FTSE 100
Dow Jones

Monday, 19 October 2009

Autumnal windfalls

According to The Times:

Banks are being threatened with a windfall tax on profits amid mounting criticism from across the political spectrum of a return to huge bonuses.

Strong financial results from American investment banks have raised the prospect of a bumper bonus season in Britain, even at the state-controlled RBS.

RBS dismissed reports yesterday suggesting that it was preparing to pay its bankers bonuses of up to £5 million each, from a total pool of £4 billion. A source close to the bank said that no decisions had been made.

Well on the last point, they have a point. There is nobody working in Broadgate who is worth paying anything like £5 million a year, but since the government control thebank through their 70% shareholding, the government can control that directly.

As for the rest it is pointless to charge an extra windfall tax. The government already owns large parts of RBS, Lloyds/HBOS, Northern Rock, B&B so a windfall tax is just taking cash out of one government pocket and putting it into another. Every £1 taken in tax reduces the receipts from hte government's sale of its RBS shares by 70p.

Then we have HSBC and Standard Chartered, neither of which have taken the government penny nor have they ever been at risk of needing to do so. Both banks might be likely to continue their move into foreign shores and even to move their headquarters to Hong Kong if really provoked.

Then we have the smaller mortgage based banks and Building societies, Nationwide, Abbey/Santander, Clydesdale, Yorkshire, all of which have escaped the worst of the recession/credit crunch by reasonable lending practices and largely avoiding the dodgier practices that caused problems elsewhere.

Which really leaves us with only one bank: Barclays. Penalising all banks for the sake of Barclays would be vindictive in the extreme, but anything can happen in an election year. But such a tax would be sheer idiocy, for the simple reason that at the moment all banks are constrained by their Tier 1 capital, and the economy is constrained by the lack of lending capacity in the banks.

Sure enough the banks have capital to trade and they will do so because they think the returns are higher from trading than lending , so it is lending that gets squeezed while the banks play the various markets.

For every £1 billion taken in taxes, figure £10 billion lost in lending capacity. For every £10 billion lost in lending capacity, figure £15 billion lost in capital investment, assuming that capital intensive companies are geared 2:1. For every £15 billion lost in capital investment, figure £15 billion in lost annual GDP and £2 billion in corporate profits assuming a 20% operating margin less overheads, or about an incremental £5 billion in annual lost tax revenues taking the current ratio of tax receipts to GDP (£500bn:£1400bn).

If the government wants to penalise the bankers they should simply restrict all bonuses to be paid in shares. and that would make the recovery work even faster.

No comments: