Scottish independence and RBS liabilities

Today's FT picked up on a question which Jon Snow asked Alex Salmond on yesterday's Channel 4 News, i.e. whether an independent Scotland would pick up the tab for "the UK government's £187 bn exposure to RBS". To which Salmond replied 'no', obviously. The article is otherwise terribly light on detail and I suspect that Snow and Salmond also both completely missed the point:

If we decide that RBS is Scotland's problem, then the Scots really don't have much choice in the matter.

Having been right royally (or should that be democratically?) stiffed by the Icelandic banks, we need some sort of plan in place to disentangle ourselves from RBS and to entangle Scotland instead.

1. The shares

The UK government originally invested £45.2 billion into RBS as shares (see UKFI annual report 2011), an average of 50p per share. Those shares are currently trading at 23p, so are currently standing at a loss of £24 billion. Who knows what the value of those shares will be when Scotland becomes independent? I don't, but I do know that RBS had £78.445 billion cash on deposit with central banks as at 30 September (Tab 1.2 from the Excel spreadsheet available here) .

I assume that the bulk of this is with the Bank of England, so all we have to do prevent RBS from drawing down its balance to below £45.2 billion. Then the day after Scottish independence, the Bank of England merely swipes this cash, i.e. deletes it from the record and we send the new Scottish government a share certificate showing them as the new owner of the 90 billion shares.

2. The loans

The UK government or HM Treasury also lent RBS money in one form or other i.e. under the Special Liquidity Scheme, Credit Guarantee Scheme and Asset-backed Securities Guarantee Scheme. As far as I am aware, these loans have already been largely repaid, and if not, we'll just have to make sure that these are repaid prior to independence, which is at least two or three years away.

If they aren't repaid by then, we'll simply have to find something in the small print which allows us to call in repayment the day after independence. RBS have plenty of assets in England, premises, mortgages secured on English land and so on to which we can help ourselves. We can't just shove the loss onto ordinary UK depositors with RBS, so we'll have to take enough to repay them as well. RBS balance sheet total was £1,607 billion as at 30 September 2011. It only had £433 billion in customer deposits, so there's plenty enough to cover outstanding loans from the UK government and deposits from ordinary English, Welsh and Northern Irish people.

Much the same thing happened when the Icelandic banks went pop, the UK government helped itself to all the assets which those banks had bought in the UK with money they had originally borrowed from greedy mugs in the UK. Primarily UK local councils.

3. The guarantees/contingent liabilities

The dividing line between a secured loan and a guarantee is clear enough if you have a choice between lending money to somebody yourself or guaranteeing a third party lender that you will repay the loan if that somebody defaults, but with state guarantees to banks, secured on other financial things it is not so clear at all.

So I'm not sure whether the Asset-backed Securities Guarantee Scheme etc was the government lending the money to banks and taking other stuff as security, or whether the government made a guarantee to people who'd invested in banks that they would be repaid. Either way, I strongly suspect however that the £187 billion figure mentioned is more in the way of guarantee than actual loan.

So all we have to do here is simply renege on them, and tell RBS or RBS' investors that they are on their own and we will not honour the guarantees. If the Scottish government, as the new owners of RBS wants to step in as guarantor, then that's their decision, and if not, they can do like Iceland and just let it go pop.

UPDATE 13/1/12. Today's FT says "129 billion exposure to RBS toxic assets: By taking a big stake in RBS [presumably the £45.2 bn referred to in (1)], the UK accepted contingent liabilities valued by the Treasury at £129 bn." So this is a historic figure anyway, and these are only 'contingent' and we can simply walk away if it suits us.

4. Summary

From that day and henceforth, RBS will be Scotland's problem and Scotland's alone. If they are happy for RBS to be split up and the losses fobbed off onto somebody else, then so be it, that's their decision. This won't go down too well North Of The Border, but hey.

Conversely, I think it's only fair that we take all the HBOS losses on the chin just to even things up, seeing as that was merged into Lloyds at our then Prime Minister's command. It may well be that Scotland retaliates by nicking stuff from HBOS - that will get very interesting indeed...

As you see, all of these supposed massive financial problems which the zealots say independence would cause all just melt away if you look at them sensibly.