Oct 28 2009
“Nationalise the losses, privatise the profits, clobber the taxpayer” – current policy
It is good news that breaking up large failed banks is on the agenda. It is good news the EU is on the side of more competition in banks. It is bad news that the UK response to this is to split the good bits off for sale and to leave the bad bits for taxpayers to pay all the losses.
This is lop sided privatisation at its worst. It is crazy economics, leaving the banking market with newly privatised large banks unencumbered by some of the usual junk loans all banks have accumulated over the years. It is another nasty mugging of the taxpayer, expecting us to pick up all the bills for past excess and present sloppy management.
I guess this shortest of term governments wants to be able to present an imminent “success” in the form of the possible sale of the good bits of Northern Rock “at a profit”. Any fool could sell parts of any of the nationalised banks for more than taxpayers paid for the whole, because the toxic estates will be so expensive to maintain and sort out.
Proper privatisation of the banks should be about two aims. The first is to cut taxpayer risk. That means selling as much of the bad loan portfolios with the better loans and branches as possible. We want to shift responsibility for managing poor peforming loans onto the private sector, where it should have remained throughout. The second is to create a better more competitive banking industry. We will not do that by selling RBS UK as a whole shorn of its unsuccessful loan books, nor by selling Lloyds/HBOS as an entity.
The main problem with the bad bank concept is obvious. Why should the poor taxpayer have to stand treat? The management issue is large. Who will run these remaining bad banks? How will they have an incentive to minimise the losses, given the recourse to the state and the printing presses to sort out the problems? Can you give me examples of well run businesses in wind up mode handled by the public sector?
We need a vision of a new UK banking sector, where brands like Nat West, Halifax, Bank of Scotland, TSB and the others subsumed into the failed mega banks are brought back to reality and established as independent private operations, each with their share of poor loans from the present accumulations. The aim should be to sell everything somehow, even if that means some of the new banks going for negative consideration in order to get all the bad loans away. Then we will know how much the taxopayer has lost from this expensive and ill judged experiment in nationalised banking, and the taxpayer will at last be freed from more risk.
There is no iron law which says that bad debt portfolios must improve from here. They could get worse. That is one very good reason why we should try to sell all we can as soon as we can. There must be a limit to how much taxpayers are made to suffer.
17 Responses to ““Nationalise the losses, privatise the profits, clobber the taxpayer” – current policy”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Quite right!
One suspects they are (privately) hoping for serious inflation which will erode and eventually eliminate the debts of these banks so they will at least notionally in non-real terms have a positive cash value. They can then say “We saved the banking system/UK economy/world/universe and look at these beastly tories who have delivered inflation”
Low politics at its absolute worst, but it does rather explain zero interest rates and £175B of printed fiat currency in the knowledge that they will be gone when the whirlwind they have sowed starts to seriously blow.
John whilst I take your point, you miss the point.
The headline statement will read:
Taxpayer investment in Banks, sold at a profit.
We were right to support the Banks.
Gordon’s plan has worked.
The small print if any, will show that the toxic debts are still on full taxpayer risk, but given the way this Government has manipulated the Media so far, I doubt that many will even pick this up.
Of course your point is correct, any defaulting, bankrupt, Company can be sold at a profit over its real worth, if you take away its debts, but how many will know the real story.
Afraid it is up to you and your Party, and the Liberals to nail this lie, if this is indeed the intended plan.
However these banks are disposed of, they should not be “sold” to any existing major banks, making them bigger still. Tesco, Virgin and Sainsburys (and no doubt some others) all want to get into mainstream banking and should be asked under what conditions they would take them over. Then there might be some real competition amongst banks.
Agreed, but we have to recognise that if banks are privatised with the bad debts still attached, we will get a lower price for them, so the taxpayer still suffers but in a different way. And the due diligence process will involve full analysis and disclosure of all toxic assets. The main reason for doing it your way is that existing private sector banks will not face unfair competition.
The truth is that the pass has already been sold. Only if we had allowed banks like RBS to crash and burn would the taxpayer have been spared. Instead, RBS depositors would have suffered. New and more well run banks would have emerged.
We can at least get it right in the future by saying – and meaning it – that any bank that is already wholly in the private sector will not receive taxpayer support IN ANY CIRCUMSTANCES.
The truth is that the investment departments of banks are prone to mass hysteria, especially when money is too cheap and they are awash with funds. There was the time when they all thought that South America was the place to invest, which cost the Midland Bank its independence. Then there was the Bank Assurance madness, when they thought that there was a synergy between banking and insurance activities. What synergy? Recently, there has been the urge to buy up chunks of sub-prime mortgage debt.
We really do need to get better people in the banks’ investment departments. If we allow banks to fail, that should happen, and regulation could be confined to cash and capital ratios.
This together with QE is effectively recapitalising the banks via taxpayers and savers. Investors who bought at the top are being bailed out whilst those who saved are seeing their money devalued.
The bankers run this country.
A lot of people are pressing for Northern Rock to be re-floated as building society funded by its account holders rather than as a bank, returning full circle.
This would appear to be the most straightforward way to split up banks: by business orientation rather than size.
Returning mortgage finance exclusively to building societies is truly conservative in backing a traditional institution that worked.
It would stop banks getting in too deep with real estate when banks’ involvement in landed property always seems to end in trouble. The global system went bust when American mortgages were pushed as triple A grade reserve assets: Lehman Bros went bust because they were acting as straightforward speculative house builders in Bakersfield.
Banks and investments in landed property don’t mix, perhaps because land has a very elastic inflationary potential.
Very well argued.
I’m with a bailed-out bank, which is constantly sending me letters to borrow loans of ridiculous amounts of money which I could never hope to pay back on a part-time wage. Are they using my money to try to get me to borrow more of my money and pay for the privelege?
Trying to prop up someone else’s bad debts who still has to borrow to survive is very like handing a signed open cheque to a gambling addict. The misery will just go on and on and on. The taxpayers at present have been committed to unknown and unlimited amounts in the future. If the Government does not stop it, then sooner or later the markets will and there will be yet another major financial disaster.
Last year, I favoured a “Bad Bank” in to which the assets were put on the basis of 1/3 of their face value being paid by the government to the original shareholders and the original shareholders and the government then holding the assets on a 50/50 basis, but with the government stake taking priority.
If the loans came out a 2/3rds of value over time, the Government got its cash back, if they did better, the banks got some extra bunce, but their losses were capped at 2/3rds of face value up front.
Too late for that now of course!
Some chap on the radio this morning was opining on the acquisitions Santandar has made in the UK and how they are now turning a very healthy profit for them and bolstering their books.
With streamlining of branches around the corner no doubt they will start doing even better.
Doubtless this will also happen if the government proceeds with this hare brained scheme and further lower the competition in the already consumer unfriendly banking sector.
You are once again very right, and there are several useful addenda among the comments. I would only add that it is inevitable that in real terms we will see defaults: either through inflation, or deflation. The real value of property will revert to non-bubble levels one way or the other in the course of the next few years.
Inflation may seem the more superficially attractive route to take assuming we can choose, until we consider how that has ended up in countries from Argentina to Zimbabwe. The implications are horrendous not merely economically but socially: unrest becomes a certainty, and virtual civil war a possibility. It is the reason why it is now so urgent to stop trying to inflate the house bubble still further, and to bring government debt back under control.
Notice nobody mentions the 180,000 Northern Rock shareholders who have had their shares stolen from them and are now powerless to watch as the government sells their shares for profit.
Regarding your blog, I think you have been listening to Vince Cable. The govt. was never at risk as NR do not have toxic assets they have bog standard UK mortgages.
JR: “It is good news that breaking up large failed banks is on the agenda. ”
Except it could have been done eighteen months ago at far less cost to the tax payer.
Northern Rock – for example – collapsed.
Bond holders and Stock holders would have lost everything in accord with the hierachy of their particular security. Good!
Depositors would have come out chastened but wiser having been protected by the deposit insurance program. Also Good!
The old Northern Rock would have closed, its top management fired, its other creditors been paid off if there was any cash left otherwise nada.
The following day, the government could have recapitalized a new company with the £1Bn, using the former Northern rock company structure. ‘New Northern Rock’ open for business.
Bam! no one loses out except the Bond and stock holders. That is as it should be – we are supposed to be a capitalist economy.
Bingo! Defined cost to the tax payer, limited loss to the deposit holder. A chastened but new Northern Rock management.
I agree with Mr Jones, Bankers run this country, in fact the Whole New World order that Mr Brown constantly goes on about.
Global this and Global that, a Global war on Terror requiring international policing, intel, internet spying, a globally integrated cctv system, Global warming so we can all pay our Carbon Taxes to a Global Dictatorship headed by the UN, a Global Pandemic so we all have to obey WHO dictates, and a Global Credit crunch.
If I were a cynic……..
We feared, and warned here and elsewhere, that taxpayers must watch out for this dying government selling good, and potentially very good, assets to friendly forces at lousy prices.
We recall that Lord David James of the buried James Report fame offered to oversee the sale of ‘distressed’ government/taxpayer assets and we felt something on these lines would introduce some control. Wonder what became of that initiative? (Maybe the same as his last effort of which we could never obtain a copy incidentally?)
This announcement by the failed money managers in Downing Street looks like the start of what we feared and it seems that you and our fellow bloggers have seen through it at the outset.
How can all this be delayed if not massaged into a sensible policy?
Andrew Gately
Many of the shareholders in Northern Rock paid nothing for the shares they received when the former building society demutualised. If the company had not been based in a Labour heartland it would have been allowed to fail, and the shareholders would have suffered the same fate as all shareholders in badly managed companies.
While there may be some debate over whether RBS and Lloyds/HBOS should have been allowed to fail (I think they should, but not all the arguments for supporting them are completely fatuous), there is no such debate over Northern Rock; when the directors drove the company onto the rocks the loan book should have been sold to repay the depositors, with the pre existing guarantee scheme making good any shortfall up to its limit. Shareholders would have been entitled to any surplus after depositors had been fully repaid (in other words they would have been unlikely to see anything).