Cutting in the middlemen

Emailed in by BobE, from Inside Housing:

Two of the sector's largest banks are offering cheaper loans to housing associations after benefiting from gov­ernment initiatives to boost lending.

Lloyds and Royal Bank of Scotland have both taken up the Treasury's funding for lending scheme and passed on cheaper borrowing costs to the sector to offer more competitively priced finance...

OK, stop right there.

i) The government is the government.

ii) Lloyds and RBS were given massive bail outs by the government, which now effectively underwrites and controls them.

iii) Housing Associations are set up, financed and controlled by the government, either directly or via legislation telling them what they can or can't do and what tax breaks they get. They are not charities or truly private organisations.

So instead of the government just building housing itself - or allowing local councils to do so, using borrowed money or otherwise - it is using taxpayers' money to lend to "banks" to lend back to "housing associations" to do the building for them.

We then need overpaid civil servants at HM Treasury to monitor the lending to banks, overpaid regulators to oversee the banks, overpaid civil servants to oversee the Housing Associations and overpaid quangocrats to run the Housing Associations, who then outsource the building work to large corporates with their high paid Chief Executive Officers, who in turn sub-contract it all back out to Joe The Local Builder.

Because, for some reason, this is seen as preferable to allowing councils to just get on with asking Joe The Local Builder directly.

"Nonsense": Stephen Hester calls for Sir Mervyn King to be split up

From The Evening Standard:

Stephen Hester today called for the Sir Mervyn King to be split up within a year to end the "nonsense" of state interference in the banks it owns.

In a dramatic intervention, the Chief Executive of the Royal Bank of Scotland said the Bank of England Governor risks a prolonged Japanese-style slump in bank bonuses if he keeps telling the high street lender what to do. Sir Mervyn would have to be split into a "useful idiot", able to resume his role as a robust lender to banks and other financial institutions, and a "bad goat" saddled with the worst debts and used to carry them away into the desert, far from the eyes of G-d.

Achieving it would be complicated but the challenge was "not beyond the wit of our finest surgeons."

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.

Is this really such a good idea?

"Spreading your mortgage over 35 years"? Did I read that correctly? Click to enlarge:

Reader's letter of the week

From last Thursday's Metro:

So the clampdown on alcoholics is a smokescreen to cover up the No. 10 e-mails row (Metro, Wed)? But wasn't the No.10 e-mails row a smokescreen for the MPs' expenses row? And wasn't the expenses row a cover-up for Labour's failure to deal with Sir Fred's pension? And wasn't that a cover-up for Brown's mishandling of the economy? I can't take it any more ...

Keith Devereaux, London NW2

Reader's letter of the day (1)

From today's FT, on the topic of Fred The Shred's pension:

Sir, An interesting reversal of the Maxwell case – raiding an insolvent company to pay a pension.

Elizabeth Roberts, London, UK.

Royal Bank of Scotland shares down 98%!

Compared to two years ago, when they touched 700 pence.

UPDATE: As John Ashton has pointed out in the comments: "RBS has a closing market capitalization of around £5bn. The government plan is to convert £5bn of prefs into 12% of the ordinary shares worth around £600m at close. £5bn into £600m in just one deal. Great stuff!"

Administrative cock-up or tip of iceberg?

UK banks are in a bit of a Prisoners' Dilemma: acting individually, it is in every bank's interest to foreclose on every mortgage loan that looks in the slightest bit risky as soon as possible, because there is an advantage to being the first to bail out. However, this will merely speed up the house price crash. Acting as a cartel therefore, it is in the banks' collective interest to hang on as long as possible.*

Whether RBS NatWest will decide that this is a PR disaster and hastily back track remains to be seen...

The Addymans have been threatened with repossession, even though they've never missed a payment on their mortgage. Peter and Marian Addyman say NatWest gave them a week to repay the £226,000 loan or face losing their home, and the deadline has expired. The ultimatum - for which they say they have been given no explanation - comes despite the bank's nationalised parent company, Royal Bank of Scotland pledging not to carry out any repossessions for six months...

Mr Addyman, a 32-year-old pharmacist, and his wife, who works for a mental health unit, have three sons. They bought their newly-built five-bedroom home in St Leonards-on-Sea, East Sussex, for £250,000 in 2004. About two years ago they consolidated their debts by taking out a second mortgage for £100,000 with a finance company, but insist they were entirely open with NatWest about this.

... NatWest wrote to them in September to say that after 'reviewing' their arrangement it was withdrawing the mortgage. They had 30 days in which to secure a new loan or it would begin recovery action and inform credit rating agencies of the debt. The letter concluded: 'We assure you that we have only reached this decision after careful consideration. However our decision is final and we are not prepared to enter into any discussion in relation to it.'

The couple tried to make alternative arrangements, but say the fall in property prices has left them unable to find a new mortgage deal.

* All cartels face a similar problem, for example for oil-producers, there is a collective advantage to restricting supply to keep prices up, but an individual advantage to breaching a quota to exploit the artificially high prices.

Another day, another desperate throw of the dice (12)

Hot on the heels of the state-controlled Royal Bank of Scotland's decision to allow mortgage borrowers to rack up six months' of mortgage arrears before commencing foreclosure, thus exacerbating the deficit faced by the borrower on the inevitable repossession and a corresponding bad debt in its own books (enhancing the loss to the taxpayer from the part-nationalisation), the state-owned, taxpayer-funded Northern Rock follows suit.

That's the fifth throw of the dice this week alone, BTW.

Another day, another desperate throw of the dice (9)

From The FT:

RBS promises mortgage respite

The political and public campaign to force Britain’s banks to do more to help customers weather the economic downturn will gain impetus on Monday with a promise from Royal Bank of Scotland to give at least six months’ breathing space to homeowners who fall behind with mortgage payments.

The promise, which will put pressure on other banks to make similar commitments, comes as ministers prepare to outline plans that could see voluntary codes of practice for the banking industry placed on a statutory footing.

*sigh*

1. Don't we taxpayers now own the bulk of RBS? Weren't we promised that the government would make an overall profit on the bail outs? As an involuntary shareholder, I'd like the RBS to minimise mortgage arrears; if the price of that is more repossessions, then so be it. I'm not aware of any "public campaign" to the contrary.

2. Is the government also prepared to subsidise all tenants who are up to six months in arrears? Probably not, and if so, they shouldn't be.

3. One thing they haven't announced yet is Council Tax exemptions for people with mortgage arrears, but I suppose that's only a matter of time...

4. Is this all maybe just another feeble, ultimately ill-fated and hugely expensive attempt to prop up house prices by keeping properties off the market?

Bastards.

*/sigh*

Richard Murphy is sometimes right

Richard Murphy sparked an interesting debate over at Tim W a year ago; he claimed that if banks etc had issued bonds that had fallen in value (because the bank's credit rating had fallen), they were allowed to reduce the value of that debt on their balance sheets, and hence book the difference as a profit, which I immediately dismissed as twaddle.

My bad!

It turns out that UK banks are now actually doing this, as evidenced by the two negative expense items of £584 million and £224 million buried away in Note 2 on page 49 of The Royal Bank of Scotland's 2008 interim results.

Altho' it seems bizarre to book this as a profit, and thoroughly underhand to bury it away like this, that is just the way that double-entry booking works, and, to be fair, at least it flags up the issue to the discerning reader.

Barclays to raise £3 bn ... and then some

As predicted here, Barclays are next in line for a rights issue.

The amount does seem on the low side, it's less than 10% of current market capitalisation of £31 billion, as opposed to my ball-park figure that banks will have to raise approximately 20% of their current market cap.

Remember also that Barclays' gross assets of £1,227 billion are roughly double those of HBOS (£667 billion - see page 11); so Barclays will only get away with this if the fraction of assets that they have to write off is less half that of HBOS, who are to raise £4 billion shortly.

UK banking 'crisis' in perspective

Total UK personal debt (mortgages, credit cards etc) was £1,409 billion at the end of 2007. That's roughly the same as gross domestic product or nearly £60,000 per household. But there can't be a liability without an asset, rather unsurprisingly, total household bank deposits are around £1,000 billion.

The banks only have to worry about those people who can't afford to pay their mortgage and who are in negative equity. Let's assume that house prices fall by one-third to their long term average price/income ratio (reversing the last three or four years of price rises) and that a fairly catastrophic* five per cent of people lose their jobs. There are about eleven million people with outstanding mortgages so let's assume the banks repossess 550,000 homes** and suffer a loss of £50,000 on each one. That'd be a loss of £28 billion, which sounds like a heck of a lot, but it's only 2% of the total money that banks have lent out.

A brief summary of the main UK banks*** is as follows:


There seems to be a heck of a lot of double-counting (total assets over £5,000 billion!), but even assuming that banks have to write off as much as £50 billion and thus have to raise another £50 billion in cash from their own shareholders, via rights issues, like RBS, this is on average only asking shareholders for another £1 for every £5's worth of shares that they currently own.

In RBS's case, it's more like £1 cash for each £3's worth of shares****, but hey, so be it. And that £50 billion is only one-twentieth of all the money that households have on deposit with banks, so all the bank's shareholders are being asked to do is swap a cash deposit for more shares. Which they can then sell in the market and stick the money back in the bank if they want.

* i.e. one-and-a-half million workers. Unless it's those one-and-a-half million superfluous public sector workers, of course.

** There were 190,000 actual repossessions (not just 'repossession orders') in the years 1990 to 1992. This time is going to be a lot worse.

*** Excluding Nationwide (a building society), Abbey (owned by Johnny Foreigner, so who cares) and Northern Rock. Total assets as at 31 December 2007 per published accounts and market capitalisation is as at today's date from the rather excellent Yahoo finance section.

**** The rights issue is supposed to raise £12 billion, against a current market capitalisation (the total value of all shares in issue) of £38 billion.