Honey, I’ve Shrunk the Banks!

Darling, what have you done?

I’m beginning to think you’re not really trying.  Still, if I were you, I’d probably be making the most of my one brief moment of power as well.  You must be getting a real kick out of waving your hand and transferring vast sums of money from one group of people to another.

Perhaps I could remind you what you should be trying to do.  You should be trying to get more capital into the banks, preferably private capital, since we’re all tax-payers.  It’s not rocket-science.  I’ve spelt this point out a few times – here, for example.  But don’t take my word for it, read John Hussman’s explanation in the comments on this FT piece.  Hmm, maybe it is rocket-science if it has to be spelt out to readers of an FT forum.

Now, has the “nationalisation” of B&B increased or decreased the risk capital available to support the £1.3tr British credit binge?  Let’s see:

  • an appendage of this increasingly Triffid-like government – sorry, that’s a bit cryptic: I mean to say one or more of the Tripartite Authorities – recently persuaded the banks (and some funds) to underwrite a £400m B&B rights issue.  They were left holding many of the new B&B shares.  Perhaps they covered the risk by short-selling, but if not, they’re marking down their value probably to zero, that is by some £100mills right now.  More of a write-off than a rights issue, it seems.  Jeremy Warner in the Indy has a quote:

‘As one banker put it last night: “Don’t expect us to put up anything for other banks after this. It’s all very well to make shareholders take the punishment for bad lending, while depositors are protected, but we were trying to help.”‘

  • the deal involved Abbey/Santander paying £400m for B&B’s liabilities, i.e the savings accounts. That’s another £400m of risk capital unavailable to the banking system as a whole.
  • then we come to the coup de grace.  The Triffid has had the chutzpah, the cancerous gall, the… words fail me, to charge the Financial Services Compensation Scheme (FSCS) for the whole of the £14bn of the B&B deposits that are guaranteed.  Worse, the FSCS doesn’t even have £14bill.  It will have to pay interest to the government (unless LIBOR plummets, more in one year than the £400m the savings business was sold to Santander for, which somehow bothers me a tad – wouldn’t the FSCS’ interest have been better served by managing the savings accounts?).  Now, I’m not an accountant, but if I was, I’d be expecting to see an entry relating to the £14bn + accrued interest on the balance sheet of every bank (and building society) that is a member of the FSCS.  Of course, this amount will be offset by the value of the B&B book, which will hopefully pay off most or all of the FSCS loan.  That is, our little Darling has decided to transfer the black-hole in B&B’s capital onto the banks as a whole.  And there’s a bit of an agency problem in that the surviving banking community will ultimately have to pay for whatever politically expedient decisions the Government takes as it runs down B&B’s mortgage book.

Not only does the nationalisation of B&B weaken the surviving banks, it will also be next to impossible to repeat it.  The FSCS can’t keep borrowing billions, surely.  Or more to the point, banks can’t keep taking other banks’ liabilities onto their books.  I would have thought repeatability was a good test of the effectiveness of a form of intervention.

And don’t think the taxpayer has escaped scot-free.  For political reasons the Government has decided to put the rights of holders of £4bn in deposits above the FSCS £35K limit ahead of the rights of shareholders.  That’s right.  The taxpayer will lose out before those who had more than £35K in a B&B account.  With a wave of his hand Darling has committed the taxpayer to protect £4bn more B&B savings than necessary.  I’d really like to know whether the taxpayers’ £4bn is to be paid back before the banks’ £14bn…

The Government has no coherent plan for restoring the operation of the banking system.  They’re making things worse, not better, they’re draining capital when they should be helping banks raise it.

Omigod, they’ve just rejected the bail-out.  My violin’s just been drowned out…