Monday, September 29, 2008

The Conservative Party: Can't Be Trusted With Glue

Oh bloody fuck. He's at it again. George Osborne is in his white coat, on the stage, flogging his snake oil. All he needs now is a gospel choir. I think we've pointed this out before, but here goes. The Bank of England was nationalised in 1946. It's part of the State. The money in it is as much public money as the money in the Treasury. It is fundamentally dishonest to pretend that you can take the assets of a failing bank onto the Bank's balance sheet without any cost to the Government budget.

And George Osborne thought the Bank's balance sheet was composed of public money back in the autumn of 2007. We were told that the loans to Northern Rock were regrettably unavoidable but also a terrible risk taken with our money. Here he is at ToryKennel:

"The question we now ask of the Chancellor is simple: has he been honest with taxpayers about the risks that they face, and has he told the whole truth? ...[snip]

The Chancellor will not tell us the size of the facility, when he expects it to be repaid or the terms of the repayment, even though much of that information is an open secret in the City. Indeed, the Governor of the Bank of England wants to publish the letter that he sent to the Chancellor to set out those terms.


Suddenly, after nationalisation, this statement became inoperative. The Bank of England had become a kind of charitable institution, nothing whatsoever to do with the Government, devoted to acting as a hospice for dying banks. Strangely, its Governor appeared unaware of this change.

Of course, this is a teachable moment about the Tories and the voluntary sector. As Boris Watch wisely points out, they are obsessed by the idea that Britain is full of charities who all have inexhaustible resources of their own, topped up regularly by squadrons of flying ponies. Poor old Gideon; what a nasty surprise to learn that the Bank is a public sector agency staffed by Daniel Davies' past colleagues and notably deficient in ponies.

Further, does the Bank even have the capital to digest a whole failed bank on its own hook, without having to turn to the Treasury, or print money? Well, we could always look at the sodding books, couldn't we? Bringing the Bradford & Bingley's mortgage book (about £41bn) onto the Bank's balance sheet would imply a Bank with one-and-a-half times the current level of assets, but no more capital than it presently has. Its current net worth is only about £2bn. Now, B&B's liabilities were about £51bn, of which £22bn was made up of deposits, which have been taken over by Banco Santander; so for the rest, assets exceeded liabilities by some £12bn. However, for public sector accounting purposes, net debt/credit is defined as liabilities less liquid assets, and the whole point is that the mortgages are far from liquid. To put it simply, the Bank of England would have had a negative net worth several times as great as its existing capitalisation.

We would have successfully replaced an actually quite well capitalised bank with a desperately undercapitalised central bank. This isn't that big a problem; central banks are weird financial institutions anyway. But the vast bulk of the Bank's assets are loans to other banks, as you'd expect, and the last thing we want it to do under current circumstances is to stop lending to other banks.

Now, the whole point of this crazy exercise is to save the Treasury's books. But it's literally insane - and inane - to behave as if the taxpayer was on the hook for some sort of huge debt. The problem isn't on the liability side of the banks' balance sheets; it's on the asset side. Now, how bad do you think the problem is? Shall we assume that the housing market will go down 50% from the peak, a crash of epic proportions? Well, that would still leave the Treasury sitting on £20.5bn worth of assets (or about equal to the Bank of England's assets), with no hurry to liquidate them. And the Treasury has essentially got it for nothing. It's also fundamentally dishonest to pretend that literally every mortgage at the B&B is worthless.

However, Osborne insists on arguing that the total numbers involved are incredibly high, and also that the Bank of England's puny capital base is sufficient to handle them without cost to the general Government budget.

I notice that Vince Cable, as usual, is talking sense.
Vince Cable, the Liberal Democrat Treasury spokesman, said that ideally a private buyer would have been found for B&B, but he recognised that part-nationalisation was the "only other way forward". Mr Cable said the deal could even benefit taxpayers. "They have got a lot of bad loans, they have got the buy-to-let mortgages, they have got the self-certified mortgage arrangements," he said.

"But it may that in the long-term, having acquired this for virtually nothing, the Government will be able to sell it and perhaps either cover itself of probably even make a profit." Mr Cable contrasted the situation with that in the US, "where the taxpayer is actually paying to buy up bad loans." He said: "here the Government is effectively getting them free, and depending on the competence with which they are managed, it may prove to be a relatively successful deal for the taxpayer."
Not so Osborne. From the same article:
George Osborne, the shadow chancellor, said: "I don't think the taxpayer should pick up the bill that really should be borne by the City.

"What is really being saved here are not the depositors or the jobs - it is the large institutions that lent lots of money to Bradford & Bingley and made money out of that when times were good, and now that times have turned down, are asking every single person in the country to pay more in their taxes to bail out this bank. "Under nationalisation, the taxpayer steps in and says 'We are going to give you your money back'. I'm not sure that's fair."
The bill *has* been borne by the City; the shares have gone to zero, the bank has been broken up. In fact, the "large institutions" lose out badly, if by that he means the major clearing banks; they ended up stuck with most of the £400m in new shares issued a couple of months ago, which are now worthless.

Here's a little extra for you (hey, I had a Halifax savings account when I was a little boy and they had branches in Dales villages); Osborne, and the entire Tory party, were very horrified by the bill for the nationalisation of Northern Rock because they claimed it contained provisions for the takeover of more banks, and only an evil socialist plot might explain this, as this would never be needed again. Clearly, when Gideon says they're all being alarmist, it's time to go short.

Update: The numbers in an earlier version of this post were based on B&B plus NR assets and liabilities, which was far from clear in the text. I've recast it to take account only of B&B. You can, of course, add the NR numbers...

2 comments:

Anonymous said...

What is the Tories plan re - BoE administration ?
I get what you saying about how nonsensical osbornes utterances are but I'm curious about how they explain the administration part , are they arguing along the lines of a quick firesale or Share liquidation like Paulson did with Freddie mac ?
Are they saying the BoE would be in charge but not liable somehow ?

Alex said...

I have to say I've no idea. Osborne occasionally says "administration" but he also talks about "BoE-led restructuring" or "reconstruction".

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