Alistair Darling Tries to Steer Economy Between Public Anger and Shareholder Revolt
Predictably, everyone’s in a right tizz about Alistair Darling’s new bailout package, mostly the bit about insuring against toxic assets, and the lack of detail about how much banks are going to pay in premiums to have those (possibly enormous) assets taken on. And the bit where the government is now the 70% majority shareholder in RBS. And the news that RBS lost £28bn last year wasn’t exactly a confidence booster.
As the banks will have to pay a lot or cash and/or shares to the government, the shareholders can’t see when they’re ever going to get premiums again. So share prices tumbled across the banking sector, especially in RBS, where they collapsed 70% yesterday, leaving them a long way from their post-Natwest/ABN-Amro takeover pomp, where they were valued at £75m. They rallied this morning, but once the bargain-hunters deserted they’ve started sinking again. Lloyds and new bosom buddies HBOS lost big today as well, adding a 35% drop so far today to their 34% drop yesterday. The plummeting graph lines have instilled a subsequent loss in confidence in sterling, which has fallen to a seven year low against the dollar ($1.3934 to the pound). Fan on high, shit everywhere.
Former RBS chief Fred “The Shred” Goodwin, who scythed through the burgeoning workforce gained from endless takeovers, has been feeling the cold steel of rejection the last couple of days as the world points the finger at him. Gordon Brown refused to answer whether Fred should lose his knighthood, but he did lay into RBS for their involvement in subprime and their over-reaching in the ABN-Amro deal. The Glasgow Herald ran with the rather more unequivocal “Make Goodwin Pay For Disaster” – “A total of £45billion lost or written off. Shares at a 25-year low. Fears for thousands of jobs. No light at the end of the tunnel. Thanks a lot for nothing, Sir Fred Goodwin”. Former environment minister Michael Meacher said he should be “unceremoniously stripped of his knighthood”, while Vince Cable said: “He should never have been given a knighthood in the first place.” Taste shred, Fred!
But Nils Pratley in The Guardian is right in saying that it’s the wrong time for admitting wrongdoing or indulging in some Fred-bashing – what we need is confidence delivered via strong assertions from people like Stephen Hester that this plan is going to work, not that he’s really sorry about the ABN Amro thing, it won’t happen again.
The government needs to sail between the Scylla of overwhelming public and press outrage, and the Charybdis of shareholder desertion. We know the sums involved are going to be huge, and that value for the taxpayer must be considered, but if the government take too much shares or cash off the banks out of fear of a violent public reaction, then shareholders will lose too much faith and send the banks share prices down, pushing them towards certain nationalisation. It’s also foolish to call this a bad bank in all but name – potentially toxic assets can still be saved under the government’s scheme, rather than consigning them to certain taxpayer-fronted losses.
The government is trying to preserve a dynamic, competitive banking system that, despite its horrendous mistakes, could still lift us out of recession provided the government’s demands that lending be effected are properly enforced. A stagnant nationalised model is less likely to do that as swiftly or decisively.
Posted by Ben Beaumont-Thomas in Hot Money | January 20, 2009 3:34PM |