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Tuesday, 3 November 2009

Radical spin operation underway

Ministers and BBC got busy this morning briefing the press about radical changes to the banking system. Lloyds and RBS are going to sell of "major parts of their businesses", including bits that you have either never heard of, or thought had ceased to exist long ago. All in all, according to ministers, this amounts to a major restructuring of the UK financial system.

Complete tosh, of course. Magicians call it "distraction". What they don't want you to focus on too much is the fact that the government is putting an extra £3.1 billion net into Lloyds and a massive £25 billion into RBS with a further £8 billion of standby equity, er, just in case. That amounts to as much as the government spent when they took over RBS in the first place.

On top of that the tax payer will take on £282 billion of toxic assets, but since the government will now own 84% of RBS, this might seem largely immaterial. Well no. Before the government took on the assets under GAPS the tax payer was protected by the limited liability of the banks and could in theory have walked away if the whole company had collapsed.

The taxpayer now has £65 billion of cash invested in RBS, £8 billion of cash committed to be invested in RBS if the bank requires it and £282 billion of assets that the tax payer is underwriting. In addition the Treasury has agreed to remove the restriction on claiming tax losses that it had agreed with RBS in February. I thought that wouldn't last long.

One item that Lloyds shareholders might be interestd in is the fact that RBS will pay £700 million per year for their asset protection, dropping to £500 million, whereas Lloyds were charged £2.5 billion for 6 months guarantees that were never actually agreed or put in place. Alternatively tax payers might be interested to know why RBS were being charged so little, effectively 10 times less.

But you want to hear the really good bit of spin? The Treasury and RBS agreed that the RBS first loss on the APS scheme would be increased from £42 billion to £60 billion, but with the government's stake increasing from 70% to 84%, that actually means the loss picked up by outside shareholders decreases from £12.6 billion to £9.6 billion. Or in other words, another £3 billion of risk for the tax payer.

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