German banks are in a bit of a mess apparently.
A study by the Bundesbank and German regulator BaFin suggests that they are still sitting on €300bn of toxic debt, reports Ambrose Evans-Pritchard in The Telegraph this morning.
Deutsche Bank head Josef Ackermann wants the government to set up a ‘bad bank’ to take on the dodgy debt. But finance minister Peter Steinbruck has warned against it, saying it would cost €200bn to set up. “How could I take such a proposal to the federal parliament? The nation would think we’ve gone crazy.”
You can see his point. After all, who on earth would think that pouring hundreds of billions of taxpayer pounds, euros or dollars into the black holes that are our banks’ balance sheets could ever be a good idea?
On second thoughts, don’t answer that…
The new rescue package could cost taxpayers billions
The latest great British bank rescue package has been announced by the Treasury this morning. The Treasury – apparently after problems agreeing on what price it should buy dodgy assets for from the banks – has rejected the idea of a “bad bank”. But the new solution could still cost the taxpayer billions of pounds.
The Government’s main proposal is that banks will be allowed to pay a fee for a Treasury guarantee on their toxic debts. Under this scheme, reports the BBC, “banks will agree with the government the amount they expect to lose from particular debts. The Treasury will then sell insurance against about 90% of the institutions’ additional losses from the debt.”
The idea is that if banks know how much they could lose in a worst-case scenario, they won’t feel the need to hoard money for emergencies, and so can start lending more freely again.
A whole raft of other measures has been announced too. The Government will also “provide full or partial guarantees” to “eligible triple-A rated asset-backed securities” including mortgage debt (enabling banks to parcel up and sell more of these loans in the wholesale markets). The Bank of England is also going to be allowed to buy up to £50bn (in the first instance) of “high quality private sector assets”, including corporate bonds and commercial paper.
Oh, and Northern Rock will be told to offer more mortgages, rather than trying to dump customers in favour of repaying the Treasury, as was the original plan. So funnily enough, the Rock could return to being the most reckless lender on the market once again, only this time, backed by the taxpayer.
The basic idea behind all this is that the risk from all the garbage on banks’ balance sheets will be taken on by the taxpayer, while the banks themselves will end up with thoroughly laundered, spic and span balance sheets. That means that they should be able to increase lending once again – assuming they still want to.
What happens with all the garbage, you ask? Well, that ends up with you and me. The hope is that by the time this is all over, the garbage won’t be quite as worthless as it is right now. The truth is that, no one really cares at the moment what will actually happen, because no one in power looks any further forward than the next election date.
RBS is set to be the next bank practically owned by taxpayers
For now, it looks like Royal Bank of Scotland is the next bank that taxpayers will pretty much completely own. RBS has announced this morning that the Government will swap its preference shares (thus getting rid of that penal 12% coupon) for ordinary shares, raising its stake in the bank from 58% to nearly 70%.
RBS expects to announce a 2008 loss of £7bn-£8bn. But that’s not including the potential £20bn writedown on its frankly stupid purchase of Dutch bank ABN Amro at the top of the market in 2007. Along with ill-advised loans to Russia oligarchs, RBS is the perfect case study for just how careless our banking sector became over the past decade.
Mind you, though it’s convenient to pin all the blame on the banks, they were hardly alone. As one interviewee pointed out in BBC journalist Evan Davis’ enjoyable documentary on the City last week, if banks had pulled back on lending, they’d have lost market share, and shareholders would have called for chief executives’ heads.
What allowed things to go so far? It’s pretty straightforward – it was down to inappropriate monetary policy and ineffective regulation.
That’s what makes it somewhat galling when Gordon Brown says he’s angry about the banks’ behaviour. Well, you know, Mr Brown, maybe you should have thought of that when you saw house prices rocketing. Did you never wonder where the money was coming from? It wasn’t because people were suddenly earning a lot more. Or because we were woefully short of houses in this country (as is clear from the sudden glut of cheap rental property hitting the market).
It’s because banks were being too free and easy with handing out the money. And just as they were careless with mortgage lending, they were being careless on every other deal they made too. You could have done something about it then, but that would have spoiled the party.
It’s too late now. And because it’s gone too far, taxpayers are now being forced to pick up a bill that in normal times should have been left with banks and their shareholders. And even this new move might not be enough – don’t bet against more money being poured into the banking system before the year is out.
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