When will the UK banks ever fully recover from the credit crunch?

We are now more than a decade away from the first real crisis of the credit crunch era in the UK. That came on the 14th of September 2007 when Northern Rock applied for and received a liquidity support facility from the Bank of England as customers queued at its various branches in an effort to withdraw their deposits. Let us have a brief smile at this from the statement back then.

The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.

It was in fact so solvent that it was nationalised early in 2008! In fact we see another feature of the crisis highlighted by this from the BBC back then.

Northern Rock is to be nationalised as a temporary measure, Chancellor Alistair Darling has said.

Hence the advent of more modern definitions of the word temporary as of course the bad part of Northern Rock still is in public hands.

Royal Bank of Scotland

In October 2008 RBS joined the bail out party. From the UK Government.

The Government is making capital investments to RBS, and upon successful merger, HBOS and Lloyds TSB, totaling £37 billion.

“Successful merger” eh?! I will look at Lloyds later but let us continue with RBS which in a clear example of failure was never actually nationalised as the UK establishment indulged its fantasy that enormous investments could be at arm’s-length. Indeed as the National Audit Office ( NAO ) tells us below the government in fact ended up have to have other goes at backing RBS,

To maintain financial stability at the height of the financial crisis, the government injected a total of £45.5 billion into the Royal Bank of Scotland (RBS) between October 2008 and December 2009.

Oh and….

The government intended to return RBS to the private sector as soon as possible

The NAO also calculated a cost for the investment.

The overall investment was equivalent to 502 pence per share.

Although if all the costs are factored in the cost gets even higher.

We have calculated that if the costs of financing the intervention are also taken into account, the government would have had to sell the shares at 625 pence each to break even.

Still with the UK economy having had 4 years of solid economic growth and stock markets around the world at or near all time highs then RBS must be benefiting surely? No as the price this morning is 272 pence per share. This makes even the 2015 sale of some shares look good.

On 4 August 2015, the government sold 630 million shares in RBS (5.4% of the bank) to institutional investors, reducing government’s holding to 72.9%.1 The shares sold for 330 pence each. This represented a 2.3% discount to the market price and raised £2.1 billion.

So a loss but less of a loss than we would see now. Except let us return to a fundamental problem which is that things are supposed to be better now! Or as the International Financing Review put it back in 2012.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

Still along the way some have at least managed to keep a sense of humour as I pointed out on the 30th of November last year.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS ( @BlueBullet January 2014).

Yesterday we saw a change in the official response as Sky News reported this.

RBS Chairman has told Sky News taxpayers will not get all of their money back from Government’s bailout following the 2008 financial crisis.

I have a real problem with this which is that any form of honesty takes about a decade. This is far from a UK only problem as foreign bank bailouts have seen their share of misrepresentations and outright lies as well. The problem is the cost as let us start with the £12 billion Rights Issue of 2012 which was based on a prospectus that must have had more holes in it than a swiss cheese. We have seen many scandals which never seem to quite come to fruition as official reports remain a secret. Yet we are forever told that the bailouts were to raise trust in the banks.

Lloyds Bank

This had a more successful effort at selling the shares previously owned by the UK taxpayer. We even got our money back although care is needed as saying that assumes the money was pretty much free which back then it certainly was not. However over the weekend other problems have dogged Lloyds Bank and we are back to bailed out banks behaving badly. Here is the Financial Times on the financial scandal that unfolded at the Reading HBOS  ( Halifax Bank of Scotland) branch.

Yet Lloyds showed little interest in finding out what happened. Not only did the bank brush off Reade’s warnings at the time, but other victims who unearthed evidence of wrongdoing were treated equally dismissively. Far from calling in the police or regulatory authorities, Lloyds maintained right up until the trial’s conclusion that its own internal inquiries had revealed no sign of any criminality.

In other words the bank was able to behave for quite a long time as it was above the law and in fact even now seems able to be its own judge and jury in spite of the fact that it is plainly unfit to do so.

Nothing else can explain the fact that the task of examining Lloyds’ conduct has been given to . . . Lloyds. The bank has commissioned a former judge, Dame Linda Dobbs, to review its response to the Reading incident and whether it complied with all applicable rules and regulations. When complete, this will not be made public and will go only to the board, with a copy being dispatched to the Financial Conduct Authority.

Simply shameful.

Barclays

Barclays escaped an explicit bailout via an investment from the Qataris. That investment provoked all sorts of issues as it appeared some shareholders (them) were more equal than others. As Reuters put it in June.

The SFO charged Varley, Jenkins, the ex-chairman of its Middle East investment banking arm, Kalaris, a former CEO of the bank’s wealth division and Boath, a former European head of financial institutions, after investigating a two-part fundraising that included a $3 billion loan to Qatar.

What could go wrong with lending to someone who buys your shares? Oh and you pay some sweeteners as well. Let us move on noting that Barclays is also in court with Amanda Staveley who arranged another share deal with Abu Dhabi. Added to this is the fact that the current chief executive Jes Staley responded to a whistle-blower by attempting to unmask the person making the claim, thus breaking the most basic tenet of how to deal with such a situation.

The current state of play is summed up by this in the Financial Times.

Two years ago, Mr McFarlane set a target of doubling Barclays’ share price. But since then it has fallen by more than a quarter. The chairman has told colleagues he aims to stay at least until the shares regain their lost ground.

The words of Lawrence Oates seem both appropriate and inappropriate.

“I am just going outside and may be some time.”

As he faced troubles with courage and self-sacrifice we watch bankers facing trouble with denial and self-aggrandisement.

Comment

The bank bailouts were presented as saving the economy but as time has gone by we are increasingly faced with the issue that in many ways “the precious” has been prioritised over the rest of the economy. The claim of building trust in the system has had Fleetwood Mac on the sound system.

Tell me lies
Tell me sweet little lies
If I could turn the page
In time then I’d rearrange just a day or two
Close my, close my, close my eyes
But I couldn’t find a way
So I’ll settle for one day to believe in you
Tell me, tell me, tell me lies
Tell me lies

Now we find that there has been some progress ( Lloyds back in the private sector and some parts of Northern Rock and Bradford and Bingley sold) but also a long list of failures. How was nobody at the top responsible for some of the largest examples of fraud in human history? We are forever being told the world was “saved” but the reality was that it was what continue to look like zombie banks were saved at the cost of ossifying our economic system. To my mind it is one of the causes of our productivity problem.

It is clear to me that this industry has seen one of the clearest cases of regulatory capture that you could wish not to see.

 

 

 

 

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25 thoughts on “When will the UK banks ever fully recover from the credit crunch?

  1. I’m afraid you’re appearing a bit naive here. One of the fundamental practices of our society is to sweep things under the carpet; if you don’t where will that lead? To changes to the status quo which is why it has to be prevented and this is a practice which is of very long standing indeed.

    No one has been indicted in the banks because during any trial all sorts of issues would come to light which would not look good yet could not be ignored because any decisions might be legal and outside the political establishment.

    Furthermore, the banks are not the only organisations subject to regulatory capture; most industries are and this is rife; the banks are not an exception they are just the same as everything else.

    Telling lies and covering things up isn’t always wrong. Imagine you are Winston Churchill leaving a town on a visit on 5 June 1944. Someone in the crowd calls out: “Prime Minister, are we going to invade France in the next 24 hours?” I would answer No! and I suspect you would do as well. Now you can argue that that is an entirely different situation to the banks; but is it? Clearly it’s a trade off but so are the banks. Being more aggressive about the egregious failures which you have listed is certainly one way but it has consequences which may be less desirable down the road as does the way we have actually chosen. Which is correct? I’m inclined to agree with you but there is a case the other way.

    • ‘Now you can argue that that is an entirely different situation to the banks; but is it? ‘
      There’s a massive difference Bob.One constituted a threat to the lives of serving military,the other constituted a threat to an overbloated financial sector and the people doing nicely off the back of it.

      It’s like arguing that giving an addict more heroin via a govt program is the way to cure addiction related theft.It’s probably true but may well beget an even bigger addiction problem.

      The way to deal with an insolvent bank like RBS is to wind it up.The systemic risk was to the City and the good times of the last four decades based as they were on expanding M0+1+2 to infinity

      • Dutch, your point about addiction is apposite. What you are saying is the same as me: you give heroin and the trade off may be a bigger addiction problem down the road but less property theft; don’t give it and you have greater threat to property; it’s trade off: it may be wrong but it may be right; there’s an argument both ways.

  2. Like Bob J above I can see why there might have been reasons at the time to paint a rosier picture than was actually the case and this might be acceptable IF the main players were prosecuted after the event when systemic risk had abated. Not to do so is criminal in all senses of the word. And at the same time we are told that cash needs to be eliminated to stop crime!! The largest frauds are always cashless.

    • I keep hearing there was systemic risk but we’ve had banks go bust before and not had a systemic crisis.Govt could have come in,got the equity holders and bond holders to take their haircuts(that’s the flip side of the coupon they collect) and nationalised the lot before running it off.

      Reality is that the political class wanted a bail out,most likely for reasons of ignorance and self interest.

      All QE and Zirp has done is extend and pretend/kick the can down the road/create an even bigger crisis than the one they were meant to solve in 2020.

      • I agree that when a bank and not the entire system is at risk of failure then wind it up and haircuts all round. The danger in 2007 was that one bank after another had problems and the contagion was spreading quickly. The bail outs were if you like a fire break to stop it all going up in flames. I would probably have done the same thing – except I would have gone after the perpetrators and made major changes to prevent it happening again with severe penalties for those who do not comply. That is what is lacking today.

        • I don’t believe the banker/Labour party propaganda that the world would have imploded, the ruling class would for once have taken a financial hit, they decided people who didnt take on ludicrous debt and had used capitalist economic fundamentals should instead.

          Scare everyone into taking their money, and its worked a treat.

          That vile leveraged landlord from Kent is the kind who got bailed out at the expense of the 1000s he rents to, not to mention the hundreds of thousands of other parasite BTLers who’d also have gone bust.

          • Of course the world would not have imploded; the bank shareholders would have lost money….no big deal.

            However, I don’t understand how any BTL landlord was bailed out. Their borrowings are presumably secured on the properties on proper mortgages; a borrower does not have to pay back the borrowing other than according to the terms of the loan….which will not include when the lender goes bust.

        • Pavlaki, Yes I agree with you. However its likely the people who offered the olive branch were not the ones in place to assess the situation as safer some years later whe the recompense was due. Its a blindside flaw of political administrations, almost baked in you might say. And wholly exploited of course by bankers who say… wot me… oh no it was them other guys…. Bernie Madoff etc.

          • Theyve been bailed out by ZIRP and money printing which kept their mortgage payments as low as could possibly be.

            The last decde has seen the over leveraged given a free ride when they should have been made bankrupt.

  3. Great blog, yet again. How quiet are the main stream press on this anniversary?
    The answer to your question is, not for a long time, if ever. Remember all the fines they have paid for past misdeeds, and the is still more to come, so who can say when they will return to real profits?
    No one held to account, apart from a few Libor traders – it’s a disgrace

    • ‘How quiet are the main stream press on this anniversary?’

      Too true Foxy……………..RBS has lost money for ten years running and yet managed to pay out bonuses every year….???

  4. Nobody has ever argued that the banking system shouldn’t have been bailed out of course the system cannot be allowed to fail. That did not meaning bailing and and excusing the individuals responsible. They should have been prosecuted and, if found guilty, required to do years of community service, not jail.
    Oh and sorry Bob, I voted down your original comment the first time I have ever done so on this sight.

    • Iceland is an example of banks not being bailed out. The Icelandic world didn’t end and more importantly – it is recovering and not continually bleeding more tax money into a lemon like RBS.

      • Quite so! And the banks are not the banking system, any more than the collective of MPs are parliamentary democracy. The banking system was not bailed out…it was never at risk; it was the banks which were bailed out. They should have been allowed to go bust and the assets of worth sold; there would have been plenty of buyers….Barclays found one.

  5. A mix of recent experience and being one of those, who warned about the crash, but was told “light regulation was doing its job, makes me conclude that the simple answer is No.

    RBS – sheer size precludes a recovery.So much of RBS was sold off to take its back to its traditional business that there simply is not the size of bank left to generate the profits, which would justify the Govt buy share price. It should have been allowed to fail.

    Barclays – a bunch of incompetent crooks. The culture within it is appalling – I was fired for challenging their PR’s basis – and thinking that those Digital Eagles would change anything as they ventured back to dodgy investment banking/massive mortgages is just that stupid PR. I asked about the mortgage exposure and was assured that the current regulation system would prevent any further issues – well someone will be picking up that massive negative equity bill once rates move up. Their crooked dealings with Qatar have finally caught up with them, but the offenders will get a Rooney sentence and will be retired with plenty of cash.

    Lloyds – fundamentally a sleepy bank taken down by having HBoS dumped on it after Hornby (Oxford and MBA Harvard) crashed it, is still a sleepy and badly-run bank. Interestingly an old school friend of mine turns out to be its Group Risk Director, but I am willing to bet that only one of us has a qualification in Financial risk Management! Glad it is him sorting out the mess at Reading HBoS.

    In short, it is a sector, which sums up the UK – run by idiots, who go on about “experience”, regulated by clowns and full of managers, who could not run a bath. The new head of RBS said today that RBS and others were upping sticks and leaving London due to Brexit. The Metro said this was why London house prices are falling. Perhaps the sooner we are rid of these clowns the better?

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