2nd August 2012
An unusual paragraph heading for me as I am not a supporter of the too big to fail philosophy. But sometimes you have to deal with things as they are and that situation is that the UK taxpayer already owns some 81.7% of RBS and that RBS would close within a minute of UK taxpayer support being withdrawn. As an independent entity it has no credibility and is unviable.
Regular readers will be aware that I have long felt that RBS has losses tucked away that we have not been told about. Some of these come via mispricing of assets and some via being off balance sheet. I have been swimming against a media tide of "we will soon be able to sell it for a profit". However last nights Financial Times article on RBS indicates a collison between their fantasies and reality. Let me give you some examples:
"the ongoing problems RBS was having with clearing up its balance sheet."
But we keep being told it is going so well:
"RBS is expected on Friday to announce pre-tax losses of about £1.5bn in the first six months of the year"
At least the other banks manage to announce profits, and it looks like the future is not exactly rosy either:
"With the bank expecting further losses to come"
There remains much muddled thinking on this subject as the Financial Times article unintentionally demonstrates:
"the proposal, which would mean taxpayers taking full responsibility for the bank's toxic debts,
Apart from exposing the taxpayer to increased risk"
Frankly the UK taxpayer is fully on the hook because in such a scenario what value would the 18% of shares they do not own have? Virtually none. And here we come to the uncomfortable bit so I hope that you are in the words of BBC childrens programmes sitting comfortably.
Why should the UK taxpayer have to pay £5 billion for an extra stake when the only reason the shares have any value is because of their support? I feel sorry for RBS shareholders as they have not been told the truth about the value of their shares and past mismanagement of the company. But I feel that there is no reason for UK taxpayers to again overpay for shares in RBS.Frankly once was too much and anyway as we go through the balance sheet I suspect UK taxpayers will find quite enough things they are liable for.
Once we have control of RBS then there will be a period of finding out the truth about its situation. After that we should begin the process of breaking it up as there are some viable parts which could be sold off and once the retail bank is tidied up it could be sold off too. You never know it might then act like a bank and start lending rather than punting markets! Bankers for banking, that sort of thing. You never know itmight even catch on and become a trend.
I do not feel that taking over RBS and directing it to lend is that good an idea. It is a seductive idea on the face of it but government directed lending has a dreadful track record. Younger readers who doubt this might like to google the National Enterprise Board , De Lorean or Concorde. Civil Servants "picking winners" had a patchy record to say the least and I cannot see how directing lending would turn out to be much different.
There are dangers in any extension of government activity but a nationalisation of RBS on route to breaking it up would be progress in much needed bank reform. It ends the fantasy that seems to believe that there is a scenario where we are not liable for its debts and also ends the crony capitalism or false market of having share values which depend entirely on taxpayer support.
Perhaps the worst initial danger is that the UK taxpayer could end up paying £5 billion for the shares….
For more economic analysis from Shaun Richards click here.
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