“This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.”
I’m doubtful that RBS will fail, despite some informed commentators’ beliefs to the contrary.
However, in the event that it should collapse, I’d like to be the first person to suggest that the Deloitte partner who led the BCCI liquidation would be an excellent choice of administrator…
Update: fail prediction FAIL. If the government is forced to take a majority stake in your company, you’ve failed.
Gummint invests £50 billion in new bank shares.
AIH, gummint spending is about £50 billion per month.
Solution: for the next one month, all public sector salaries, welfare and pensions payments etc will be paid in bank shares!
Truly, a plan with no drawbacks…
…rates are still looking pretty good on UK government bonds, so even after the financial bail-out the government has plenty of room to borrow for infrastructure investment.
The only danger is if politicians bow to the pressure from “let’s turn this recession into a depression because we hate Keynes” maniacs and don’t take advantage of the opportunity…
Individuals who lost more than £50,000 in the Landsbanki collapse certainly let greed get in the way of good sense, and certainly don’t deserve the generous bail-out terms that the government has given them. However, that pales into insignificance compared to the 20+ local councils who’ve lost tens of millions between them in Landsbanki deposits. And who won’t get a penny back, as compensation schemes for bankrupt banks only protect retail investors.
These organisations actually have people employed with financial qualifications in working out what to do with their money. And it’s not like they haven’t been burned before by the collapse of a dodgy bank that just happened to be the highest interest payer (if it is in fact possible to work in local government finance without being told about the BCCI collapse and its knock-on effect for councils, then there’s a systemic problem in that everyone in the entire industry is completely inept).
It’s unfortunate that local taxpayers can’t recover the missing assets from the idiots in question, and the councillors who’ve singularly failed to oversee them (and who, I’m willing to stake near-Landsbanki-style amounts of money, will be more or less equally drawn from the ranks of the major parties).
Update: The Daily Mash calls it right: “oh fuck, we meant ‘Luxembourg’”…
So, when I said “don’t bother switching banks,” what I actually meant was “don’t bother switching banks unless your bank, instead of falling under the UK compensation scheme, falls under the compensation scheme of a small, rainy, historically very poor island which crazily overexpanded over the last five years and has absolutely no chance of meeting its bailout obligations if things go wrong”.
Sorry, Icesave investors. On the plus side, my point about the daftness of transferring money to Irish banks is made rather conclusively.
Oh, and while I’m clarifying – I’m in the lucky position where my savings (just about) go over the protected limit, and I’ve had them split between several accounts to diversify risk even before the current crisis started. While I think it’s likely that a crash – especially if it’s of a real bank, rather than ultra-high-interest online chancers – will bring full protection, it might not, so get transferring now if you’ve still got over £50k with one institution.
Relatedly, Seth Freedman has a piece in the Guardian, wondering why people who chose to sign up for ultra-high interest rates with a ropey over-leveraged bank should be bailed out at the expense of the poor and the prudent – and he has a good point. It’s fair for the government to fully compensate savers in banks that a reasonable person would see as ‘safe’ [*], but hard to justify going over the clearly stated FSCS limits for people who’re choosing to gain an extra 2% interest in exchange for investing in, say, the First Bank of Nigeria rather than Lloyds TSB.
Looking to the longer term, and today’s liquidity-for-shares UK bank nationalisation announcement, my dad has a piece up on Liberal Conspiracy arguing that liquidity bail-outs are a terrible idea, as the crisis would otherwise be an excellent opportunity to get rid of the parasitical bastards at the major investment banks and end the toll they’ve exacted on the global economy ever since the Depression. If my dad were Mark Steel, that’d be unsurprising; since he’s been a stockbroker for 30 years and is currently head of investment banking for a broking firm, it’s a little more interesting…
[*] there’s a difference between savers in Northern Rock or HBOS, and Icesave or First Bank of Nigeria here. Northern Rock was originally a safe, conservative institution that made itself unsafe without most of its customers noticing, while HBOS did something similar (with less ineptitude and worse luck). On the other hand, Landsbanki was a foreign investment bank that nobody in the UK had ever heard of, and that was massively over-extended when Icesave started – and FBN is actually a reasonably good institution by local standards that appears to be holding up well, but hello! it’s a fucking Nigerian bank!
Update 8/10: Darling has copped out slightly. Rightly, he’s agreed to pay the €20,000 that the Icelandic government should have covered to Icesave savers; and rightly, he’s frozen Landsbanki’s remaining UK assets in the hope of recovering some money to offset against the compensation. Wrongly, he’s also covering deposits over £50k, which should have been written off to “if you’re that stupid then you don’t deserve to have 2x the average annual wage in cash”. Still, it’s more evidence for my “put the deposits in whatever goddamn bank you choose and you’re still safe” theory…
Executive summary: If your savings are deposited in a UK retail bank, they are safe, and if you’re wasting your time transferring your money into UK government-backed savings or Irish banks you’re a muppet. Although if you’re super-paranoid then Ulster Bank might be worth a punt…
1) If your savings below £50,000 are deposited in a UK retail bank, they are no less safe than they were deposited in government-issued savings products. That’s because the only context in which you would not get your savings reimbursed in the event of bank failure would be if the government was so financially shafted that it couldn’t afford to do so, which is pretty much “tinned food, bottled water and a shotgun” time anyway…
2) With the government guarantee, your savings are probably slightly safer in a UK retail bank than an Irish retail bank, because there’s no way in hell the Irish government could possibly afford to keep its promises, whereas the UK government is slightly better placed to do so (also, the UK economy is slightly less shafted than the Irish economy).
3) Savings in a UK account above £50,000 are also effectively safe: it’s impossible to imagine any situation where the UK government would be able to reimburse savings below the limit and would not also compensate savers above the limit (they account for 2% of bank balances, so the cost to the government of providing the extra bail-out money would be negligible – but the confidence impact of not doing it would be dramatic).
4) Ulster Bank (RBS’s subsidiary in both Northern Ireland and the Republic) might get covered under the Irish plan as well as already falling under the UK scheme. While it’s unlikely that a catastrophic failure that led to the collapse of RBS and the UK government’s inability to bail out RBS depositors would occur without the Irish banking system also collapsing, it’s not completely impossible – so shifting your deposits to Ulster Bank if the deal goes through is the only way to (at least theoretically) enhance your risk profile…
The excellent Rachel North is back. Hurrah! She’s been in New York addressing the UN on terrorism. Hurrah!
However, I had a bit of a double-take moment when I read her ‘I’m back’ post:
“…went to Turkey for 2 weeks with J, read a lot, chilled a lot, went to the Turkish baths a lot, turned extremely brown. Came back, had another week at home with J. Bliss.”
It took a few moments until I realised that was “with my husband J. It was bliss”, not “with excellent Irish greenblogger J. Bliss, with whom I am having a secret and passionate affair”. I think this makes me an idiot…
Right. I’ve sorted out a bizarre WordPress permissions issue, and now have full control over this blog again. Hurrah. In other news, apologies for not posting anything for a while. I’ve been in Canada and San Francisco not working, and therefore my blogging threshold/time has been limited.
In particular, apologies for not posting anything much here or elsewhere on the financial crisis / teacup / disaster that’s going to kill us all / etc. I’d like to claim this was based on the same worthy principles as Dsquared’s lack of comment, but actually it’s more that a) I’ve been on holiday, and mountains are more fun than Congressional bills and b) it’s getting towards the ‘complexity beyond my experience or understanding’ end of the spectrum, so I’m reluctant to say anything which isn’t either very flippant or very data-driven.
Luis Enrique has some interesting thoughts at the other place, which are probably as close to my views right now as anything I’ve seen. Oh, and Alex’s piece on how anyone who thinks the Tories would be less inept at handling the current mess than Labour is certifiably mad is probably worth a read.
I’m starting an exciting period of gardening leave now-ish, so may have more time to comment shortly. Anything I’m particularly proud of will go on LibCon; anything I’m not totally ashamed of will go up here. In the meantime, I’d be delighted to hear your views and/or pointers towards interesting people on the crisis.
One thing that I will say here, though, is that the US government is not planning to give $700bn to the banks, and that the UK government has not spent £50bn on bailing out Bradford & Bingley. In both cases, they’re taking on assets that more or less everyone who isn’t mad agrees are generally worth something approximating their book value, which is perfectly reasonable.
The reason intervention is required is that if (e.g.) B&B went bust, then without state intervention it would have to liquidate its mortgage portfolio at fire-sale prices. Now, this would be an absolutely excellent deal for anyone with cash to spare – the problem is, there aren’t any non-state actors with £50bn in cash to spare right now.
The underlying house mortgages aren’t going to decline significantly in value (even if house prices fall 25-35% in the medium term, that’ll be mostly equity lost by homeowners rather than negative equity), but once a bank is perceived as weak, its asset value is the fire-sale price of its assets rather than their underlying value. Governments are among the few institutions with the cash and the long-term focus to go beyond the market’s sillyness on this (although Lloyds TSB is also getting itself a very good deal, and if I were HSBC or StanChar right now then I’d be seriously considering purchasing some distressed Western assets with the backing of my Asian savers’ deposits…)