Time to Break Up RBS and Get Shot of It

Time to Sell it Off

The Chief Executive of Royal Bank of Scotland, Stephen Hester, has commented that the banks are

coming down to earth with a bump

are

detached from society

and need to reconnect with their customers.

He was uneviling RBS’s latest losses – this time of £1.5 billion in six months.

Channel 4 comments that

On top of the £1.5bn loss in the first half (compared to a loss of £794m last year) there are mounting frustrations within the government about RBS’s failure to lend to UK businesses, prompting senior government figures to discuss a possible £5bn buy-out of RBS private investors to fully nationalise the bank.

(RBS is currently 82% owned by the State.)

Well, its only taxpayers’ money after all. Let’s sluice another £5 billion after the last lot.

Indeed, while those government people get upset because they think RBS isn’t doing its bit to keep the debt balloon inflated, actually the bank provided almost half of all new loans to small and medium enterprises last year. It seems that State-owned banks like RBS can be relied upon to provide loans where others are more reluctant.

The government definitely should not be buying more RBS shares. On the contrary, the right way forward is to break up the bank and sell it back into the private sector as fast as possible. If this drags on too long, RBS will become the British Leyland of our banking system.

Hmmm. Am I too cynical in suspecting the government does indeed intend to announce a sale – just before the next election?

Those Cuddly Mutuals Have a Dark Side

Image by Kake Pugh via Flickr

Lloyds has agreed the sale of 632 branches to the Co-op.

The sale of these branches was a condition imposed by the European Union on Lloyds, as a condition of its receiving State aid when the government bailed it out during the credit crunch.

The customers who are attached to those Lloyds branches (who number 4.8 million) will also be transferred to the Co-op.

The Telegraph comments that the price, £750 million, is far below the £2 billion that Lloyds had hoped to get for those branches. This is a “blow for Lloyds”, according to the Telegraph – but at least they have disposed of those branches and can now move on.

The Telegraph also mentions that

The price cut reflects the the regulatory and funding problems Co-op is likely to face

Those problems will be alleviated by the fact that Lloyds will underwrite the debt that the Co-op is taking on to pay for the deal. But that won’t help with those regulatory problems.

The problem is that the Co-op took over Britannia Building Society as recently as 2009. The Britannia at that point was actually larger than the Co-op Bank. The integration of that business with the Co-op is far from complete.

This deal will boost the Co-op Bank to 1,000 branches. Of those, 638 will be former Lloyds branches, and more than 200 were previously Britannia ones. The Co-op Bank will therefore have five times as many branches as it had two years ago.

Peter Marks, Chief Executive of the Co-op Bank, claimed he had achieved a “good deal” for his members.

Well, it’s obviously a good deal for him and the other executives of the Co-op Bank. But does it really benefit members?

George Osborne, of course, loves the deal:

“This is another step towards creating a new banking system for Britain that gives real choice to customers and supports the economy,” the Chancellor said. “The sale of hundreds of Lloyds branches to the Co-operative creates a new challenger bank and promotes mutuals. This… represents another important step towards a more competitive banking sector.”

Really? I guess it makes the Co-op a more powerful challenger on the High Street, but is it really desirable to promote mutuals?

It is often commented that publically listed companies are only weakly accountable to their shareholders. But the accountability of mutuals to their members is weaker still. A Building Society, or indeed the Co-op, will have thousands or even millions of members, each with a single vote at the AGM.

At least for a public company there are typically a small number of large shareholders who can force some accountability by virtue of the fact that they get a vote per share they hold.

In the case of a mutual, most members don’t bother to attend the AGM or to vote, and those that do typically vote as they are recommended by the managers. After all, those managers are leaders of a cuddly mutual so obviously have their best interests at heart!

And there are no big shareholders with the muscle and loud enough voices to force the management to listen if they are making mistakes, or if they are more interested in empire building than the interests of their members, or even just if they are paying themselves too much.

In the case of the merger of the Co-op with Britannia, the Britannia members had to approve the deal. Of course, like sheep, they did so – at least the minority who bothered to vote. There were in fact good reasons for thinking that the deal was not in the interests of Britannia members.

And in this case, with the Co-op stretching itself so wide to grab these Lloyds branches, there are also reasons to think their members really have no reason to welcome the deal.

More generally, it seems to me that mutuals are grossly lacking in accountability and are typically run for the benefit of their executives, even more than public companies (or indeed the government!) are.

The mutual “movement” really has nothing to be proud of. There is a serious accountability deficit inherent in their business model.

George Osborne’s £80 Billion Smokescreen

Image by altogetherfool via Flickr

The latest taxpayer bailout for our banks has been launched by George Osborne. This time it amounts to £80 billion.

It is rather unimaginatively called “Funding for Lending”. The government say it is designed to get banks lending to businesses. (And whisper it: to housebuyers.)

To understand the scheme, you need to be … well, you need to have a screw loose really.

Bear with me here. It is quite complicated but if you think it looks ridiculous, that isn’t because you don’t understand. It is because it actually is ridiculous.

Here’s how it works:

The bank provides “collateral” to the Bank of England in the form of loans or mortgages. Against that collateral, the Bank of England lends Treasury Bills to the bank concerned.

For example, if you have a mortgage, the bank could use that as security to borrow Treasury Bills from the Bank of England.

The Treasury Bills are not money. But they can be used by the bank as security to borrow money at lower rates (because they are backed by taxpayers). If the bank wanted to use your mortgage directly as collateral to borrow the money, they would have to pay much higher rates – because the markets would see that mortgage as pretty poor security.

So the bank can borrow money more cheaply, and can lend that money to somebody else to buy a house or expand a business.

Does that sound like it would work to you? No, me neither.

But it’s actually even more stupid than that. Where did the Bank of England get all those Treasury Bills from? The answer is that they were bought from the commercial banks during the Quantitative Easing programme.

And where will the banks be borrowing all this new money from, with their shiny new taxpayer-backed Treasury Bills as security? Well, they will be borrowing from “the money markets”. And that means the money will be taken out of somebody else’s bank account, somewhere.

In other words, the amount of money available to the banking system as a whole will be entirely unaffected.

That somebody else’s bank account would have been one upon which the bank was paying derisory interest, and now the bank is paying money market interest instead. So the costs to the banking system of the money are higher, not lower, as a result of the scheme. Some has, in effect, been syphoned off by the people who run the money market.

So there we have the net effects of the scheme. It will increase the banks’ costs and not increase their ability to lend.

It is even more hare-brained than Gordon Brown’s theory that he had abolished the economic cycle (aka “Tory boom and bust”).

No, actually, it is not hare-brained. It is a smokescreen for the real issue.

The clue to the real issue is those Treasury Bills. The Bank of England bought those from the commercial banks during Quantitative Easing, remember. But where did the commercial banks get them in the first place?

They came, of course, from the Treasury. The Treasury issued them to fund the humungous government borrowing requirement.

The real reason the banks don’t have any money to lend to housebuyers and companies is that they have lent it all to Her Majesty’s Government. This new scheme of Mr Osborne’s is just a smokescreen to hide the fact that the government is strangling our economy by spending too much.

A Little Light Relief from Our MPs

Sir Mervyn King – image by Downing Street via Flickr

The Treasury Select Committee reckons the taxpayer may have been a victim of the Libor interest rate fixing scandal.

The taxpayer may have been a victim of the rate-rigging scandal during the £200 billion bail-out of the banks, leading politicians have warned.

By manipulating interest rates, apparently, the banks

may not have paid enough to take part in the first bail-out engineered by the Bank of England in 2008.

Jeepers. Talk about not seeing the wood for the trees.

Just how much was “the right amount” for those banks to pay for a £200 billion rescue from bankruptcy?

It is easy to be wise with hindsight of course, but it is becoming ever clearer that no price was right for this rescue, because the rescue simply should not have happened at all – or not in the way it did.

The government certainly needed to intervene to prevent a disorderly collapse of the banking system. But it did NOT need to bail out the banks’ owners. The insolvent banks clearly should have been put into Administration, broken up and sold off, with the State standing behind the bank deposits to prevent a systemic collapse.

At the time, Mervyn King was a hawk on all this. He was, quite rightly, warning of moral hazard.

Sir Mervyn may have many faults as an economist, wedded as he is to the Keynesian orthodoxy. But it is clear that he understands banking very well.

What a shame it was Hector Sants, and not Sir Mervyn, who was regulating those banks while they were fixing Libor.

Bankers

Image by World Economic Forum via Flickr

They really are. Bankers. Or bonkers.

Says Peter Sands, head of Standered Chartered: the biggest threat to the City is that Britain might leave the European Union. Because, well, if we left, then…er…well, something bad might happen. Possibly. He has, according to the Telegraph, been muttering dark warnings to David Cameron.

Meanwhile, back on planet Earth, the biggest threat to the City is actually the EU itself. As the Telegraph says:

…Monday EU summit at which European-wide banking union, will be a key item on the agenda.

Mr Cameron is concerned that the plans – which include proposals for a pan-continental regulator – will undermine the City of London and is seeking formal safeguards to protect Britain. On Monday, European officials said a deal on banking union would be agreed with or without British backing by the end of 2013.

The City should understand very clearly that sooner or later the EU will find a way to undermine and destroy it. It is a key objective, certainly, of the Germans, who would like to see Frankfurt take its place.

The City has long prospered by being banker to the world, not by confining itself to Little Europe.

But I guess the story is all part of the strategy. Mr Cameron must be thought to be privately tough and sound – just constrained by forces beyond his control, whether that is the Liberal Democrats or the City of London. The act is beginning to wear a little thin.

The idea that David Cameron, of all people, will ever order a referendum on our EU membership, is absolutely laughable.

Why Some of our Banks Need to go Bust

Liam Halligan in the Telegraph explains why the hidden insolvency of our banks is at the heart of our economic difficulties – and why the attempts of our politicians to cover up the problem is not the answer.

And then follows up a couple of weeks later by explaining why the Euro is bound to fail, regardless of those same politicians’ attempts to shore it up.

First class. Is it too much to hope that some of the shadowy people in our hallowed ruling elite share those views?

Robert Peston and the Debt Crisis

 

But now he wants to make sure new debt goes to the financially struggling. Image by UKTI via Flickr

 

Robert Peston, the BBC Economics correspondant, was on the radio this morning. He was discussing George Osborne’s latest wheeze to pour money into the banks.

Mr Peston expressed some doubt whether the scheme would work. (Indeed it won’t, as I blogged earlier. The chorus of raspberries that greeted the proposal in the comments on the Telegraph website were pretty unanimous too.)

But Mr Peston’s reasons for expressing doubts were tremendously revealing about the attitudes of the “ruling clique”, if I may call them that, upon the fringes of which Mr Peston finds himself.

His doubts are repeated on his blog:

Bankers give me two reasons for their doubts about how far the schemes will revive our anaemic economy.

First, they say creditworthy businesses and households are reluctant to increase their debts in these uncertain times. Second, many of the companies and individuals desperate to borrow are those in some financial difficulties, so the banks don’t actually want to lend to them.

Here is the nub of the matter: the Treasury and Bank of England want the risks of lending to stay with the banks; but if that remains the case, the new credit almost certainly won’t get to those who most need it.

The big outstanding question for the Treasury, therefore, is whether it is prepared to expose taxpayers to the probability that some businesses and households, who may deserve to be kept afloat, would not be able to repay all of what they owe.

(The bold typeface is mine.)

In other words, Mr Peston thinks that the key to economic recovery is to make credit available to people who are not credit-worthy. He thinks the “nub of the matter” is that the people “who most need credit” are the people who can’t pay it back.

He thinks the answer to our debt crisis is to make sure that people can take out loans they can’t repay.

No doubt when he has a hangover his answer is a bottle of Scotch.

How Long Do We Have to Wait for Europe’s Black Wednesday?

 

Treading in Mr Lamont’s footsteps – image by scatterkeir via Flickr

 

Through all the travails, indeed through the slow motion train crash of the collapse of the Euro, the EU integration juggernaut is grinding on.

The European Commission is now proposing what the BBC calls “an EU-wide banking union”.

This plan includes:

• A single EU regulator to oversee banks across the whole of the EU.
• A new bank bailout fund, financed by a tax on financial institutions.
• An EU-wide deposit guarantee scheme to protect savers.

The BBC says

But the UK government has indicated its reluctance to sign up to closer EU ties.

It prefers a body that only covers banks in the 17-member eurozone.

Yeah right. “Reluctance.” The negotiations have already begun:

However [the UK government] would support a strengthened single market in financial services for all 27 EU states.

A “strengthened single market”. I guess that means more European regulation of our banks.

The BBC fatuously comments that

This would also remove the possibility of one set of taxpayers, for example, in Germany, having to bail out savers in another country such as Spain.

which is completely untrue, since for example if the new fund has to bail out banks in Spain, then the banks in Germany would in effect be paying via that levy. The only difference would be that the bailout would be co-ordinated by European bureaucrats instead of European politicians.

In any case, none of this would explain how to stop a systematic debt problem that afflicts all countries.

The problem is DEBT. And that means the problem is our politicians. The answer though, is not to take power from them and give it to the likes of European Commission President Jose Manuel Barroso. The answer is instead to change the politicians.

No matter. This is all light relief. This whole proposal is so far off into fantasy-land as to call into question the sanity of the European Commissioners.

The pressure on the Euro itself is not abating. The latest bailout, of the banks in Spain, ended up being as much as €100 billion. It unravelled within hours, with Spanish 10-year bond yields reaching 6.8%. In other words, the markets believe there is a high risk that loans to the Spanish government will not be repaid – or not in Euros, anyway.

The whole Southern part of Europe – Greece, Italy, Spain, Portugal – is right now where Britain stood just before “Black Wednesday”, when the country fell out of the Exchange Rate Mechanism. Remember Chancellor Norman Lamont telling everyone that Britain’s commitment to continuing in the ERM was unshakeable? Remember his telling us all how essential it was for the credibility of our country’s economy that we stayed in? Remember all the great and the good loudly telling us that leaving would be a disaster and a humiliation for Britain?

Remember Mr Lamont’s bumping up interest rates on Black Wednesday to 12% and then within hours to 15%, to try and defend the pound against the wall of market speculation that Britain would leave the ERM?

And remember that just hours later he was forced to capitulate and announce Britain’s withdrawal anyway?

Here is how Wikipedia describes that day:

The UK’s prime minister and cabinet members tried vehemently to prop up a sinking pound, and withdrawal from the monetary system the country had joined two years prior was the last resort. [John] Major raised interest rates to 10 percent and authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets but the measures failed to prevent the pound falling lower than its minimum level in the ERM.

The Treasury took the decision to defend Sterling’s position, believing that to devalue would be to promote inflation. On 16 September the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 19:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent (however, on the next day interest rate was back on 10%). It was later revealed that the decision to withdraw had been agreed at an emergency meeting during the day between Norman Lamont, Prime Minister John Major, Foreign Secretary Douglas Hurd, President of the Board of Trade Michael Heseltine and Home Secretary Kenneth Clarke (the latter three all being strong pro-Europeans as well as senior Cabinet Ministers), and that the interest rate hike to 15 percent had only been a temporary measure to prevent a rout in the pound that afternoon.

Disaster! Calamity! Er – no. That day was followed by a surge of economic growth and the resolution of the economic slump that had afflicted the country for a couple of years.

If the Southern European countries whose economies are being destroyed by the Euro – Spain, Italy, Portugal, Greece – don’t leave the Euro, then Europe itself will face a bleak future. Their leaders ought to understand that this isn’t going to stop. This is not a question of getting through the next week, or the next month. The financial and economic pressure will be as great or greater in a week, or a month, or a year, or a decade. Sooner or later their citizens will decide they’ve had enough and hang them from the nearest lamp-posts.

Of course Britain could have a referendum and withdraw from the whole sorry business of the EU. In fact, that scenario is looking increasingly possible. We could watch from the sidelines as Europe rips itself apart. But we are intimately involved – partly just for historic and geographical reasons, and partly due to the disastrous misjudgements of a series of British leaders. Even though we might escape the worst of the pain, collapse in Europe would hurt us very badly.

Some leadership from David Cameron would not go amiss. He ought to be urging those Southern European leaders to go for broke and make plans to leave the Euro. But of course he won’t. Leadership and Mr Cameron do not go together. He and his mate George Osborne will just sit on the sidelines hoping it’s all going to go away. After all, they might get a kicking from their European masters if they do otherwise.

Banking Regulation – The Turf Wars Begin

 

Image by Bank of England via Flickr

This Man Wants You to Pay for Your Banking – And He’s Not Even a Banker

 

Andrew Bailey is shortly to become the head of the Prudential Regulatory Authority, the new banking regulator that has been set up to replace the Financial Services Authority. He has been telling us that the banks rip us off – by providing free current accounts.

Yep, you heard that right. Free current accounts are one of the few things that most people like about our banking system. Mr Bailey says the regulators, i.e. the government, are thinking of intervening legally to stop them.

Reform of retail banking in this country cannot move ahead unless we tackle the issue [sic] of free in-credit banking, and have a much better sense of what we are paying for and how we are paying.

Mr Bailey said that he recognised that no bank could independently impose current account charges without losing customers and that the industry could not act together “without appearing to collude”.

“So, it may require intervention in the public interest, not least because it is a way to encourage greater competition,” he said.

The banks would be accused of running a cartel if they did it on their own. So Mr Bailey wants to give them legal cover for doing it.

He wants to help the banks collude against consumers. Even more astonishing, his given reason for helping the banks collude against consumers is to encourage greater competition.

He wants to get them to compete more – by forcing them not to.

Why on earth would he want to do that? Well, Mr Bailey reckons that current accounts are “cross subsidised” by other bank activities, He reckons that free banking is a “myth” that “encourages the mis-selling” of products such as payment protection insurance.

Is that right? Is free banking a myth? Or do the banks make money out of running current accounts?

The Office for Fair Trading produced a report in 2008 into the market for current accounts. That report estimated that the banks make £8.3 billion from personal current accounts. Of that, £4.6 billion came from offering little or no interest on credit balances, while £2.6 billion came from overdraft charges.

So Mr Bailey is being tendentious. Yes, of course “free” banking is not really free. There are charges for people who go into overdraft, and also the banks offer little or no interest on current accounts, meaning they are borrowing your money for nothing. But it is not the case that current accounts are cross-subsidised by other banking activities.

What is even more interesting is the implications of Mr Bailey’s fatuous remarks for the banking regulatory system.

The Coalition reforms of banking regulation consist of abolishing the Financial Services Authority, and creating two new regulators to take its place.

One, the Prudential Regulation Authority, will be part of the Bank of England and will be in charge of regulating financial institutions at a macro level – the extent of the capital they hold for example. The other, the Financial Conduct Authority, will regulate retail services – preventing misselling for example.

This “issue”, of free banking, doesn’t really fit into either of those quangos. To my mind, it is more a matter for the FCA than the PRA. But Mr Bailey will be head of the PRA, not the FCA. The turf wars between the two, it seems, have already begun. And the new system isn’t even up and running yet.

Adam Posen – the Bank of England’s Tame Socialist

Image via Wikipedia

“Bank of England’s Adam Posen calls for credit boost,” says the BBC.

Mr Posen wants the Government to set up a new publically-funded bank to lend to businesses:

Mr Posen proposed two institutions: a public bank or authority for lending to small business and an organisation which would package loans made to small and medium-sized businesses.

Think about that for a minute. Basically, he wants the Government to set up a new public sector bank in competition with the private banks.

But where would the Government get the money to fund the new State Bank?

Well, obviously, they would borrow it.

They would create gilts, and sell them. The buyers would obviously take the money from wherever else it previously was – maybe from their bank accounts, or out of alternative investments, or even by borrowing themselves in competition with the small businesses who want the loans from the new State Bank!

This is silly on so many fronts that it is hard to believe a member of the Bank of England Monetary Policy Committee has suggested it.

First, if the Government borrows money, it will tend to push up interest rates. That will in turn hurt all the businesses who are borrowing.

Second, the banks are experts in their field. They lend to the businesses that are the best risks. By definition, Mr Posen’s plan would result in money being lent to businesses that otherwise would not be able to borrow – in other words, to less credit-worthy businesses. In short, his plan would divert resources from sound businesses to less sound ones.

Third, the Government borrowing yet more just might be seen as a tad risky, given that it is already borrowing more than a tenth of national output.

And fourth, the credit crunch was transmitted around the globe by systemic risk distributed all around the economy and indeed the world. Mr Posen actually wants the Government itself to get tied up into the whole system. You can’t get much more systemic than the Government. His idea would, in fact, increase the risk of a collapse of the banking system.

But fifth and most devastating of all, the Government already owns a big bank. Well, 84% of it, anyway. It is called Royal Bank of Scotland. And the last time I looked, it was indeed “lending to small businesses”. So why create a new public bank? Why not just pour even more taxpayers’ money into RBS and have them do the lending? That would actually be exactly the same as Mr Posen’s suggestion – except that RBS are, at least, banking professionals, and therefore might be expected to have some competence at least in lending the money.

Somehow I think that if George Osborne proposed lending RBS further billions of public money, his idea would be met with a huge raspberry by the public.

In fact, why even bother with a bank? Why not just lend direct to businesses? Why not just pick winners, create national champions, and nationalise the means of production? That worked so well with British Leyland, after all.

Mr Posen is a closet socialist, even though he may not even realise it himself.