Opinion: Bank nationalisation

Opinion: Bank nationalisation

By Neville Bennett The odds are that the UK and US will nationalise some banks and echo Mrs. Thatcher's dictum: "There is no other way". Perhaps I am wrong, but what can you do with people who continue to ignore warnings against using bailout money to award themselves obscene bonuses and golden handshakes?

Great Britain Britain has already accepted the principle of nationalisation in necessity, such as Northern Rock, and Bradford and Bingley. Other banks in which it has an equity stake keep losing money. Lloyds got hammered on the stock exchange last week, losing 32% on Friday, because HBOS's losses were ₤11 billion (NZ$30 bln) and the market  worries that it will need additional capital. This raises questions about many British and American banks (I am not looking at others in this piece, see the link below for a full list). The big questions are 1. Will massive losses continue? and, 2. "Assuming that more capital will be required to repair balance sheets, where can it be sourced, except from the taxpayer?" The ₤10 billion loss by HBOS is humiliating, especially as the losses at the end of December were ₤1.6 bln (NZ$4.36 bln) more than expected in November. Moreover, Lloyds have eaten up more than half of the ₤17 bln pumped in by the British taxpayer only a few months ago. This means that something hiding in the accounts is chomping into capital. How long can the capital cushion last? When the bank's capital has gone, will there be an alternative to nationalization? Who else but the state has the money to maintain the bank's required capital ratios? Another factor pushing nationalization in the UK particularly is what The Times calls "extraordinary public rage and a fierce sense of injustice". Patrick Hosking (London Times February 14) reports a City lunch discussion of a Eurozone breakup, a "catastrophic shock", leading to a (mindboggling) "far greater financial crisis than the current one". Hosking observes:

"Even with this crisis, it may already be too late to prevent social unrest, especially in Britain, which is tipped to be one of the worst-hit countries economically ... The spectacle of bankers continuing to award themselves bonuses while taking taxpayer support is feeding an extraordinary public rage and a fierce sense of injustice. With 40,000 people losing their jobs each month, it is a recipe for trouble, come the traditional rioting months of the summer."

Gordon Brown's promise of no rewards for failures is looking exposed. Peter Cumming, whose division at HBOS lost ₤7 billion last year, got a ₤660,000 payoff and a ₤6 million pension. Other bankers told Parliament that they would be paying billions in discretionary bonuses in the next few weeks, show a sociopathic obsession. Lloyds' need an estimated ₤5-10 bln from the state, and quickly. Gordon Brown refused to rule out nationalisation, acknowledging perhaps the necessity of increasing the state's 43% shareholding. More capital will be needed because only ₤11 bln. has been written off a ₤100 bln loan book, much of which is in property-backed assets. Worse is expected from the Royal Bank of Scotland, reporting on February 26. The [English] Sunday Times reports that it intends to cut 20,000 jobs and announce losses of ₤28 bln. ($NZ 76 bln.) The state already owns 58%. How long can it fund these losses without taking over? The USA US Treasury Secretary, Timothy Geithner, disappointed markets with an unconvincing bank rescue plan. G7 was as skeptical as Wall Street. He wants to establish a public-private investment fund to buy illiquid bank assets, thereby freeing up their balance sheets for more lending. This is as unlikely to get off the ground as Henry Paulson's 2007 proposed bank-funded vehicle to buy up tainted assets. No one was interested then. Paulson scored another own goal in 2008 with a $700 bln bank bailout. Initially he intended to buy assets in a reverse auction process. Lack of interest killed that idea, so he turned to direct capital injections as confidence was plummeting. Geithner proposes to examine capital adequacy. Those banks that fail will have to raise capital or accept Government convertible securities. Exactly who would supply a failing bank with more capital is unclear at present; and the terms of convertible securities are unknown. But banks that take public money will have caps on pay etc. Geithner favours a "bad bank", now called an "aggregator" which will "partner" private capital in setting prices for distressed assets. The bank will have $500 bln. or even a trillion or so at its disposal the plan rather loosely conjecturers, and it may (also conjectured loosely) generate direct lending to consumers, house-buyers and business. One imagines queues of people interested in receiving direct lending. One wonders if only Americans can apply, or would that be too protectionist? Trouble is, the banks need money yesterday. A trillion would help as long as it is cash on the barrel: not vague convertible securities. Selling distressed assets will not be easy: private buyers will want bargains, while banks will not sell if the price crystalises their insolvency. With government support, banks might hold assets to maturity. That's the problem. The banks are looking for a free lunch, either in the form of a direct capital subsidy, or by private buyers getting state help to collect distressed assets. The banks benefit in both cases. Many taxpayers will express indignation, slowing up the transfer of money to the banks. Even if the plan proceeds there are inherent problems arising from the ongoing credit crunch and housing shambles. Assets continue to lose value, and American banks are like British banks in making ongoing losses which will devour new capital injections. The state seems certain eventually to control the bank's equity. The logic of the situation will force very reluctant governments in the UK and US, I suspect, to nationalise some banks. The problem with banks is that they have massive assets and liabilities, funded from a narrow capital base of about 5%-8%. When the assets go bad, the capital melts. The market will not now put in more capital because share prices have collapsed. The state has to step in. It will find partial funding does not work and find full ownership forced on it. http://www.reuters.com/article/euIpoNews/idUSLB76855620090211?sp=true for losses in all banks.  ------------------ *Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.