3 Nov 2009

Government bailout 3.0: Lloyds and RBS

Just over a year ago we thought that the £37bn injection of equity by the government into Lloyds and RBS was the landmark, never-to-be-repeated event. Bailout 1.0 literally saved the banking system from collapse, and was copied around the world.

Then, in January, came Bailout 2.0, which we were told would be a bailout not of the banks, but of the economy. That bailout was to enable the banks to continue lending to prospective homeowners and to businesses.

And now we have Bailout 3.0.* Incredibly, the extent of actual taxpayer funding into these two banking giants will be larger than the first bailout, which rescued them from collapse. £40bn more.
This will be spent on banking shares that have fallen in price since the last tranche was bought. RBS, two years ago the sixth biggest bank in the world on some measures, will now be 84 per cent owned by the state.

To be fair to the Treasury, this outcome was indicated back in January, though it had not been expected that all the £25.5bn would be needed up front. There’s also an incredible tax break, worth billions for RBS, which reflects their ability to charge losses against future tax bills. It must have caused the government accountants a headache.

What really has changed is that the extent of the guarantees: the so-called contingent liabilities have been reduced markedly. Lloyds have sidestepped the government’s toxic waste guarantee scheme, so £260bn of HBOS’s rotting commercial property and mortgage assets will now be dealt with by the private sector. The process of due diligence has also shrunk the RBS guarantee from £325bn to £282bn.

I had previously pointed out that the APS was seen internally as the biggest government contract signed since the Lend Lease arrangements with US forces during world war two. As Lloyds exits, this may no longer be the case. Indeed having gained £2.5bn for a nine-month insurance policy that did not pay out a penny, Lord Myners may wish to start up shop as an insurer if he leaves government next year.

So arguably the situation is better than the worst-case scenario envisaged by Bailout 2.0. The taxpayer no longer has to worry about HBOS’s toxic waste dump. But more money more quickly appears to be seeping into RBS.

The crucial difference is that this happening at a time when we are told there is no money for anything else. No money for public sector pay. No money for other industrial or consumer stimuli. Small wonder that the government shot George Osborne’s fox by banning cash bonuses to anyone at these two banks earning above £39,000.

*The biggest hedge fund in Britain, is how Robert Peston referred to this deal. The government is borrowing money at 3 per cent to buy shares in banks. It’s the classic story of leverage that funded the champagne lifestyle in Mayfair.

Of course, the next leg of this analogy is to point out that the Treasury’s deficits are actually being funded by the Bank of England, which in turn is creating the money out of thin air. No hedge fund has those powers.

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10 reader comments

  1. Ray Turner says:

    So how does that further injection of capital affect UK PLC’s credit rating?

    Are we still triple-A or is UK PLC about to go bankrupt instead of the Banks, i.e. has the problem of massive debt simply been shifted from one failing sector of the economy to the state and it’ll be the country looking for bailouts from the IMF before long…?

    Surely there’s got to be a limit on how much the state can reasonably afford to invest in its banking system. Its not a bottomless pit of money, particularly if it is being used to pay the Bankers high salaries and ludicrous bonuses…

  2. David Smith says:

    Hi Faisal

    Would it not be simpler with RBS simply to nationalise it? The idea of owning 84% but voting with less is close to a farce isn’t it?

    As to Lloyds there is no guarantee that their new capital will be enough. Should we hit choppy waters again it may be time for bailout no’4 and Lord Myners career as an insurance salesman would end in tears.

  3. adrian clarke says:

    Well what a mess!Team UK led by GB yet again does as Europe orders.Just more debt for the British people.I am afraid they should have been let go to the wall in the first place

  4. Traver says:

    Faisal……I’ve got it.Since they are scrambling unsuccessfully to hatch a financial doctrine without any noticeable clue,is it time for Plan B ? This involves getting Gordon Ramsay around any failing bank encumbered with clueless owners.After 3 days or so of abuse,he magics up a recovery based on nothing more than making it do the simple things it’s meant to do,in a helpful friendly manner – got to be worth a go.It ain’t rocket science,right ?

  5. Andrew Dundas says:

    It always was correct that the eventual sell-off of UK Banks we’d invested in would be done at a massive profit. Which will be a welcome profit on the layout of almost zero cash invested.
    That fat ‘zero’ arises because our so-called bailouts have not involved taxpayers cash. Most of our investments are invented money, not taxpayer’s money. Much of it raised by Bonds sold to our wholly owned Bank of England as Quantitative Easing! Even the notional interest largely ends up in that bank, and belongs to us.
    Which makes these Bank investments quite different from other sorts of public spending. Those require taxes or borrowing from third parties. Moreover, our Bank investments are our assets, not our liabilities. [Unless we’re ever obliged to sell them quickly and on ‘fire sale’ terms. That’s unlikely].
    Whichever government is in power following next May’s general election stands to reap these enormous profits on our investments. I appreciate these are not perspectives that haven’t been widely published – hence my blog!
    One question is so far unasked: how shall we spend these huge Bank windfalls that will be accrued in the next five years?

  6. margaret brandreth- jones says:

    What I want to know Faisal is how they clawed back a large amount of the money they owed so quickly, to put them in a position to do a larger than ever bail out.

    Listening to a documentary on black holes last night, scientists were trying to correlate motion and gravity and Quantum mechanics to achieve a cohesive singularity.silly! there is no singularity in recurrence!

    I say why bother? our galaxy must have this gut like structure which regurgitates apparently dumped matter ,back through into our own galaxy rather than classing monies as toxic waste.

  7. Ian Edmunds-Tutty says:

    We should turn these tax supported banks into mutuals like the TSB used to be.
    Any shares that people have in them could be turned into permenant interest barring shares like some building societies have

  8. kenrick says:

    When everyone understands that we are all owned by the BANKERS as economics slaves, we will begin to understand why the government bailout the banks and why they cannot fail. When every one Understands the coursion between the banks and your so called representitive and how FRACTIONAL RESERVE BANKING SYSTEM was made LEGAL. You will be awaken to your true STATUS. You will not see or hear this info.on Mainstream News . WHY? YOU tell me.
    KG

  9. Andy Sloan says:

    Dear Faisal,

    The whole banking system is a gigantic scam, that no-one was taught about at school or university. Go to http://www.moneymasters.com and buy the dvd. There would be a world revolution tonight if the peoples of the world understood their slavery and peonage. Government should issue money NOT BANKS!!!

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