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Friday, 27 February 2009

Gordon Banks

The last time a one-eyed man was called on to make a double save, Gordon Banks was playing for Stoke. Now only 3 months after Gordon Brown single-handedly saved the world by injecting £20 billion in cash for ordinary shares and preference shares (which have since been swapped for ordinaries), the one-eyed son of the Manse is gong to do it again, but this time putting in up to £19.5 billion. That is £39.5 billion in the year. Remember that number because we will come back to it.

This is how it works. As part of the bailout package the government will guarantee up to £ 325 billion of assets, although if the pound devalues that number will go up. The government, ever eager to drive a hard but pointless bargain, insists that RBS take the first £13 billion loss. RBS reply that they don’t have £13 billion to lose, so the government say they will inject £13 billion.

Then the government say they aren’t going to do this for free. Oh no, they want a fee. 2% sounds good. Quite frankly they shouldn’t have bothered. This stuff is either worth very little or it's fine, actually the former. 2% is an absolute steal for the bank. It's a fraction of what they would pay for one year's insurance for this lot, forget about a once-and-for-all payment. In any event that means they have to pay £ 6.5 billion in premiums, which RBS say they have not got, so the government says they will put in another £6.5 billion if required.

So where does that leave us for the year? Well RBS say they lost £24.1 billion for the year, and they will have to pay out another £6.5 billion, so let’s call that a £30.6 billion loss, but on the plus side they have offloaded a net £ 312 billion of dodgy assets and they got equity commitments of £33.9 billion, so they are in good shape. They also lose some tax breaks for a few years, but as they probably don’t expect to pay tax in the UK for a while but I don’t expect that makes much difference.

The tax payers side of the story doesn’t look so rosy. Already a net £33 billion out of pocket and at risk for a further £ 312 billion against assets known to be worse than a bit iffy.

Who said crime doesn’t pay?


an ex-apprentice said...

You have laid it out, Mr Alex, with your usual combination of unique clarity and wit.

The problem is, I keep reading and re-reading it, thinking I must have missed something, or misunderstood in some way, because surely no-one, not even Gordon the Ruiner, could possibly, not in their worst nightmare, ever be THAT stupid...

Alex said...

Dear Mr Apprentice,

Thank you for your compliments. My acuity comes from more than a qaurter of a century working in the City on some of the most complicated financing ideas, but nothing like the CDOs, etc (they are relatively simple it is their price, volatility and risk which is complex).

I am afraid Mr Brown is hopelessly out of his depth, as is Mr Darling. The analogy is apt because it as though neither of them want to get their feet wet and they have no idea how deep the water might be - and neither do their political allies, the Treasury or FSA.

The figures look bad, but the £ 325 billion exposure is likely to be backed by assets of some value, so maybe the government won't lose the whole amnount. Perhaps only £ 100 billion.

Figure this. The people running HBOS and RBS were far from the best in the City. You wouldn't take a job in those banks if you could get a job in a more prestigious one elsewhere, which is why non-bankers Crosby and Goodwin ended up in decidedly second tier banks and not Goldmans or Norgan Stanley. But if they screwed up, what chance do rank amateurs like Gordon Brown and Alastair Darling have? They have never run so much as a whelk stall and they wouldn't know how to make a good lending decision.

If you think things were bad under Goodwin and Crosby, see what happens when Mandelson or Balls get their hands on the banks' controls.

Now that is a nightmare.

Demetrius said...

What a pity you drag Gordon Banks into this business. He was a decent honest man who did his best for his country.