Dec 04 2009
Banks double – or treble – the national debt
The National Audit Office yesterday confirmed that taxpayers have £850 billion at risk through government guarantees, subsidies, shareholdings and other support for the banks. This is a generous way of working out the figures. In practise taxpayers are on risk for £3 trillion of banking liabilities at Lloyds and RBS, as we all know it will be taxpayers who pay their losses if they make more. If we equity accounted for these two banks as private sector companies do, attributing some of the risk to the other shareholders, it is still a £2 trillion plus taxpayer commitment. On the NAO’s figures public debt and financial risk is double the old figure, thanks to the banks. It now exceeds National Income on the NAO figures.
The NAO also revealed that the cash cost so far to taxpayers is £117 billion plus refundable fees, producing a gross total of £131 billion. That is larger than either the Health or the Education annual budgets. Readers know that I recommended a far cheaper and less risky way of seeing the bad banks through the crisis. Now we are where we are, there are still cheaper and better options for taxpayers from here.
The overriding priority should be to cut the risk to taxpayers. Selling off foreign banks from within the RBS and Lloyds group would allow taxpayers to get cash back from their forced investments, and would reduce the risk of future losses. Winding up or selling on much of the investment banking business would also slash risks. It would have the happy political effect of removing the highest paid executives with their bonus pools from the taxpayer. It would mean that next time a Dubai World stops making payments it will just be private shareholders and their bank executives who have to sort it out, not the hapless UK taxpayer and our bank executives.
The UK state is too small to accept these massive risks. The electorate cannot accept that taxpayers have to stand behind the investment banking and foreign banking arms of RBS and Lloyds, and watch as their heavily subsidised banks pays salaries and bonuses beyond the dreams of most people’s avarice to a favoured few, whilst reporting overall losses. They are right to challenge this. Let’s start getting some cash back. Let’s stop underwriting so many risky businesses.
27 Responses to “Banks double – or treble – the national debt”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
We know that there are c. £350bn of impaired assets on the balance sheets of UK banks – £250bn on RBS’s. These are not valueless but they are certainly worth much less than face value. So there is an embedded loss, yet to be recognised, which is likely to exceed the £131bn cash cost of the equity injected to date by the taxpayer. The shares are still quoted with positive value as the banks are not being forced to recognise losses and therefore now trade at a ‘profit’, so can pay dividends. But the taxpayer has no realistic prospect of recovery of the equity – unless the state keeps its guarantee in place and remains the major shareholder the equity will find its true value (zero). An absurdity is that the managements are incentivised to maximise the quoted share price – and therefore have every incentive not to recognise true losses, so locking in the taxpayer and perpetuating the zombie nature of the banks. If the board of RBS is changed the government should take the opportunity to change the strategy and wind the whole thing down. Its time to recognise that the equity has gone and can’t be recovered, and that the main focus should now be on getting rid of the contingent liability (which is far greater, as you point out).
michael read Reply:
December 4th, 2009 at 3:58 pm
That’s clear. Great post.
What I find worrying is the difference in values you suggest that the taxpayer is at risk, and the calculations suggested by the National Audit Office.
If the figures put forward from the National Audit office are so wrong, is it any wonder we are in one god awful mess, and will not have proper policies to get us out of the mess, as all solutions would be based on incorrect figures.
Today we have as headlines in the daily newspapers, differing figures as to how much this Banking Crisis is costing each family in the Country. They vary by huge amounts some being four times as much as others.
Given that the amount of debt that is toxic is as yet not really quantifiable (at least that is what we are told) until they are either sold, repaid, or defaulted upon, who really knows the true figures, and who is putting spin on them.
John I do not doubt that you have done your homework, but how many others have, and what are they leaving out.
Reply: The different figures on different bases. The NAO figures are not wrong – but my view is we the taxpayers are on risk for all the assets/liabilities of RBS and Lloyds. That would be reflected in pirvate sector accounting.
It was also reported that we’ve spent over a hundred million on “advice” from consultants. I think they could have got a better deal there by using their own brains, instead of paying.
Mark Reply:
December 4th, 2009 at 3:54 pm
Their own brains? That’s what got us here. I’m not suggesting that the advice they got was worth what they paid for it except in the sense that the losses would have been greater by more than the cost of advice. However, a subscription to e.g. Prof. Nouriel Roubini’s analyses would have been much cheaper – let alone the free advice available by reading this site.
james harries Reply:
December 4th, 2009 at 9:27 pm
Whose brains would those have been? Yep, those brains. So, paying consultants may have been a pis aller.
As Gordo found out when he timed the sale of our gold so well, is this not a bad time to be selling off assets?
The banks seem to be playing the game of saying that if the Govt cuts/taxes or stops bonuses then they will move overseas. This is blackmail and should be dealt with by removing all Govt guarantees. Let them sink or swim.
I’m a capitalist and this isnt capitalism, its simple theft by a few from the majority of taxpayers. To think this is happening under a Labour Govt is very sad indeed.
I find myself in despair at how the standards in public life have plummeted, now it seems even the NAO are falling down on the job. SKY reported that the NAO weren’t able to tell what the final bill would be (so far, so true) but that it was “worth it”
So now the formerly sensible NAO is able to pronounce on the merit of something without a clear idea of the costs! Words fail me.
Had I, as a lowly graduate trainee, gone to see my bosses and recommended the purchase of asset A, without knowing to the penny, what the costs would be, but blithely announced “it will be worth it” I would have had my cards that day. This perhaps explains why my erstwhile employer remains profitable while the government is perhaps less so.
An apposite quotation, spoken by the Paranoid Android, “I think you ought to know that I’m feeling very depressed” sums it up nicely.
Heresy is proposing some unorthodox change to an established system of belief, especially a religion, that conflicts with the previously established opinion of scholars of that belief such as canon. (Wikipedia)
This is Heresy no less. The next thing John Redwood will be telling you is that the earth is not only flat, but also revolves around The Sun.
Cat got your tongue?
I’m absolutely amazed the government hasn’t already tried to close down the investment banking business of RBS (such that it was, created a day late and a dollar short in the boom time). There are many gems in RBS. Hoare Govett could quite easily be sold. (I had a large overdraft working on a PhD at Bristol in ‘95 when I said to myself, stuff it, I’m off to the City – Hoare Govett gave me my first job – I can’t help but think Belle De Jour, working on her PhD in Bristol, should have considered a career in the City). They also have a commodity trading business (Sempra), that could be sold.
I suppose the trouble is, these are the ‘good’ assets, that as an investor you’d be keen to keep: the point is though, government has no business running banks.
As Balls would say, “So what”. Sadly, until many more people follow the Corus workers and face a bleak Christmas and future, all this madness will go unnoticed.
i agree with the need for the state to get out of investments banking, it just is not the game. I wrote the same on my blog this morning.
However, all the toxic assets are part of RBS’ investment banking group, albeit now called ‘non-core.’
the value realised from selling what is left won’t cover very much at all. it is the non-core assets, mainly property, that will cause the pain. it may be that over the years these unwind and do not cause too much pain; it may not work out quite so well.
Whether they will ever generat enough money to pay the interest on the gilts issued is again very unlikely.
it is a sorry mess, but I notice the Government very handily had the NAO report out to rebuff RBS v. quickly. Power in the UK does still reside in the Government…
Through the hazy mists of my memory do I recall a couple of weeks ago reading that Mr Darling had now shifted bank losses off balance sheet a la PFI? Has he been taking banking lessons from Baldrick so cunning are his plans?
In that case what do the losses matter! In the la-la land of Brownbottomian economics things will actually start improving from now on regardless of the reality of the situation! (Or at least the headlines in the BBC and Guadian will say they are)
Wasn’t the original idea that we needed big banks in the UK to compete internationally? (whose ad campaign was that?)
If we split up and flog off the rescued banks, the bits will surely be snapped up by our foreign competitors. Is that really the plan John? sell out our financial infrastructure as well as energy ,water etc?
If, instead of “rescuing” ailing banks, the government had said, “declare yourself insolvent and we’ll take you on from the official receiver as a going concern,” they could have kept the banks trading without the contractual bonus liabilities and debts.
Propping the banks up by injecting share capital and lending liquidity was a mug’s game; just good money after bad.
For the future retail banks which are guaranteed by the tax-payer should be constrained to a deposit/lending ratio of 1 and not allowed to lend to or invest in leveraged situations. Commercial banks should not be allowed to take deposits, should not give government guarantees and can do as they please.
alan jutson Reply:
December 5th, 2009 at 10:28 am
Mark
Your first Para exactly my thoughts.
On 25 November as part of my posting I asked “Are there any credible accounting standards that apply to government and the BoE? How can anyone have any faith in what they are told about the state of the banks, the economy or anything else the government is involved with?” The answers are clearly No, No and you most certainly cannot!
feedback on the conservatives on the TV over the last few days…
if the Conservatives cannot front up some educated folk with underclass/working class/or even middle class accents to put their points they are going to struggle
brown was right to hit straight for the biggest weakness of the conservatives
if cameron thinks surrounding himself with folk with inherited wealth and public school backgrounds is a winning strategy he is badly mistaken
frankly it terrifies me that folk think they can run the country with such a poor cross section of the population reflected in their ranks
and this is from someone who badly wants you to win!
please please tell me the conservatives have a plan to address this?
Kirstie Allsopp? Zac Goldsmith? is this the best talent the country has available? i think not
Our host has been saying for some time now that:
1. We ought not to underwrite banks because we are a medium sized country and the banks are big.
2. We ought to sell off as much of the banks as we can now – or sooner.
3. We own the banks, so running them is up to the government. (Bonuses).
4. Nationalised endeavours often do not make profits for the country.
5. The toxic debt is still there, lurking.
Obvious? Just look at the media coverage!
After lunch today, I went to sleep watching Education Debate in the H of C. There was Mr Balls graciously receiving questions and generously handing out tens of millions of pounds of our money for charitable works, often to his own MPs’ constituencies.
Shortfall? What shortfall?
I was reading that some Dubai debt is trading at 50 cents on the dollar with the gamble being whether it will be repaid or not. Any UK banker could gamble on this – if it is repaid at par they would make a fortune for their bank and receive an enormous bonus. Yet if the debt defaults the bank would lose a fortune but the taxpayer would come to the rescue. Heads they win, tails we lose! That just can’t be right can it?
O tempora, O mores!
For those without a smattering of Latin:-
Oh, the times! Oh, the morals! (Cicero)
Mr. Redwood, you are the one bright light in a very dark sky. Please keep telling us how it really is.
The national audit office figures are plain weird, why can’t they just produce proper accounts that show a distinction between capital and revenue expenditure.
I fully support selling off as much of RBS and Lloyds/HBOS as soon as possible. However, let us not fool ourselves. Any buyers will want to go over the books and assess the value of assets, including the liabilities of “toxic assets”. The best time to sell will be in the second half of 2010, when the effects of QE have reinflated asset prices, including US and UK house prices, and before the second dip of the double dip recession. I’m sure that the US Fed will continue to co-operate with easy money.
The government got it completely wrong when it re-financed the banks. The core of the problem was that we collectively had over-borrowed. We had borrowed more than we could afford to pay back. The banks were having to write off such large sums, they were running out of cash.
Instead of flooding the banks with cash, which we now have at risk and must pay for through our taxes, and simultaneously leaving us all with our debts, which we also still somehow have to pay back, the government achieved the worst of all worlds.
It is said that we each individually owe in excess of £5,000 to pay for this mess in addition to whatever we each owe for our own personal debts.
Would it not have been more sensible to sit down with the banks and say to them that they could have £5,000 per individual, but that the price to be paid was that the banks had to write down the amount every domestic (UK) account holder owed by an amount that would match the sums received by the bank from the government. That way the banks would have been refinanced and we would all have had real money made available to us to spend, which would have been available for use in the real economy. The banks balance sheet ratios would have been improved thereby enabling them to keep lending, if indeed that is a desirable thing in the first place.
As it is, there is no money for the banks to lend to us and we have no money to spend in the economy because we all still have to pay back the banks.
Now that armageddon has been avoided, perhaps the government should say to those banks which want to pay bonuses to their staff that they can do so on condition that they pay back to the taxpayer the same amount that they are paying out in bonuses. After all, if they are sufficiently profitable to pay bonuses, surely they are sufficiently profitable to pay us back some of what they owe us?
Jeff Reply:
December 6th, 2009 at 4:28 pm
This is a great idea for the debtors. Would the savers also get 5000?