Who Watches the Watchmen?: A Letter from a Lloyds Shareholder

Dear David Howarth MP,

I am writing to you not only as a stunned longstanding Lloyds Group shareholder and former employee in Lloyds Bank, but also as a potential Lib Dem voter in the next General Election, in which I presume you will be hoping to win a second term as the MP for Cambridge.

Over the last fortnight it has gradually become apparent that shareholders in Lloyds are, for the second time, about to lose a large part of their stake in the future earnings of the Group. Details had still not emerged by Friday evening, when I realised I needed a little film therapy. I found myself in a packed cinema watching the tremendous Watchmen. Maybe you won’t have a chance to see it, so I’ll explain where the title comes from – though you may be able to guess. It’s the ancient philosophical problem, of course, dating back to Plato, Socrates and Juvenal: “Who watches the watchmen? Who guards the guards?”

I’ve grown up with the understanding that the UK government is accountable to the House of Commons. Furthermore, in our system, the role of the Opposition in the House is to hold the Government to account. The question I therefore want to ask you, as the British state assumes more control of its banking system than any other country, in the process expropriating shareholders’ assets, is simply: “Why is the Government not being held to account?”

I see the Labour Government exercising blanket powers – foolishly granted to it by Parliament at the time of the Northern Rock fiasco – to progressively seize control of the banking system, it seems as a specific goal in pursuit of a strategy to pull the UK out of recession. One hardly needs to be even a mild cynic to conclude that the electoral timetable motivates many of the drastic measures being taken – a recovery by early next year could yet keep Gordon Brown in Downing Street. Of course, it would only be right that he does now secure a mandate, albeit somewhat belatedly, since the context in which Labour won the 2005 General Election was that Tony Blair had given an explicit undertaking to “serve a full term”. You’d think the Opposition parties would be pointing this fact out on a daily basis. But no, they no longer care to oppose. A new consensus has arisen – partly, perhaps as a result of the UK’s ridiculous first past the post system – it is, I suggest, now seen as reckless for parties to go around opposing policies, or even presenting their own solutions to the issues of the day. Instead they minimise risks by manoeuvring and attempting to outflank the others. It’s far safer to blame the Government for “not going far enough” than to question the direction they are leading us all in. So we see the Conservatives unable to present a clear plan, and the Lib Dems outdoing Labour in calls for nationalisation of the banks.

Let me make a few suggestions as to what the Opposition parties should be saying. I’ll start by quoting the Lib Dems lead spokesman on business issues, Vince Cable, who, like John McFall, the Chair of the Treasury Select Committee, is presented in the media as an expert only because fellow MPs are even more ignorant. As they used to say: in the land of the blind, the one-eyed man is king. Here’s what the Lib Dems one-eyed man had to say to the BBC this weekend:

“The government can’t now just sit back as it has with the other banks that it’s taken over and just watch them – it has to make sure that they are run in the national interest.”

The article in which Cable’s quote appeared had begun:

“The deal giving taxpayers a 65% controlling share of Lloyds Banking Group is a ‘vital step’ to get banks lending more, the chancellor [Alistair Darling] has said.”

Here are some questions Cable might have asked instead:

1. Why should the banks “lend more”? The problem we have is a result of an unsustainable asset boom, principally in residential property. Surely, if prices fall, less lending will be required in that sector, yet the Government is demanding that the banks increase lending. This does not compute. Surely, too, the commercial property sector needs to retrench, and, in many other business sectors, businesses need to reduce their borrowings to a level where they can be profitable over the entire business cycle. Some businesses may need to fail. What are the precise objectives of the renewed lending the banks are being ordered to make? Is it wise to insist they throw good money after bad?

2. Is the state really best placed to make lending decisions? Surely the system that has developed over the centuries is that those lending money must judge how much to lend in total and to whom, on the basis that such lending is likely to be profitable. Why would we want the state to control the banks? How does this support the principle of lending only to those likely to pay it back?

3. The implication of Alistair Darling’s celebration of having achieved control of Lloyds Group (as well as RBS and Northern Rock), in particular, is that the process of insuring potentially bad loans on the books of Lloyds Group has been manipulated to produce just this outcome. If so, this would be an abuse of power of the highest order: not only is it against British tradition to seize property, in this case shares, without adequate compensation, it is also contrary to international undertakings the UK has given, for example, in ratifying the European Convention on Human Rights. There appears to be a motive, as well as a wealth of prima facie evidence. Has there been a crime?

4. The nightmare for Lloyds shareholders has arisen in large part from the decision to take-over HBoS last October. After this, and Bank of America’s rescue of Merrill Lynch, I can tell you now that no bank will ever again support a government in the sort of cosy backroom deal that the insufferably smug Mervyn King bemoaned was not organised at the time of the Northern Rock fiasco. “Why”, Vince Cable should perhaps be asking, “was Lloyds not given adequate time to perform due diligence?”

5. And, given that Lloyds did step up to the plate, why have draconian terms been imposed on them for participation in the Asset Protection Scheme? As a shareholder, I understood that the banks had been stress-tested in October 2008, and capitalised to withstand the worst of downturns. I simply do not understand why further action is necessary to save Lloyds. If it is the economy (or Government) that is being saved this time (which is what Gordon Brown keeps saying), why should Lloyds’ shareholders pay for it?

6. There are many agendas at play in the Government’s handing of the banks. Two of these are to:
(a) Ensure the banks “resume lending”;
(b) Minimise the risk to and maximise the profit for the taxpayer.
Why is (a) the concern of individual banks? Where does the obligation to behave in a way that may be expedient to the Government come from? Especially as much of the “problem” is a result of foreign banks exiting the UK. And if a bank such as Lloyds is required to lend more than its management might otherwise judge is in the best interests of its shareholders, then surely they should be compensated, not pay for the privilege.
As regards (b), how do I know that paying something around £10bn for insuring £260bn of loans is a good deal? Especially as the excess on the insurance is no less than £25bn! I understand that the loans would have to be worth on average less than 86p in the pound for this deal to be of any value to the bank – that is, before the excess and the fee are covered.

7. But the bank is being forced to pay for the insurance in shares issued at around 40p each (compared to more than 10x that much before the credit crunch). The bank is legally obliged to act in the general shareholder interest, a principle which the Government appears to be riding roughshod over, and any company would only dilute its shareholders in such a way as a last resort. This is on top of the simultaneous dilution caused by the conversion of the extortionate prefs the shareholders were forced to take in October. The purpose of the insurance is to ensure the bank survives and that the shares are worth more in future. But the majority of this benefit will accrue, not to the existing shareholders, but to the Government. “Why”, perhaps Vince should be asking, “is the Government penalising shareholders because it is having to support the financial system?” Surely the Government should be ensuring the smooth operation of the banking system anyway, not charging for the privilege?

After Tony Blair’s honeymoon period, there was a huge reaction against New Labour spin. Now the self-serving scape-goating of the banks by the political classes has gone unchallenged, not just by the Opposition parties, but also by the media. It is the government and regulators who are responsible for the oversight of the UK’s financial system. They are not being held to account.

Who’s watching the watchmen?

I await your response. Please confirm that you agree that I may make it public, in part or in its entirety,

Yours sincerely,

Tim Joslin