Nov 07 2009
More taxpayer losses
RBS yesterday posted more disastrous losses. They are dribbling out the write offs on their loan books. They are not making much money on their current activities. Despite this the bonus payments carry on.
Taxpayers are going to find this difficult to understand or accept. If the trading and investment banking arms are profitable and require people who will only work for a large bonus, then they should be sold into the private ownership as soon as possible, so they can enjoy their bonus there with no suggestion of public subsidy. If these activities are not profitable the taxpayer should not be subsidising the remuneration. Private companies can pay bonuses to people working in loss making businesses, because private shareholders stand treat and pick up the tab. If it works and the business moves into profit they make money. If it fails they lose their capital. Taxpayers should not be expected to run risks like this, and should not be subsidising bonus payments.
The results from this nationalised industry are dreadful. They make past losses of past nationalised industries look quite modest. They explain why the government has been persuaded to put so much additional capital into this loss making bank. It would still be far better to split it up, sell what can be sold, and find out how much has to be written off the remaining parts to reach a fair value. Doing it the current way, taxpayers are subsidising things they should not be subsidising, and the bank is being let off the essential tasks of cutting costs and working off bad loans as quickly as possible. The bank remains far too large for comfort, and its stretched balance sheet far too large for taxpayers to stand behind securely.
11 Responses to “More taxpayer losses”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Yes this is exactly right, as the profitable bits, if they are truly profitable, would fetch an appropriate return for the taxpayer even now, whereas other less profitable parts wouldn’t.
Sadly I’d expect a Tory Governement to take their cue from Brussels on what to do next though, and proclaim that nothing different could possibly be done.
JR: “RBS yesterday posted more disastrous losses. ”
While I wouldn’t start from here, I wouldn’t have nationalized the banks in the first place, it is not completely bad news.
Government creates £25bn out of thin air, RBS destroys several bn. hopefully the result is attenuated inflation.
It would be much better if the government simply cut back its spending and cut loose its nationalized banks. We would soon see how much money was available for bonuses then.
But I doubt the Labour government will do that and indeed that is exactly what QE is designed to stave off.
And because a politician is incapable of making an electorally disadvantageous decision, the government drives the country to bankruptcy.
Agreed no bonuses until into profit, if they do not like it go elsewhere.
These workers would be out of a job without taxpayer cash, as the business would have gone broke, the value of any agreement would then have been zero, and they would have no wages at all, only the statutory government redundancy money.
They ought to think themselves lucky they are still in employment at their old salary in their old positions, unlike the millions who are on job seekers allowance or less.
Many of us are getting fed up with this endless subsidy.
Have normal accounting practices been suspended for banks like RBS? Why are they allowed to “dribble out the write offs on their loan books”? Is there a conspiracy amongst the banks, the accounting/auditing firms and the government at play here? I have zero confidence that this banking crisis has been dealt with and await the next instalment with some trepidation.
JR, selling off the bits that can get a bid price in open market would be the normal way to go. I would hate to be the guys doing the “due diligence” though.
Would / should there be a “claw back and overage” clause in the offer document – like is done for land sales likely to get planning permission in the future? It would drop the bid price for such assets at sale; but, just might be a nice little earner down the road for us taxpayers.
What you reckon?
I am disappointed that you choose to get involved in the smokescreen that is bankers bonus.
The question that should be asked is why is the government borrowing money to speculate on bank shares.
I can understand why at this point of time the government (with their ability to borrow monies) should be acting as bankers to the banks, but not why they are constantly asking for then supplying more capital at a time when banks are shrinking their balance sheets.
I think it is true to say that even Goldman Sachs would be in serious financial difficulties if AIG hadn’t been bailed out: the fact that they “made” $100m profit a day in the last quarter should be seen in this light.
When I first became involved in trading, our manager used to say “I don’t know if my grandmother could have done a better job” – meaning that just because our trading was profitable, it might have been due to luck rather than skill, or to some inbuilt advantage that we had as a business. Among the things I did while working there was to devise some methods for measuring what element of profit was due to skill (you can’t expect to be just lucky perpetually), and what to market conditions, etc. which allowed a much more genuine benchmarking of performance that picked out e.g. doing well in tough conditions, and not doing well enough when the going was easy.
Since the financial crisis broke, banks have had the market dice loaded in their favour in many different ways. Normal competition has been suspended, allowing them to enforce a huge interest rate margin between savers and borrowers on their hapless customers. The BoE has been buying assets (in particular gilts) at well above free market prices – allowing profit to be booked by the banks: it has also been lending to them at below market interest rates. Market moves are well signalled because the BoE’s supply of cash has to be invested, allowing profit to be washed through equities, currency and commodities trading, sucking in punters into today’s new asset bubbles.
In such heavily subsidised conditions any bank should make a profit from ongoing operations without displaying the competence that merits a bonus (that applies to solvent and nationalised banks alike). Indeed, there is some argument for a windfall profits tax on those banks that don’t need the subsidy to recapitalise as they drip feed the writedowns from their off balance sheet vehicles.
I said that RBS should have been allowed to fail in the first place. Still, we are where we are. The RBS CEO’s idea of getting the bank back to profit is to take a punt on creating complex high risk financial instruments for the Indian market; we know who’s at risk, don’t we? Meanwhile, how much time and effort is being spent minding the shop?
RBS is a conglomerate. Many of the businesses that they have taken over still trade under their old names – NatWest, Direct Line, Churchill etc. This should make them easier to sell off. Certainly, the insurance companies Direct Line and Churchill should be sold off PDQ. There is NO synergy between banking and insurance.
Perhaps an RBS bad bank should be created. It will speed the sale back to the private sector of everything else.
The timing of selling off an RBS bad bank would depend on when the housing market reached its temporary peak, before the start of the second part of the double dip recession that is inevitably coming.
Generating rip roaring inflation will ensure that this temporary peak is both later and higher – closer to the 2007 peak. This will minimise the taxpayer’s losses at the expense of those who lose out (savers, those of fixed incomes, the general public) when high inflation occurs.
Whatever happens, the wise virgins will have paid for the foolishness of the foolish virgins.
I should have said that selling off an RBS bad bank would involve paying someone to take it away.
Some of us are heading for sunnier climes to re-charge the batteries. For those who care – which includes all contributors here – it’s been a depressing week in a sad year for Britain.
Thoughts aloud as we pack the swimming shorts…
1. Would the sale of the trading parts of the banks in reality yield much of a return for taxpayers? Isn’t it like ‘trading’ in any commodity…the organisation is as good as its last few deals and the economic climate/market conditions that prevail at any particular time? With the key personnel gravitating to the highest bidder, or being paid retainers to stay put, is the organisation itself of any real intrinsic value?
2. What would have been the cost of simply guaranteeing the retail customers deposits in the 4 banks that failed, as many advocated, rather than shoring up the complete edifices?
3. The reason that banks seem to be piling up huge profits again seems to relate to the 4 or 5% commissions being paid on paper transactions. Doesn’t the taxpayer get short-changed by these rates and why doesn’t a more realistic say 1% commission apply for these straightforward trades?
As with so many percentage measurements the proponents lose sight of the ‘Quantum’ return. As grocers and wholesalers of old WE never have…it’s the cash return that counts and financial market traders are leading us a merry dance!
Reply: Almost any method of aiding the banks and protecting depositors would have been cheaper than the chosen route. A time limited loan or deposit gurantee could have been priced sensbily for taxpayers and would by now no longer be needed. Breaking up and selling off the banks is important to cut taxpayer risk.
Lindsay’s comment reminds me: perhaps we should be seeking to sell off all public sector housing to foreign interests. Even with a volume discount, the price would probably contain a bubble premium. 4 million homes at say £130,000 each would generate £520 billion – which would knock a serious hole in government debt. The foreign interests would be on the hook for the real capital loss as prices correct. What’s not to like?