Economic Myths: "Government loses £2.1bn on RBS stake sale"

From the BBC:

The government has incurred a loss of £2.1bn after selling another tranche of shares in Royal Bank of Scotland. The shares were sold at 271p each, almost half* the 502p a share paid in the government's bailout of RBS a decade ago when it rescued the bank at the height of the financial crisis.

Clearly, the government did lose money, but that money was lost/wasted ten years ago when the government bailed out RBS. The government did not lose a penny on the sale itself, it merely converted shares worth £2.71 into cash of £2.71.

* The phrase "almost half" is totally misleading as the government sold the shares for more than half of what it paid for them. It would, however, be correct to say "The shares fell in value by almost half".

This leads me on to something else which annoys me. Let's say Object A weighs/has mass 1 kg and Object B weighs/has mass 2 kg. It is fine to say that B is twice as heavy as A, or that A is half as heavy as B. It is also OK to say that A is lighter than B. But for some reason, a lot of people say that A is "twice as light as B", which is nonsense. You can't use a comparative with an adjective meaning light, small, short, near etc, only with adjectives meaning heavy, large, long, far away etc.

Financial Contagion (2)

I offered an explanation as to why falling house prices end up harming the real economy (despite logic saying they ought to help it) recently, nobody came up with anything better so it'll have to do for now.

To cut a long story short, when house prices fall, people want to withdraw money from banks which are overweight in mortgage lending (which is most of them) because the banks' collateral value is falling. Most banks have about 80% of their lending on mortgages and 20% to the real economy (business loans, overdrafts, credit cards, HP deals/personal loans etc).

It is impossible to make mortgage borrowers repay any faster than under the terms of their mortgage, so the quickest source of cash is to call in business loans, cancel overdrafts, cut credit card limits and stop offering HP deals/personal loans. So the real economy is starved of credit/finance, things which oil the wheels, and it grinds to a halt.

TBH emailed me an article about new revelations on the most extreme real life example of this i.e. the RBS Global Recovery Group which operated on a slash and burn basis. It upped fees and charges, deliberately bankrupted businesses and then a different RBS department acquired their land and buildings at undervalue 'off the market' (can't have forced sales depressing open market prices!). This is a very short term thing and must harm RBS profitability in the long run, but that's not how bankers think; it's only this year's bonus that matters.

I thought that everybody knew this, but apparently not - the BBC re-ran the story (giving due credit to Buzzfeed who uncovered it).

There's no point me summarising, it makes for very interesting reading if you have time.

The point being that without the house price falls, depositors wouldn't have demanded cash, RBS wouldn't have done the slash and burn, and had other banks been expanding their business loans or offered easy remortgages, RBS borrowers would have simply taken their business elsewhere. As things stood, RBS had them by the throat.

"Landmark crackdown on fake shares fraudsters"

From the BBC:

Criminal gangs who tricked taxpayers into investing in worthless bank shares have been targeted by police in the biggest ever national crackdown on the fraud.

The operation resulted in 110 arrests - mostly in Westminster and the City of London with one further arrest in Kirkcaldy and Cowdenbeath. Police targeted the masterminds and facilitators of the "bail out" fraud - so-called because of the fact that banks were bailed out.

There are thirty million confirmed victims of the racket in the UK and the losses run into the tens of billions.

Detectives say the aim of the two-year investigation, codenamed "Operation why-the-fuck did they bail out RBS and Lloyds?", is to "decimate" bank bail out fraud in Europe.

They believe it is the biggest ever operation against the crime.

Translator required: Anyone any idea what Stephen was really "saying but not saying"?

From The Guardian:

"We are now in a position where the government can begin to prepare for privatising RBS. While leading that process would be the end of an incredible chapter for me, ideally for the company it should be led by someone at the beginning of their journey. I will therefore step down at the end of this year to allow a new CEO to lead the group in this next stage," Hester said.

Hester, describing the role as "bruising and difficult" added "it is a sensible thing for the board to look forward to privatisation and I can completely understand that a fresh face with an ability to commit many years into the future may be a good thing for privatisation"...

Hester's resignation comes amid speculation that the chancellor will use next week's Mansion House speech to signal a privatisation plan for both RBS and Lloyds Banking Group.

Update  The Indie is currently running:
Hester la vista: RBS chief forced to go as Chancellor paves way for bank sell-off
George Osborne to fire starting gun on privatisation after the forced departure of Stephen Hester
"Mr Hester, who is in-line for a £1.6m pay-off, was asked to step down by the RBS board following consultations with the Treasury. He will leave the bank later this year clearing the way for his successor to oversee a “British Gas style” public sell off."

"George Osborne urged to split into 'good' Chancellor and 'bad' Chancellor"

From The Scotsman:

Chancellor George Osborne is understood to be facing calls from a high-powered commission of MPs and Lords to split himself into a 'good' Chancellor and a 'bad' Chancellor. A draft copy of a report from the Parliamentary Commission on Public Finance is believed to have recommended breaking up the taxpayer-backed public liability.

The draft version of the highly-anticipated report from the commission was sent to its members in the last week and they have until Monday to read it through, with a final report due by the end of the month. The recommendation to split Osborne would be awkward for him, given the pressure to start reducing the public sector deficit before the 2015 election...

The move is also said to be favoured by the commission as a way of increasing potential investor confidence in the 'good' part of the Chancellor and improving his party's chances at the next general election.

The so-called 'bad' Chancellor would be held on to by the UK government, avoiding the need for a fire sale of the more toxic Coalition policies and will remain responsible for subsidising banks and house prices, steadily increasing taxes on output and employment and doubling the national debt every five years.

The 'good' Chancellor would play a key public role in the Conservatives' 2015 election campaign and he would highlight all his many positive achievements for the UK economy such as

"I’m open to all ideas and proposals

and a proposal which George and I find very attractive is to flog you shares in the bank you already own, and then when we don't make enough from it to avoid making a loss from the whole, overall "taxpayer supported bail out and buy out" shebang we can turn around and say, hand on heart, 'It's all your fault, you should have been prepared to pay much more for those shares!'"

RBS boss Hester "desperate for people to have to borrow to eat"

From the BBC and the BBC:

Royal Bank of Scotland is "desperate" to lend to UK households who need to "borrow money for food", the bank's chief executive has claimed.

One in five UK households borrowed money or used savings to cover food costs in April, a Which? survey says. In an interview with the Sunday Times, Stephen Hester said RBS was sitting on £20bn in cash but economic worries meant businesses were not borrowing, so the RBS was seriously considering a move into payday loans.

"We are lending as much as we can," he said, adding that the bank could not "force companies to borrow. But it's not enough. If only the government could find a mechanism to push people's wages down and push rents up, then we'd be able to tap into a whole new market."

The Which? survey suggests the equivalent of five million households used credit cards, overdrafts or savings to buy food. Partly state-owned RBS reported a return to profit in its quarterly results on Friday. It announced pre-tax profits of £826m and said it lent a total of £13.2bn in the first three months of the year - £7.8bn of it to small businesses.

But like other banks it has abandoned its stated aim of supporting the UK's economic recovery by increasing business lending further because of far more lucrative lending opportunities, such as people's need to put food on the table.

The consumer group tracks the spending habits and behaviours of 2,000 people every month. Which? boss Richard Lloyd described the findings as "shocking". RBS boss Stephen Hester described the findings as "a godsend". The government said tax and benefit changes meant working households were now better off, while working households reported the opposite.

H/t BobE.

Economic myths: what caused the UK public sector deficit.

Thanks to Icarus at HPC for additional input.

People are vaguely aware that the UK government has been running horrendous deficits for the past few years, around one-tenth of GDP, i.e. +/- £150 billion a year. Various explanations, nay excuses, are bandied around:

Excuse #1: A fall in tax receipts

Nope. According to the Public Sector Finances Databank Tab C1, tax receipts in the last pre-crisis year were £519 billion, and by 2009-10 they were down to £513 billion. Tab C1 also shows that taxes went down slightly from 38.6% of GDP to 36.5%, in other words that nominal GDP went up by 4.5% over the three years (which was still a small real fall after inflation).

So that's a fall of £6 billion.

Excuse #2: An increase in the cost of welfare

Nope. According to DWP's June 2010 Benefit Expenditure Tables, working age + child welfare went up from £46 billion in 2006-07 to £52 billion in 2009-10. Tax Credit spending is in addition to that, which according to Table 1.1 of the Public Expenditure Statistical Analyses ('PESA'), went up from £19 billion in 2006-07 to £28 billion in 2009-10.

So that's a total increase of £15 billion.

Excuse #3: The cost of the bank bail outs

Nope. Table 1.1 of PESA includes cash outflows for 'Financial sector intervention', but as explained in Box 2.A, those are zeroed out again, in other words they are treated as short term investments which are expected to be recovered, and so excluded again as 'accounting adjustments'.

The figures included under 'Resource Departmental AME' show a big expense in the first year of the bail-outs and then corresponding income in the following three years, the line appears to net off to +/- nothing.

The figures included under 'Capital departmental AME' show the amount invested in RBS and Lloyds shares and money lent to banks (total £122 billion), the shares are currently standing at a loss (I believe) but the cost of the shares was added back as an 'accounting adjustment', it's an investment not spending (allegedly).

So the net impact of the bank bail outs on official government spending was, according to Box 2.A +/- nothing.

Excuse #4: The current government has to deal with Labour's deficit

Not really true. From PESA, under the last three years of the Labour government, total public spending went up from £550 billion to £669 billion, that's even after excluding the cost of the bank bail outs. Under the Lib-Cons, spending is still drifting upwards, they've pencilled in total spending of £744 billion by 2014-15. So it's increasing less rapidly, but it's not falling in cash terms.

From PSFD, annual deficit was about £30 billion in the years up to 2006-07, and it shot up to £156 billion in 2009-10. The Lib-Cons hope that this will come down over time, but they plan to run deficits for the foreseeable future, their spending plans are a continuation of where Labour left off.

As Sherlock Holmes said...

"Once you have ruled out the impossible, what you are left with, however improbable, is the truth"

In this case, the truth is not improbable at all, the real reason for the deficit is quite simply that the UK government is spending money like water and makes no pretence otherwise. This has little to do with the tired old excuses listed above. From PESA, the total increase in annual public spending between 2006-07 and 2009-10 was £119 billion, and the annual deficit went up from £30 billion to £156 billion.

Either way, this looks like and increase in spending/deficit of about £120 billion a year.

If you want, you can deduct £6 billion tax revenue shortfall and £15 billion extra welfare spending from the extra £120 billion spending/deficit (these were a direct result of the financial crisis), and make some cunning inflation adjustment as well, but that still means that £100 billion of the extra annual public spending (compared to pre-crisis years) is unaccounted for or unexplained, i.e. it's just waste and crap (in addition to the £30 billion pre-crisis deficit which also went on waste and crap).

Just sayin', is all.

Will Hutton speaks with forked tongue: shock.

Will Hutton in The Guardian on the subject of Stephen Hester's £1 million salary + £1 million bonus for meeting targets at the Royal Bank of Scotland:

There is no inbuilt sense of proportionality in pay: no determined effort to link exceptional reward with exceptional contribution; no rigorous effort to separate out the luck of being in the right place at the right time from genuine effort and innovation; no mechanism to require executives to have some stake at risk, or some "skin in the game" to use Warren Buffett's phrase; and a process in which the guiding principle is to give in to empty threats from executive teams.

It is a one-way street in which executives in any circumstances always get more bucks or mega-bucks – never fewer bucks.

And the by-line reads: Will Hutton chaired a government inquiry into top pay in the public sector, published in 2011

Now, Hester turned down the bonus, but a base salary of £1 million is still an outrageous sum of money for just running what is effectively a government department, there is no particular skill involved. To be fair to Hester, RBS is a huge organisation (150,000 employees) and while he was in charge, it appears to have made modest profits and hasn't gone bankrupt or anything.

So let's look at Will Hutton's record shall we?

He was paid (or paid himself) around £180,000 a year for running a quango called The Work Foundation (formerly The Industrial Society), which had 43 employees and went horribly bankrupt in 2010.

Hesta La Vista, Bonus

Alex Salmond

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.

Life copies satire

The Onion published the minutes of the Board Meeting of a large US bank back in August 2002:

So we're unanimous on the merger with Chase Manhattan? Excellent. I think we all agree that this merger will benefit both companies tremendously. Nelson, get started on the paperwork for that immediately. I want it on my desk by Friday. Now, on to the next order of business: Our continuing discussion on whether to pre-approve Douglas C. Schwoegler of Arden, CA, for a Visa Gold card...

From the FSA's report on the RBS-ABN Amro merger:

It was well known to investors, regulators and observers at the time that the consortium ‘conducted only a limited due diligence review of ABN AMRO’. As is normal for a contested bid for a publicly owned company, ABN AMRO allowed RBS and its consortium partners only extremely limited access to confidential information...

RBS submitted a detailed information request to ABN AMRO on 26 April [2007]. On 29 April ABN AMRO provided two lever arch folders and one CD ROM of information to the consortium and stated that this was the same information that had been provided to Barclays.

Banking regulator goes over to the opposition

From the Evening Standard:

The man in charge of the taxpayers' shareholdings in high street banks today warned that any break-up (1) of Royal Bank of Scotland or Lloyds would damage their value. (2) "There would likely be a diminution in value," Sir David Cooksey, chairman of UK Financial Investments which looks after the taxpayers' £67 billion stake in the banks, told MPs on the Treasury Select Committee...

Budenberg also said bonuses for chief executives and key staff were vital in keeping top talent and to maintain value at Lloyds and RBS. (3) He told the committee: "I understand that it is very difficult to justify the sort of bonuses paid at these banks. (4) But if we want to sell these shares, we have to make sure the banks are able to retain top talent. We believe it is essential to maintain high quality management at these banks. They will effectively determine the outcome of value at the banks."

... The taxpayer is currently sitting on a paper loss of around £9 billion for its RBS and Lloyds shares. (5)

1) It is never clear what 'they' (whoever 'they' are) mean by 'break up':

a) Some mumble along about splitting up 'investment banking' (which is hugely profitable for the insiders, they are all con-artists and spivs, separate issue) from 'retail banking' (which is where all the losses were made, i.e. reckless lending on over-priced land and buildings). What really did for them was the inter-bank lending, whereby banks bought each other's mortgage backed crap, but that can be fixed quite simply making it illegal for banks to invest in or lend to other banks. Which is dead easy to implement and actually quite effective. No break up required!

b) Or do they simply mean splitting banks into smaller banks, i.e. Lloyds back into Lloyds, TSB, Halifax and The Leeds? If there are lots of competing smaller banks, it is in theory better for the general public, but the question is how many competing banks you need to maximise the benefit for the consumer - is it four, six, ten, twenty? Who knows? And the more competing banks you have, the more duplication there is of admin costs, which benefits nobody.

2) Hang about here. I'm a taxpayer and a bank customer. They could quite easily maximise the value they get for me qua taxpayer (to the extent that the government doesn't just piss the proceeds up the wall anyway) by e.g. merging Lloyds and RBS and withdrawing banking licences from Barclays, HSBC, Santander and Standard Chartered. But then my losses qua consumer would far outweigh the benefit I get qua taxpayer, wouldn't they (not to mention the losses suffered by investors in those other banks)?

3) The geniuses who got us into this mess? The simple fact is that running a bank isn't that difficult and does not require superstar salaries. The Nationwide has been managed rather less badly than most banks, and their entire board of directors took a total of £8 million in salaries and bonuses for 2010 (see 2010 accounts, page 66) and their 18,350 other employees were paid £584 million between them, i.e. an average of £32,000 each. which is a decent wage, but chicken feed compared to other banks, such as...

RBS, where the "aggregate remuneration of directors and other members of key management" was £48 million (2009 accounts, page 346) and its 183,700 employees (page 108) were paid £9,635,000,000 (page 281), an average of £52,450 each.

4) No it's not 'difficult'. Taking off a wet suit in a telephone booth is 'difficult'. The word he is looking for is 'impossible'.

5) The £67 billion is a sunk cost, the £9 billion paper loss is a sunk cost. The previous government almost certainly overpaid - they could have let the banks sort themselves out at zero cost to the taxpayer with debt-for-equity swaps - but what's done is done. They've lost £1,000 of my money already, and I see no reason to throw good money after bad. If they now make a paper loss of £9 billion (or £67 billion) but structure these banks in such a way as to minimise the costs to consumers (who are synonymous with 'taxpayers') by more than £9 billion (or £67 billion), then go for it, say I.

"Acronyms not in battle over non-publication of non-existent report"

From the BBC:

A row has not broken out over why the Financial Banking Authority (FBA) has not published a non-existent report into what did not go wrong at Royal Services of Scotland (RSS).

Lord Turner, chairman of the government's banking supervision quango the FSB said that the government-controlled bank SSAP had refused to give the regulator permission to release a non-existent study. However, SAP disputed this, saying that it would "engage constructively to facilitate production of the report".

The FRC ruled on 2 December that the RSPCA had made some decisions, or possibly not, but cleared it of any wrongdoing when judged subjectively by those neither capable of making those judgements nor with any interest in finding those conclusions to have been wrong. Lord Adair made his comments in an unpublished open letter on Wednesday to Treasury Committee chair Andrew Tyrie.

He said the FPA is only legally able to make a unilateral decision to publish the details of its whitewash if consent can be obtained from his fellow government employees with whom he regularly plays golf. And this is not the case with RoSPA.

In its response, an RMT spokesperson explained that the institution - whose legal status was unclear - would help to facilitate the re-write of the KGB's adolescent scribblings "when they have has actually bothered to compile the confidential material they wish to release publicly. In which case it wouldn't be confidential, would it? So we'd be back to square one."

The New Feudalism (2)

From the BBC:

A new not-for-profit lending scheme is being unveiled aimed at giving manageable loans to financially excluded people. A pilot scheme has been set up in the West Midlands called My Home Finance, in the hope of diverting people away from borrowing from loan sharks. However, the interest being charged is higher than the maximum by law that credit unions can charge. It will charge 29.9% APR in the pilot scheme, rising to 49.9% APR in April...

My Home Finance has been set up by the National Housing Federation (NHF), with 10 branches opening as part of the pilot project... The pilot scheme is being launched by Work and Pensions Secretary Iain Duncan Smith on Thursday. The "vast majority" of the set-up costs for the scheme have been met by the Department for Work and Pensions, according to the NHF. There has also been input from local housing associations and the Royal Bank of Scotland.

Please note that all of the parties involved are branches of government or are controlled by the government and financed by the taxpayer - the National Housing Federation is just the umbrella lobbying body for Housing Associations, who are in turn creatures of legislation and financed by the taxpayer (whether they do a better or worse job at providing 'affordable' housing than local councils is a separate issue), and this whole concept of 'living within your means' appears to have been lost in the mists of time.

NuLab BluLab LibLab

From today's CityAM: "[The Conservative Party's manifesto will include] details of plans to sell discounted shares in part-nationalised RBS and Lloyds when they are eventually re-privatised."

From today's Daily Telegraph: "Shares in Northern Rock will be handed to its customers under plans in Labour's manifesto to turn the troubled bank back into a building society."

Debt-for-equity-swap Of The Week

A lot of people don't like the idea of banks being expected to sort themselves out via debt-for-equity swaps because they think that somehow debtholders are being 'forced' to lose money. Nonsense. The only serious alternative is government bail-outs, whereby the taxpayer is forced to give the banks money.

The good news is, if you just leave it to market forces, then debt-for-equity swaps are what will happen anyway, even though these swaps come in an infinite number of guises. From BusinessWeek:

RBS and its National Westminster Bank Plc unit offered to buy back some dollar-denominated preference shares with a face value of $14.3 billion, paying as little as 52 cents on the dollar, the Edinburgh-based lender said in a statement...

D'you see that? Those preference shares (halfway between shares and bonds - so the same principles apply) are trading at 52p in the £1. The pref holders have already lost 48% of their initial investment - provided they are offered a choice of 52p in cash; or ordinary shares or new bonds with a market value of 52p, then they shouldn't be too bothered.

The gimmick is that the old pref's had a nominal value of £1 but the cash paid out, or new shares or debts issued have a nominal value of 52p, so the bank can book the difference of 48p as a gain. It's not really a gain, it's just losses which have been crystallised in the hands of the bondholders, which have to be removed from the bank's accounts to prevent double-counting.

RBS, which is 84 percent owned by the government after it arranged a 45.5 billion-pound bailout of the lender, also said it converted $935 million of its 9.118 percent preference shares into ordinary stock. Investors in $548 million of the shares opted to receive a cash payout rather than common stock...

Again, d'you see the key word there - 'opted'?

RBS said it decided not to follow Lloyds TSB Group Plc in issuing contingent capital notes because it saw “limited benefits from doing so at this time...”

Which is a pity - those CoCo's are like rolling debt-for-equity swaps, something that Denis Cooper and I once dreamed up during an email exchange (not having realised that they already existed).

More Tory gimmicks, Labour lies

From the BBC:

The public could be offered discounted shares in state-owned banks under a "people's bonus" plan outlined by Tory shadow chancellor George Osborne. Mr Osborne told the Sunday Times: "The bankers have had their bonuses. We want a people's bank bonus for the people's money that was put into these organisations."

It was expected people would be offered shares worth between a few hundred and few thousand pounds at a discount on the market price, the paper reported. There could be extra discounts for young people, low-income families and parents saving for their children...(1)

"The man who would be chancellor wants a new generation of mass share ownership," said BBC business correspondent Joe Lynam, "And he wants to create a new culture of saving rather than borrowing."(2)

... Chief Secretary to the Treasury Liam Byrne said: "When it comes to the shares in the banks the public expect us to focus on getting their money back.(3) That means selling them at a time and way that maximises their value, not an irresponsible and expensive political gimmick."

RBS and Lloyds shares are currently worth about a third of the prices paid by the government.(4)

1) Hang about here. Taxpayer's money has been used to prop up banks, how about giving taxpayers x shares in RBS or Lloyds for every £100 tax they pay in the next couple of years, that seems to be the fairest way of repairing the damage.

2) I'll come back to the 'savings culture' later on, this is more lies and spin.

3) That's the beauty of plc's - it doesn't matter who owns them. If I, as a taxpayer, get given a few hundred RBS or Lloyds shares (see 1), then it's my decision whether and when to sell them. As like as not I'd dump them on Day One, but others may wish to hold on to them, and if they later sell them at a profit, well good luck to them :)

4) OK, the government cheerfully and deliberately pissed £30 billion of taxpayers' finest up the wall to try and keep the credit and house price bubbles inflated (rather than letting the banks sort themselves out via debt-for-equity swaps), does that not smack of 'expensive political gimmick' to anybody? Sure, the Tories don't really know a way out of this, but they've been given the shitty end of the stick - there is no longer a 'right' answer (short of doing what I said in 1) above).

Nope, sorry, still not big enough to be "too big to fail"

For the benefit of the majority of people who talk a lot about banks, but have never bothered looking at a bank balance sheet, here's the RBS balance sheet as at 30 September 2009 (full results here, pdf):
1. The only bits that the real world cares about are:

A. Loans and advances to customers of £631 billion. This is real money that real people (mortgage borrowers, credit card holders, businesses) are contractually bound to repay to the bank. Buried away in 'Other assets' of £102 billion are a few quid for proper fixed assets, buildings, safes, IT systems and so on.

B: Customer deposits, which are on the liabilities side of course, of £483 billion. This is real money deposited by real people, and the banks are contractually obliged to repay them when they ask for it.

All the rest of it is jiggery pokery, and even if I could explain what it all is and people understood it, that's of no real interest to real people in the real world.

2. We also know that the UK government has historically given implicit or explicit guarantees to depositors (which is fair enough, apart from the fact that the banks didn't pay for the insurance). So, next time RBS is in a bit of a mess, there's no reason why the government or the bankruptcy courts or whoever shouldn't do something similar to what they did with Bradford & Bingley or Northern Rock, which is to write down A to its market value (knock off twenty percent = £505 billion) and then transfer A and B into New RBS, the balance of £22 billion is non-repayable share capital in New RBS, which gets given back to Old RBS (so there's no net transfer of value away from actual Old RBS).

3. The non-repayable shares in New RBS and all the other rubbish gets left behind in Old RBS for the shareholders and long-term bondholders* and so on to squabble over. Whether they get back more or less than they expect to get back is a different topic - the total market value of all RBS shares is currently under £20 billion, so shareholders (mainly the government, having invested taxpayers' money) have already pencilled in losses of £37 billion. We could do the same exercise with bonds and we'd find out that they have also pencilled in losses of £50 billion or something, so splitting the bank is not depriving anybody of any money that they haven't lost already.

What's not to like?

* There are grey areas where it's not clear whether something is a deposit or a bond, but hey, lines have to be drawn somewhere. I suppose the acid test is "Would this bond have been included in the government's deposit guarantee scheme?"