a duty to tell the nationalised banks what their aims are, who will run them, and what we will pay them. They cannot deny all power or involvement. That’s a stupid cop out.

It’s none of the government’s business how much Barclays pay their staff or how big their bonuses are. That’s still a matter for Barclays shareholders as they refused taxpayer share capital.

At least this weekend saw briefing from RBS that they are at last going to slim the Group down to cut taxpayer risk. Readers of this site will know I have been urging them to do so since they first dreamt up the dangerous idea of nationalising it. Let’s hope the government backs this or even encourages this. Or is this further evidence of banks we own but do not control? Was this a spontaneous policy on the part of the new management, quite unconnected with the interviews and job offers made? What is UKFI doing in all this to earn their bonuses? What guidelines are they setting RBS? I of course as an MP am not allowed to know, as my questions on it are blocked. People should not be so surpised. Many of my questions on all sorts of subjects relating to public money are blocked, and many of the ones that are allowed do not receive anything a normal person could call an answer. It’s just the way this government treats Parliament.

They are looking at cutting back the size of the investment banking activities substantially, as they should. They are looking at disposals of overseas activities. The sooner the better, as we need to get the bank down to a size the government can manage, before completing the return of the viable parts of the business to the private sector.

Liam Halligan this week-end in the Sunday Telegraph wrote a good piece warning about a possible increase in inflation in due course. He is right to remind us that CPI inflation rose last month to a high 4.1% if you adjust it for tax changes, and right to remind us that imports are going to be a lot dearer as the big fall in the pound works through to consumers. Readers of this site may remember my warnings of price increases ahead based on the fall of the pound. We have already seen some car price increases announced, despite the poor demand, as manufacturers seek to offset some of their losses on the Euro. We should expect more for other imported goods.

The Monetary Policy Committee will doubtless come up with some tortured prose to try to justify their further cut in interest rates last week. They clearly are not considering inflation in a year or so’s time as they should be, as prudence would have dictated an increase in rates from 1.5% if they had been. They are once again getting it wrong – they are so mesmerised by the present mood all the time, they find it impossible to think ahead as they should. They are clearly trying to manage rates now with an eye to activity rather than to inflation. Did they not see that despite agressive price discounting and the big drop in activity, some prices are already moving up, with much more to come as the lower pound works its way into import prices? Have they bought any petrol or diesel recently, where the pound has offset a chunk of the fall in world oil prices? Do they watch City attitudes to inflation linked bonds and to future inflaiton protection from commodities?

Once again they are driving using the rear view mirror, and now they even have a blurred view of that. Inflaiton is still too high despite the collapse in demand and output. We are living through slumpflation. There will be more price increases ahead, as a greedy public sector puts up its fees and charges, and as the higher import bill feeds through. The Monetary Policy Committee is meant to take all that into account. Instead, in a state of panic for their past mistakes, they continue to do the wrong things.

Meanwhile the Chancellor kicks bank bonuses into the long grass of a year long review. Why is it so difficult to accept the consequences of his mistaken nationalisation of RBS? Why can’t he come out and say as owner he wants to sell it off bit by bit as quickly as possible before it does more serious damage to the public accounts? And in the meantime there will be no bonuses for 2008, because the bank as a whole lost a stunning £28 billion and needed public money to preserve all its jobs.

When bankers bonuses are the main topic of conversation, I went to a soccer match yesterday afternoon to see what value we get from some of those very well paid footballers. It was a good thing as a cricket fan and cricketer to keep my mind off the collapse of the English team in The West Indies.

I would love to know from football regulars why the following occurred most of the time at the professional match I went to see:

1. The ball was kicked long up the pitch everytime it came into the hands of the goalkeeper or every time a goal kick was awarded. It seemed that more often than not this gave the ball to opposing team who could then launch a counter attack. Why don’t they kick or throw it out to backs or midfielders, to pass it up the pitch?

2. Most of the players huddled together where they thought the ball would land, instead of holding position or trying to get themselves into unmarked territory awaiting a pass. Wouldn’t it make sense to keep some players in less guarded areas and try to pass to them? Wouldn’t that force the opposition to spread out a bit more as well, creating some space?

3. Many of the longer passes were directed through the air, over the heads of other players, but this often meant they missed their targets or ended up on the chests of the opponents players. There was less attempt to change the angles, to run into space or to push through ground level passes to well positioned other players who might be able to move the attack on.

With all the money they were spending on manager and player wages, is it not possible to have a bit more variety and thoughtful enterprise? Or am I missing something, that all these well paid people have worked out long ago?

It was not a good day yesterday for English sports lovers. The only good thing that can be said about the rugby performance was we won, which was more than could be said for the cricketers.

Please spare us having to pay for another study of the banks. I can tell Treasury Ministers for nothing what it should say.

1. Many of the banks lent too much, and lent too much to peple and companies that will have trouble paying the interest and paying the capital back.
2. Many banks bought too many options, futures and sophisticated pieces of financial paper. Some of these are now worth a lot less than the banks paid for them.
3. The banks hired too many expensive people, and then paid them huge bonuses, in many cases without making the profits to pay them after allowing for changes in values of the loans and instruments they were trading.
4. The regulators allowed all this to happen, and actively encouraged over expansion of the banks by setting capital and cash requirements that were too low and interest rates that were too low. They then did the opposite and depended the crisis upon us. They also allowed mega mergers which overstretched managements and balance sheets.

If the government belatedly wants to know how much they are likely to lose on the banks they have bought, they should ask the expensive managers they are already employing to tell them, and have the figures confirmed by the auditors we are also paying for. If they want to know the positions of the banks they do not own, then read the Accounts they publish or ask the FSA who should know the figures.

There is no point in asking for another review and wasting time and money on it. If they just want to blame the banks again, then make a few more speeches. They won’t cost us anything extra and will not get us any closer to solving the problem. Listening to them in the Commons, the problem seems to be they have not read the Accounts that have already been published, let alone asked for management figures about what is likely to happen next.

The banks are overstudied and under managed. When it comes to bonuses for 2008, the Treasury should say to RBS:

” Bonus payments are inappropriate in a bank which has just lost £28 billion and taken £20 billion of capital from taxpayers. Staff are asked to forgo their bonuses for 2008, even where they are contractually entitled. No discretionary bonus will be paid. They should note if they do not agree to forget the bonus, there will need to be bigger staff losses and bigger remuneration cuts for 2009, as the banks costs are way out of line with its revenues, and it needs to start making profits and generating cash again. Senior staff insisting on their bonus payments will be held responsible for the overall losses of the bank when decisions are made about their future prospects”

In industry without access to public capital many good people are not just losing their bonus but losing their jobs. It is time the public banking sector woke up to the reality.