This is The Big One, e.g. from The Daily Hatemail, RBS and Lloyds cancel bonuses for bankers - in return for £40bn MORE of taxpayers' cash.
The politicians will waffle on about "stabilising the banking system" (1) and "encouraging banks to lend to businesses" (2) and "getting value for the taxpayer" (3), of course. To their credit, they appear to have steered the debate in a completely different direction, i.e. breaking up the large taxpayer-owned banks (as instructed by the EU) to "encourage competition" - despite the fact that a few months ago the government was boasting about having arranged Lloyds TSB's "rescue" of HBOS when all that happened was that HBOS dragged Lloyds TSB down all the quicker, so double points there.
(1) Missing the point. The government allowed them to get themselves into this mess, and once they were in it, debt-for-equity swaps could have sorted this all out a year or two ago. Note that it says that Lloyds' rights issue "will be accompanied by a debt conversion offer expected to generate £7.5 billion."
(2) If the government really wanted to help businesses, it could just cut taxes by £40 billion. It wouldn't even need to do this all in one go, it would be sufficient to offer a £10 billion cut this year and make it clear that this would be permanent; this would simultaneously reduce businesses' need for credit and make them a better credit risk. So that can't be the reason.
(3) What does that have to do with anything? Maybe they'll make a profit on this, maybe they won't, but if taxpayers wanted to invest in banks, then they are free to do it on their own account.
So the real reason for all this is to encourage banks to lend to mortgage borrowers to keep the house price bubble inflated, and as long as the government controls over half the banking system, they have the whip hand. When I first started this series on their efforts to keep the bubble going - which commenced nearly three years ago - I didn't think it would work. To my horror, it does appear to be working and the house price crash has been flattened off, or even reversed, over the past six months. I think we've gone a bit beyond "Spring Bounce" by now. The question is, how long can they keep it up?
Thoughts on being a quitter
2 hours ago
8 comments:
Let's consider something: this recession is the worst EVER. Prices of houses were pumped up worse than ever happened before.
The idea that this is somehow going to get solved quicker than the recession of the late 90s is just fiction.
And if the government is just throwing money at getting house prices up, it simply won't last. Eventually, it's got to be paid for. If money is going into banks, it means it's not there for people to create real businesses. We could see near stagnant (real) growth for many years.
And yes, I'd have let the banks spectactularly fall if I was in charge. For many decades later, the memory of the pain would encourage people to run them properly.
I'm not convinced debt for equity swaps would have worked at the height of the banking crisis, due to the systemic nature of interbank lending and the fact that some of these banks weren't actually worth anything.
It looks to me like the primary reason behind this is to make the gov't look good "see, we've got the bankers to cut their bonuses" whilst bribing them with another few billion quid to agree to it. Yes, it fends off the electoral disaster that a proper house price crash would undoubtedly be, but I think that is an added benefit.
OC, no it won't last, but I worry about how long they will keep the charade going, remembering that the Tories will be no better.
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SL, debt-for-equity swaps would have worked at any stage, they would always work and always will.
You say "the fact that some of these banks weren't actually worth anything."
What you mean is, "the value of their assets (dodgy mortgages) were less than their total liabilities (deposits & bonds)."
Sure, that might be the case with some of them. Let's assume dodgy mortgages have fallen in value from £1,000 to £800 (that's the assets side); customer deposits are £300; bonds are £600 nominal and share capital is £100 (that's the 'financed by' side).
Shareholders bear the first £100 of losses and are wiped out.
The chances are, the market value of the bonds is only £500 (or less). So £600 nominal of bonds is converted to (say) £90 of new share capital (worth £90) and £410 of new bonds worth £410.
Hey presto, restructured bank has assets with market value of £800 (total assets £800); and deposits of £300; bonds of £410 and share capital of £90 (total financing £800)
That's how simple it is.
For a real life worked example, see CIT Group.
If you worry about inter-bank stuff, as a thought experiment this could be fixed using the Mega-Bank concept.
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Bayard, yup, this is a triumph of Home-Owner-Ism.
"OC, no it won't last, but I worry about how long they will keep the charade going, remembering that the Tories will be no better."
That's the problem. It's a bubble that no-one wants to pop now. It's going to take someone with some very shrewd maneuvering to change things or it will be transformed by accident.
If you say so. I still can't get my head around that the liabilities you are swapping for equity will be assets on another banks balance sheet and that this would have just unravelled into an ever downward spiral of downgrades leading to systemic bankruptcy.
Because let's face it, these banks were bankrupt. I don't see how you can unravel an insolvent banking system and create a solvent one. The more and more it unravels the smaller the banks balance sheets become, the more loans are called in, the more the downward spiral continues.
I think they understand this, hence the gvt borrowing and QE, aka robbing savings, pensions and future taxpaters to pay for it.
WV - 'under' I kid you not.
SL, please read up on the Mega-Bank thought experiment.
If the government really wanted to help businesses, it could just cut taxes by £40 billion.
Precisely.
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