German Banks Generously Agree Not to Bankrupt Themselves

Image via Wikipedia

Generous to a Fault

It is said that if you owe your bank £1 million, you have a problem.

If you owe your bank £1 billion, on the other hand, the bank has a problem.

The BBC reports that the German banks have agreed to take part in the new “rescue package” for Greece. Which is generous of them considering that Greece owes them €20 billion, and if Greece is not “rescued” there would be a default that would bankrupt those German banks.

So the German banks will re-lend Greece €3.2 billion over terms of up to 30 years. In other words, if Greece can’t pay, they just won’t ask for the money for a while – a long while.

And that means the loans stay on their books, they don’t go bust, and everybody’s happy. Even the Greeks are spared the pain of being let off their debts.

Whoever said banks aren’t generous?

Half a Cheer for George

Image via Wikipedia

Gordon Brown Nationalised Northern Rock. Now It is to be Privatised.

The Chancellor has announced that Northern Rock is to be privatised. That’s certainly good news, and a little step in the right direction. Says the BBC:

The auction of Northern Rock is expected to raise about £1bn, which is less than the £1.4bn the government injected into the bank, although not all of it is to be sold.

The former mutual has been split into a “good bank”, containing customers’ savings and about 70 branches, and a “bad bank” containing the more toxic loans.

The former is set to be sold, while the latter will continue to be owned by the Treasury.

That doesn’t sound half bad, does it? They’re getting only £400 million less than they put into it. And they will still own those “toxic loans”. Maybe some of those are worth something. They might even make a profit overall!

But wait. That BBC article is grossly misleading.

The “good bank” is called Northern Rock. The “bad bank” is called Northern Rock Asset Management, or NRAM. On 31st March the BBC itself reported Northern Rock’s financial results. In that article, it noted:

NRAM said it had repaid £1.1bn of its government loan over 2010, reducing its balance to £21.7bn.

£21.7 billion! Which is quite a bit more than £1.4 billion actually. But of course, it was lent by Gordon Brown’s government to Northern Rock Asset Management and not Northern Rock. How silly of me.

Getting the “good bank” off the government’s books for £1 billion is great. But the main part of the Northern Crock millstone is still hanging around the government’s neck.

And that’s before we even start on Lloyds Banking Group, 42% owned by the taxpayer, or Royal Bank of Scotland, over 80% taxpayer-owned. It would be nice to hear something from Mr Osborne along the lines that he expects to start selling Lloyds, at least, soon.

In the same speech, Mr Osborne announced that he is going to make the banks hold much more capital even than the new international rules say they have to, perhaps as much as 10% of their “risky assets”. (The new international rules say 7%.)

That will mean an even more extreme credit famine, because the banks will be forced to cut their lending further to protect that capital ratio. You can hear the squeak of stable door locks being closed and the thunder of hooves as the horses disappear over the hill.

During the unsustainable boom years, the banks were allowed to keep hardly any capital. Now that there is a credit famine, they are being forced to hold a much larger amount. The government has talked quite a lot about counter-cyclical rules, that would tighten up during booms and loosen during recessions. This qualifies whole-heartedly as pro-cyclical regulation.

Next time you hear the government claim that it is putting pressure on the banks to lend more, bear it in mind.

The final measure Mr Osborne announced is that retail arms of British banks must be protected from the investment banking arms. The idea, apparently, is that in a crisis the government would be able to step in and save the retail part, while letting the investment banking part fail.

Does anyone really believe the government would let that happen? The failure of a big investment bank would send shock waves through the financial system, just as the failure of Lehman Brothers did. In practice, I believe the government would step in to save the complete bank anyway.

Overall, then, only half a cheer for Mr Osborne. On second thoughts, only a quarter of a cheer. The significance of his announcements today is minimal.

Uncle Vince, Our Saviour From The Big Nasty Banks

Image via Wikipedia

Damned if They Do and Taxed If They Don’t – Yes, Uncle Vince is in Charge

Uncle Vince has been championing the little man against the Big Nasty Banks again.

He has been telling those banks that if they don’t give more loans to small businesses, he will put up their taxes.

We do have the option of approaching the taxation of profits or bonuses or balance sheets in a more forceful way – that’s certainly is one of the sanctions open to government

he said. Putting them in the Naughty Room is probably the next step after that. And yet, at the same time he is also pushing them in the opposite direction by threatening other sanctions.

The government, at the behest of internationally-agreed and EU banking regulations, is requiring the banks to hold more capital and to keep more liquidity. Loans to small businesses, or indeed any businesses, do not count as “liquid assets”. Gilts (loans to the government) do. And of course the government has been doing rather a lot of gilt sales over the last couple of years.

This year, government borrowing is down a bit. But the QE programme has also ended – so almost all gilts are being bought by commercial banks rather than the Bank of England. The money they could be lending to small businesses, is being invested in government debt instead.

Basically, Uncle Vince is telling the Big Nasty Banks to lend more to small businesses, otherwise they’ll get caned by higher taxes. At the same time he is telling them not to lend so much otherwise they’ll get caned for infringing banking regulations.

And all the time the government (through the Bank of England) is also holding official interest rates down at record low levels. That increases the expectations from businesses that cheap loans will be available. It also encourages bank customers not to hold bank deposits (due to the derisory interest rates they get). And it hits banks’ profits on the loans they do make.

The government seems to think that these low interest rates are boosting economic growth by encouraging borrowing – that loans are available but people need to be encouraged to take them. Yet here is Uncle Vince telling us all that the problem is that people who want to borrow cannot get loans from the banks.

Uncle Vince is like a Nanny who tells a child to share his sweets with his friends – while at the same time beating him up if he doesn’t let her eat most of the sweets herself.

Our problem is not the Big Nasty Banks. It is our dysfunctional and incompetent rulers, of whom Uncle Vince is a prime example. Both the government and its pseudo-independent Bank of England are at the heart of the problems we are facing.

The problem is not the Big Nasty Banks. The real problem is the Big Nasty State that destroys everything it touches.

If You Work for a Bank Nick Clegg Wants to Wring Your Neck

Image via Wikipedia

If You’re a Banker, This Man Wants to Wring Your Neck

Nick Clegg has been digging himself ever deeper into the hole in which he finds himself.

He has now given an interview to BBC Radio Sheffield:

I am like anybody else: you want to wring the neck of these wretched people who behaved so irresponsibly and then we are now having to bail them out.

Apart from being utter nonsense (the causes of the crisis cannot simply be blamed on the banks), this is really dangerous talk. Whenever a politician starts to sneer at a class of people, and tries to blame them for all the country’s woes, you can be sure they’ve lost the plot.

Setting our people at each other’s throats is not the answer. Bankers are no worse than the rest of us. They enjoyed Brown’s boom as much as we all did.

They are now being vilified and made scapegoats for the inevitable morning after the party, by a small-minded politician who clearly has no real ideas to offer.

For the record, we didn’t have to bail out “the banks”. It was the Labour government’s decision to do so. They nationalised three banks in Britain – Northern Rock, Royal Bank of Scotland and partially Lloyds TSB (or more accurately HBOS, since Lloyds merger with HBOS, encouraged by the Labour government, is what did for Lloyds TSB).

It is blindingly obvious to all but the most blinkered commentator that Northern Rock could have been allowed to fail – while protecting the depositors, of course. It would most likely have been bought by a competitor, possibly by Virgin, who were interested at the time. The government later followed a more sensible course with Bradford and Bingley.

And what about the big two supposedly bust banks – RBS and Lloyds? Did we really need to bail out their shareholders and bondholders as we did? Remember, bailing out the banks is not the same thing as bailing out depositors.

So what was the alternative? Well, RBS could have gone into receivership. The Bank of England would have provided the liquidity to protect depositors and enable the bank to continue running while the receivers looked for a buyer for the business. In receivership, the assets could have been disposed of in an orderly way and the bank broken up and sold off. Yes, the bank’s lenders would have lost a proportion of their money. But that’s a risk you take when you lend to a company.

As it is, those lenders risks and potential losses have been transferred to taxpayers. Note the irony of a government that, when it nationalised RBS, proclaimed that it would eventually make a profit by selling it.

Gordon Brown tried to have it both ways – arguing that RBS was bust, but it was a great investment for taxpayers and he could sell it at a profit.

Regardless of all that, what of the more sensibly run banks like HSBC, which is very much solvent and thriving? Was the crunch their fault too? Was the crunch the fault of the teller behind the counter of your local Barclays?

According to Nick Clegg, it was. He wants to wring all their necks. I guess he would deny that. “Of course,” he would say, “I wouldn’t wring that teller’s neck, just the Big Bad Bankers whose fault everything is.”

But he didn’t distinguish, did he? If you work for a bank, don’t forget. We all know you work for Britain’s most successful and crucial industry, and have a right to be as much a valued part of our country as anyone else. But the Liberal Democrats want to wring all of your necks. Remember that in May.

Roll Up Roll Up for the Great Lib Dem Bank Giveaway

Image via Wikipedia

Stephen Williams MP – Liberal Democrat and Bank Giveaway Maestro

A Liberal Democrat MP, Stephen Williams, has suggested that the government should “give away” shares in the Banks that it owns. The BBC reckons that “senior Liberal Democrats” are sympathetic to the idea, including Danny Alexander, the Liberal Democrat who holds the key cabinet post of Chief Secretary to the Treasury.

There would be a “floor price” set at the price at which the government originally bought the shares. Nobody would be allowed to sell their “free” shares below that price.

The floor price is to prevent people dumping their shares into the market all at once of course. That would cause a share price collapse to the true value of those shares – which is well below what the government paid for them. Everybody would be able to clearly see how much the government’s decision to nationalise the banks had really cost us all.

If the government has so much money that it can afford a £50 billion give-away of free shares, how about giving us a tax reduction and letting us decide whether bank shares are the best home for our money?

This idea is just a variation on the old politicians’ scam of giving people their own money and hoping they will be grateful.

The Irish Government Must Not Make the Mistakes Brown Made in Britain

The Irish government is in talks to obtain a loan of up to 90 billion Euros from the IMF and the EU. Britain will be contributing £7 billion of this.

When the current British government took office, it made some immediate spending cuts and tax increases amounting to £6 billion. So in a sense all the good work so far in tackling Britain’s own huge deficit has been undone at a stroke.

John Redwood and others have argued that this is not our problem, and we shouldn’t be helping out with these loans.

The government says it hopes to get the loan paid back in due course by the Irish. And I have no reason to doubt that. Ireland is, despite everything, very far from being a basket case, and the promises and contracts made by the Irish government can be relied upon more than most. Therefore lending that £7 billion is not the same as spending it.

Our £7 billion will of course be borrowed from creditors of our own. The British government is simply lending its AAA credit rating to the Irish – acting rather like a parent who acts as guarantor for their child’s mortgage. We will get our money back, and therefore be able to repay our own creditors in turn.

However, that is not really the point. Wolfgang Schauble, Germany’s Finance Minister, let the cat out of the bag by saying

We are not just defending a member state but our common currency.

This Irish deal is not about saving Ireland. It is about saving the Euro. And that, of course, is why John Redwood is so much against it.

The main losers in this deal, obviously, are Irish taxpayers who will ultimately foot the bill for all this borrowing. They should be very angry this morning.

To my mind, what is really bad about this deal is not that it involves Britain in supporting the Euro. What is bad is that it also may be about subsidising the owners of the Irish banks – among them our own basket case bank, Royal Bank of Scotland.

We need to be clear about the difference between insolvency and lack of liquidity. Insolvency means your liabilities exceed your assets – effectively your business has negative capital. If your business is insolvent, then its shares are worthless.

Illiquidity means you can’t find the cash to keep your operations going – even though you may have assets that are easily enough to cover all your liabilities. In that case, if your company can obtain temporary loans to keep it going, it may very well have real value.

If the Irish banks are insolvent, and it appears that they are, then the money Irish taxpayers provide to those banks is a subsidy to the banks’ owners, not a loan or an investment. The true value of those banks’ shares is, right now, nil. But if they are propped up and the shareholders don’t lose everything, then the value of the shares becomes not nil – and the value of the shares will have come directly from the government / taxpayer support.

That represents a real cost to Irish taxpayers. They will be paying the cost in full – all 90 billion Euros of it.

What about the shareholders in the Irish banks, never mind the bondholders? The details of the bailout are not yet clear. But one thing that is crystal clear to me is that if the banks are insolvent then the shareholders, at least, should lose every penny of their investments as part of the deal.

If the Irish banks are insolvent, in other words their liabilities exceed their assets, then the first losses should fall on the shareholders. That’s how share markets work. (I’ve been a victim of that myself in a small way, having owned a small shareholding in a company that went bust – I lost the lot, which is fair enough and a risk you should accept if you buy shares.)

If the Irish bank shareholders don’t lose their investments, then this deal won’t be a deal to save the Irish banks. It will in fact be a direct subsidy from the Irish taxpayers to the shareholders in the Irish banks.

All the world’s politicians are scared witless by the idea of banks going bust. They should try and learn the difference between allowing a bank to go bust as in cease operations, and allowing the bank shareholders to lose everything.

The same kind of thing happened in Britain, after all. Royal Bank of Scotland was propped up by taxpayers – but the shareholders still own 16 percent of it. Perhaps they would argue that their company was lacking liquidity rather than insolvent. In that case, the government should have provided liquidity, through the Bank of England, not almost fully nationalised the bank.

The public probably think that the government getting shares in RBS was the least taxpayers could expect in exchange for the support the government gave. In fact it was a bad deal because shareholders stand in the queue behind lenders in terms of calls on a company’s assets. If RBS was insolvent, it should have been fully 100 percent nationalised and the shareholders should have lost the lot.

The right course of action is clear, depending on the circumstances in each bank:

• If the bank is solvent but is having trouble borrowing the money to fund its operations, then the relevant central bank should provide the funds to keep it afloat in its capacity as lender of last resort.
• If the bank is insolvent then a deal should be done in which the bank shareholders lose everything but the bank stays in operation at least temporarily so that depositors are protected.

Let’s hope the Irish are more canny than Gordon Brown and Alistair Darling were in Britain.

Ireland is not Greece

The media are full of speculation that Ireland will be asking for a European bail-out.

According to the BBC, The Irish Republic has insisted it does not need European Union assistance.

According to the Telegraph, Ireland’s justice minister has refused to rule out the possibility of an EU bail-out.

Be that as it may, a bail-out would be a very bad idea, and I am not convinced it is necessary.

The theory appears to be that Ireland may be forced to default on its bonds, and that the holders of these bonds, including German and British banks, would therefore lose money and this would “spread the contagion” to other countries. Alternatively, “international investors” could simply panic and stop lending money to Spain or Portugal. The connection between any Irish default and the likelihood of default by those countries is unclear. And I fail to see any reason why Ireland should be forced into a default.

It is quite astonishing to see the extent of media hysteria about this issue. It is even more astonishing to see supposedly professional investors spooked by such irrational nonsense, and frankly appalling to see politicians joining in the panic and throwing taxpayers’ money around with gay abandon.

A few key facts need to be remembered here.

First, the Irish government deficit is a whopping 32 percent of Irish GDP. However, most of that relates to a one-off bailout by the Irish government for the Irish banks. The underlying deficit is reckoned to be 12 percent – about the same size as the UK’s – enormous but not unmanageable if the government has the will.

And second, the Irish government does have the will. It has plans to reduce the deficit by 6 billion euros next year alone, and to cut it to 3 percent of GDP by 2014. Unlike certain other countries you might name, the Irish statistics are credible and the Irish plans probably serious.

And third, and most significantly, the overall debt of the Irish government is only around 90 billion euros. That’s pretty big – but it’s less than half of GDP, which is a lower percentage than Britain’s. There’s a way to go before Ireland starts having trouble servicing its debt.

Of course, if you are a neo-Keynesian, this problem is completely insoluble. Reducing the government deficit will hurt the economy, and so reduce output and worsen the debt crisis. Luckily, this is nonsense, as has been amply and repeatedly demonstrated by history in many countries. Reducing the State deficit is more likely to increase growth, especially when credit is scarce.

I fail to see any reason why Ireland should need a bailout. Worst of all, just like a bailout of the banks taught them that they could take any risks they like, because the government is always there to rescue them if they come a cropper, a bailout of Ireland would be a great excuse for the Irish government not to take the measures necessary to cut their deficit.

As in the UK, the prescription to cure Ireland is for the State to get off the back of the economy, not for the wider Euro-State to saddle Irish taxpayers with more debt.

The FSA Acts at Last on Mortgages

The Main Beneficiaries of High House Prices

The Telegraph declares today “Millions of home owners face restricted lending”.

The Financial Services Authority is acting to restrict the issuing of mortgages based on how much people can afford to pay, based on repayment mortgages (rather than interest-only) and factoring in a potential rise in interest rates.

The Telegraph claims this means

2.2 million existing home owners being refused a new mortgage. These so-called “mortgage prisoners” would be trapped in their homes, unable to remortgage or move.

A further 3.4 million home owners would be able to obtain a new mortgage, but they would be offered less than the amount they would have been able to borrow previously, forcing them to move to a cheaper property.

I can’t quite see the Telegraph’s logic here. These “mortgage prisoners” are to be prevented from taking on new mortgages that they can’t afford. Why is that bad news for them? And why will this prevent them from moving? The clue is in the Telegraph’s own words: “forcing them to move to a cheaper property”. Which might be better described as “forcing them to move to a house they can afford”.

The Council of Mortgage Lenders, who of course are the main beneficiaries of high house prices, predictably said the move was

an overreaction to past problems

It is nothing of the kind. It is a long overdue measure to tackle potential problems in the future. It will reduce the mortgage lenders’ ability to weigh people down under a mountain of debt that they spend their lives paying off – and often struggle to pay at all.

People are upset about government plans to charge £27,000 for a three year university degree – and yet seem quite happy for banks and building societies to lend ten times that amount, and leave borrowers facing a lifetime of debt just to get a roof over their heads.

It is in nobody’s interests for people to borrow four or fives times their income to buy a modest house. It is only a few years since interest rates were at 15 percent. With inflation rising and likely to rise further, we could easily see those rates again before too long. How many of those four- or five-times borrowers could afford the repayments at that rate?

If the Financial Services Authority, and their counterparts across the Atlantic, had taken this action several years ago, we might never have had the credit crunch or the present financial crisis. And our houses might be just that bit more affordable, since a major factor in the price of houses is the availability of credit.

Tighter lending rules will mean lower house prices – which might not be in the interests of those of us who already own a house, but most certainly is essential to the lives and future wellbeing of our children and grandchildren.

Tighter lending rules will also mean fewer people taking on massive loans that they are very likely to regret before too long.

Banks and Money Printing

There’s Not Enough of It About

From the Daily Telegraph today:

British Banks Face £390bn Funding Gap.

Bank of England Could Pump More Cash Into the Economy: MPC Minutes.

Quantitative Easing at its most basic consisted of the Bank of England buying gilts from commercial banks. But there was also talk that it could be used to buy other “high quality” assets. Like commercial bank bonds perhaps?

No, no, I must be being too cynical.

How Much Has Gordon Brown Learned?

It All Looks a Bit Complicated

Today is a red letter day.

Gordon Brown has admitted to not one, but two serious mistakes.

First, he admitted that during his boom, he should have been regulating the banks more.

All the complaints I was getting from people was, ‘Look you’re regulating them too much’. And actually the truth is that globally and nationally we should have been regulating them more.

He said:

I’ve learned from that.

And second, he admitted that his decision to scrap the 10p starting rate of income tax was a mistake.

But don’t worry. He said about that too:

I’ve learned a lot from that, I learn all the time.

Well, it’s great that Mr Brown is such a keen learner.

Of course, people always tell the pollsters they would like politicians to admit their mistakes. And they are right. Politicians should not be afraid to admit it when they make a boo-boo.

But these weren’t just little mistakes. These were stonking great disastrous mistakes, especially the failure to regulate the banks properly. And these from the “Iron Chancellor”, the man who at the time was supposedly bestriding British politics like a Colossus.

Consider especially that the regulatory failures were a key cause of the whole credit crunch and subsequent recession. When Mr Brown admits he failed to regulate properly, he is admitting for the first time that his own errors were partly responsible for the economic crisis that has befallen our country.

Consider also that at the time that Mr Brown was setting up that regulatory system, the Tories opposed it. They wanted banking regulation left in the expert hands of the Bank of England, where it had been previously. Even now, the Tories are promising to return that responsibility to the BoE and scrap the Financial Services Authority.

But Mr Brown has refused to countenance that. He’s still committed to the Financial Services Authority.

So perhaps he hasn’t actually learnt so very much after all.