Friday, January 16, 2009
Taxpayers Vs Shareholders
On this one, Tyler is stuffed either way. He's a taxpayer, but he's also a bank shareholder*. So however the latest wave of bank bail-outs finally breaks, he's a loser.
Ahhh, shame, you say.
Which is a fair point. Except that if you've got a private sector pension, or a with-profits policy, or unit trusts, you too are a bank shareholder.
And it's now obvious the banks are in an even bigger mess than we'd imagined. What we can gather from the unmissable Bloomberg TV, is that they've now quaffed their final shot of Red-Eye in the Last Chance Saloon, staggered out onto the street, and are facing the final show-down.
In the US, the once mighty Citibank is tottering around trying to amputate its own gangrenous limbs, and whether what remains will be capable of fighting another day looks doubtful.
Bank of America has done even worse. Its rushed takeover of Merrill Lynch during the autumn was done in such a slapdash way that it inadvertantly ingested enough toxic debt to poison the entire combined enterprise.
Elsewhere, Anglo-Irish Bank has now had to be formally nationalised, the leading German banks have revealed huge new losses, and most mainstream continental banks are only being propped up courtesy of their governments (see here for summary). Total admitted loan losses by US and European banks have now reached a staggering three-quarters of a trillion dollars, and nobody believes it will stop there.
Here in the UK, we taxpayers have provided billions in formal guarantees to banks, and we are now effectively guaranteeing their entire £6 trillion balance sheet. What's more, because nobody else would provide fresh capital, we've ended up owning 58% of the equity in RBS, and 43% in Lloyds/HBOS.
Unfortunately, the nightmare hasn't stopped. It turns out the banks' cupboards down in the vaults are stuffed full of loans that have gone putrid. Slimey green gunk is seeping out all over the place, and up above in the gilded dining rooms senior management are gagging at the stink.
Hence the latest plan - the so-called Bad Bank.
The Bad Bank will be a toxic waste dump. Our banks will be encouraged to load up all their putrid loan cupboards onto the back of a big sealed artic, cart them round to the dump, and leave them. Which means our banks are then once again sweet-smelling, and can get on with the wholesome task of lending money to Perfectly Viable British Businesses and Hard-Working Families.
Well, there is one other small detail - as the owners of this toxic dump, we taxpayers will be paying the banks handsomely for every putrid cupboard they deposit. In effect, we will be handing the banks a get-out-of-jail-nearly-free card, letting them off the consequences of their bad lending during the go-go years.
Like the sound of that?
Now, we can all agree that we must have functioning banking sytem. That is an essential condition of future prosperity.
And here on BOM we can also agree that state ownership of banks is a terrible idea.
But right now, what is the least worst option?
We taxpayers have already given bank shareholders a stack of support. Do we really want to buy all their toxic debt? Do we really want to let the banks choose all their smelliest most putrid legacy cupboards and sell it to us sight unseen?
Because if you believe the Simple Shopper will be able to negotiate a "fair price" for this stuff, you just haven't been paying attention.
The only possible way we can accept this is in exchange for a further big slug of the banks' equity. And frankly, in the case of RBS, the next stop is full nationalisation.
Bank shareholders did a terrible job at controlling bank management during the boom, and lessons must be learned. Shareholders need to be far tougher. The B of A takeover of Merrills - where B of A management apparently failed to make even basic checks on what they were buying - once again highlights that shareholders still need to be much more active (HTP JW).
We've said it many times before, but taxpayers really should not be forced to bail out bank shareholders.
*Small print - Tyler Investments (Cayman) Ltd holds no direct equity positions in banks. But it holds plenty of indirect positions via collective investment vehicles. Bad call.