Tuesday, November 03, 2009

Bank Job - Are Taxpayers Better Off?

On a day that has been spun as the most momentous in British banking history (that's what they said on the BBC anyway), A Darling proclaims his latest bank job:

"What we have here is a better deal for the taxpayer."

Sounds a little unlikely.

As we understand it, the key points are:

  • Taxpayers are buying another £25.5bn of RBS shares (taking our total equity stake to 84%), with a further £8bn earmarked for possible probable further purchases
  • Taxpayers are buying another £5.7bn (net) of Lloyds shares, maintaining our current 43% stake post Lloyds' planned capital raising
  • Altogether, this is an additional £31.2bn going into bank equity immediately, probably going up to around £39bn in due course.
  • The amount of toxic assets taxpayers are insuring under the APS (Asset Protection Scheme) is being cut by £300bn
  • Lloyds is withdrawing its £260bn of toxic assets from the APS altogether
  • RBS has cut the total assets it is insuring in the APS by £40bn to £282bn, and also increased its excess (ie it will now pay the first £60bn of losses); for that it will pay us an annual insurance premium of £700m (one-quarter of one percent)
So does that lot add up to a better deal for taxpayers?

Well, the fact that we're now insuring less of that toxic debt must be a good thing. So we can give that a tick.

But not quite a full tick, because although we now have less direct exposure to toxic losses, we have also lost the future insurance premia Lloyds had agreed to pay us. They totalled £15.6bn, and all we'll now get is a one-off £2.5bn penalty exit fee. Which isn't quite fair, given that we wrote that insurance when it looked like the sucker really was going down. It's like a traveller on a crippled airliner taking out life insurance, and then cancelling it once the plane has landed safely.

So net net no more than a semi-tick on the toxic debt front.

As for our £39bn additional equity injections, it's difficult to see how that makes taxpayers better off at all. Because the money will have to come from incurring yet more government debt. And we've got more than enough of that already.

Oh yes, the government claims we will eventually make an excellent return on our investment. But how do they know? If the prospects were that good, RBS and Lloyds would be able to raise all the extra money from private investors.

And if we taxpayers wanted to borrow to invest in bank equity (which is what HMG is doing here), then we could do it off our own bat. Under Darling's plan, we're being forced to subscribe to a mega-hedge fund specialising in financial "recovery" stocks and managed by the Simple Shopper. We all know how that ends.

So dealwise, Darling's new bank equity purchases get a big red cross.

What Darling did not do today was to grasp the giant elephant that is still rampaging around the banking hall - to wit, the question of splitting the megabanks between their retail and wholesale components (the new Glass-Steagall). Compared to that issue, the promise to spin off a few bank branches and Direct Line is so much loose change.

As long as we taxpayers remain locked into guaranteeing the combined balance sheets of all our megabanks, adjusting  the Asset Protection Scheme is really not much comfort. We might be less exposed to losses via the APS, but we are now exposed to a further £30-40bn of potential losses on our increased equity stakes. And we remain fully on the hook for all losses over and above the banks' equity capital base.

George, you're going to have to do better than this.


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