This is getting serious…

As the whiff of panic rises on a grey February Monday morning, there’s a common factor. The government has been dithering – and fatally. Is this part of the panic and should be ignored? I suggest it should be. The eye of the storm is not the right place to make the judgment, even though you feel the pain most.

Lloyds/TSB shares fall 15% in the first 10 minutes of trading after losing 36 billion in a few hours last Friday. £17 billion of public money poured into the ailing group has gone already, reports the BBC. Full nationalisation cannot be long delayed.

850 jobs go at Mini car factory. The government and doing too little too late, says Unite chief Tony Woodley

The Times
The CBI says that the country’s economic output will fall by 3.3 per cent this year – the sharpest annual contraction since the Second World War – and will all but stagnate in 2010. The CBI Director-General Richard Lambert attacked the Government for failing to head off the worst of the downturn. He said that the Government needed to draw up a timetable to outline when its multibillion-pound package of measures, announced last month, would come into force. “Business needs the Government to hurry up,”

The Financial Times
Only about £12m has been lent to companies under the government’s £1bn loan guarantee scheme for small business, a month after it was launched, according to analysis by the Financial Times and is “nowhere near enough.”

and the Sun’s Trevor Kavanagh, a big bellwether of political trends, once a big Gordon Brown fan..

WHY is Gordon Brown still Prime Minister? After the events of last week, why has he not resigned? And if he won’t go of his own accord, how long before he is hounded out by voters whose homes, pensions and jobs he’s put in peril?

Even sober political commentators like the Guardian’s Jackie Ashley are talking wild

I’m told the German chancellor, Angela Merkel, has a favourite candidate to head (a new world regulatory body) – Gordon Brown. Doesn’t the party want Brown to take them through the election, go down fighting – if that’s what happens – and then start again with a new leader? Not necessarily. If Brown stepped aside and was replaced by, say, Alan Johnson, then Labour might do better (in a Spring election.) ..Better amputation than slow death…

  • Comrade Stalin

    I’ll stick my neck out and predict that Lloyds TSB will not be nationalized, and that the government already knew about this likely £10bn loss at HBOS (which is why they forced the shotgun marriage in the first place). When the dust clears, this is the largest banking group in the UK which controls the lion’s share of the retail banking sector. There’s plenty of money to be made there.

  • kensei

    I’m not sure.

    Nouriel Roubini, who was one of the few people right about the sdcale of the losses has been calling for the US banks to be nationalised:

    http://www.washingtonpost.com/wp-dyn/content/article/2009/02/12/AR2009021201602.html?nav=hcmoduletmv&sid=ST2009021502037

    And he’s stated elsewhere that the UK banks are probably insolvent too. The key point in that article is this, for me:

    Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises

    Which is why the HBOS deal is so horrifying: they created an even bigger systemic risk, a bank that can never fail, which is precisely the opposite of what wa sneeded.

  • LJS

    Too big to succeed is a concept we need to understand.

  • cynic

    Kensei

    Of course Lloyds could fail …its just that the Government doesn’t want it to.

    I don’t think it will be nationalised though as that would immediately import all the risks onto the Government accounts and they are bad enough already. It will be supported and over time will turn into a great UK financial force with 30% + of the market- it will take about 5 years though.

    I also wouldn’t be surprised to see it do a Barclays with a foreign investor

  • kensei

    cynic

    It can fail in the same sense that the government could drop an A-bomb on their own populace, except the government doesn’t want it to.

  • Harry Flashman

    Already posted elsewhere but worth checking here too:

    Ireland’s bust

    No, seriously they’re fooked

  • Dave

    “Lloyds/TSB shares fall 15% in the first 10 minutes of trading after losing 36 billion in a few hours last Friday. £17 billion of public money poured into the ailing group has gone already, reports the BBC. Full nationalisation cannot be long delayed.”

    It doesn’t occur to you that threatening investors with nationalisation might have something to do with why the share price is falling?

    Also, where is the logic in nationalising a failed business? Private sector debt doesn’t magically vanish by the expedient of converting it into national debt.

    The insanity that underpins this ‘thinking’ runs along the lines of ‘The taxpayer has now lost £17 billion of his money, therefore we need to ensure that he loses several hundred billion more. This will allow the failed bank to continue borrowing money and to continue to add it to the national debt.’

    Lloyds TSB is bigger than your government. You cannot absorb its debt without bankrupting your own country. Exposing the taxpayer to that level of risk should really carry a mandatory life sentence in prison for the political elite just as surely as it will carry a mandatory life of debt for the taxpayer.

  • Dublin voter

    Already posted elsewhere but worth checking here too:

    Ireland’s bust

    No, seriously they’re fooked

    Posted by Harry Flashman on Feb 16, 2009 @ 02:29 PM

    The thread is about the UK’s serious economic difficulties. But us being Irish (which doesn’t exclude those of us who are British too or British first), Harry reassures himself by pointing out that Ireland has serious economic difficulties too. The truth is, Harry, that all of us are fooked – British, Irish, American, Russian, probably Chinese too. Yes, capitalism transcends national boundaries. And whatever fairer system we replace it with in the future will have to do the same.
    And we will rejoice in our neighbours’ good fortune, while humbly enjoying our own. And Harry will enjoy the odd céilí and the Paddy’s Day Parade and I’ll enjoy the 12th and a natter in Ulster Scots.

  • Comrade Stalin

    kensei,

    I’ve put my money where my mouth is and bought a bunch of Lloyds Banking Group shares.

    The press release last Friday explains that part of the large writedown is due to Lloyds applying their more conservative impairment criteria to HBOS’ loan book.

    As regards the £10bn, it is what was expected. Courtesy of the Motley Fool discussion board,

    Lloyds TSB has made a preliminary assessment that net negative capital adjustments of no more than £10 billion after tax

    ..


    The Group expects HBOS to report an underlying loss before tax of some £8.5 billion for the year ended 31 December 2008.
    (so we’re 1.5bn out).

    ..

    Lloyds TSB has made a preliminary assessment that net negative capital adjustments of no more than £10 billion after tax would need to be made to HBOS’s financial position

    This news was coming out in early November. So what we’ve got here looks like a clear case of the media, and certain politicians (hello Vince Cable) whipping things up. I think the plan with Lloyds – take an initial, hard kick in the balls followed by becoming a large and stable bank later, a bank so large it will probably have to be forcibly broken up for competition reasons – is still on track. The Lloyd’s group cleared a pre-tax profit of £1.8bn, and that’s before the cost savings due to synergies with the HBOS operation are in play. Put that against the adjustments of £10bn and you’ve got 4-6 years to wait before Lloyd’s has unloaded the bad debt.

    So I don’t think there is any need for the British government to nationalize, although they may legislate to ensure that the bank is kept afloat even if someone decides that it meets the definition of “insolvent”.

  • kensei

    CS

    It’s not that I believe that it’s going to fail — though given the last few months, I would be putting my money anywhere near bank shares and some are most definitely insolvent — it’s the fact that the new entity cannot be allowed to fail that bugs me. The merger would never have been allowed in normal times due to competition law. In these exceptional times another super bank was not what was called for. Even without nationalisation, anti-trust laws should have been applied to break up larger entities, increase competition, reduce conflict of interest and systemic risk. This is storing problems for the future.

    I suggest you read Kay’s “Truth About Markets”. Both discipline and pluralism have been broken down. Both need restored sharpish.

  • Dave

    Exactly, Kensei. The logic behind “too big to fail” should conclude with “then shrink them” rather than “force the taxpayer to repay the private debt.”

  • Comrade Stalin

    kensei,

    Yeah, my Lloyds purchase is a gamble. Pretty much a binary bet, either they’ll get nationalized, or they’ll recover. I didn’t bet the house on it, just a little bit of spare dough that I can afford to lose.

    The breakdown in discipline occurred before the current crisis, so trying to address it by reducing the influence of the large banks whose largeness is part of the cause seems like a case of closing the door after the horse is bolted – with the rather serious side effect of lots of people losing their cash savings which would have caused extremely serious long-term damage and hardship. Allowing the banks to fail would have been, and is, politically and economically infeasible. An economy cannot survive a situation where people cannot keep their money in banks for fear that they will lose it.

    The plan is not so much “force the taxpayer to repay the private debt” as it is “force the taxpayer to temporarily underwrite the private debt until the economy has recovered again, at which point the taxpayer will benefit by the reprivatization of the state-owned parts of the banks”. This worked in other places (Sweden?), it currently appears to be working in Northern Rock which is ahead of schedule in terms of repaying its government loan and becoming a profitable bank (next update due on that in March). And I see no particular problems with the State becoming indirect owners of the real estate used to guarantee a significant proportion of this debt which, in time, will regain much of it’s value.

    Once we have restabilized the economy again – which must be the first priority – we can then look at what we are supposed to do about institutions which “cannot” fail. It’s clear that there will have to be severe regulatory restrictions placed upon deposit-taking and lending institutions to ensure that this fiasco is not repeated. That may well include setting defined limits on the loan book, capital ratios and deposit retention capabilities of a single institution in order to ensure that these institutions do not get too big. In the meantime, this is an unabashed case of market failure, and the normal rulebook of market capitalism must be set to one side.

  • Dave

    Stalin, you haven’t followed the logic. ‘Too big too fail’ means that the profits are privatised but the risk is nationalised. If it is too big to fail, then why make it bigger by merging it with another bank? You have then given a de facto guarantee to privaye business.

    That is why the logic of ‘too big to fail’ must conclude with making the banks smaller and not bigger. Then, like any other private business, it can fail. By the way, it is possible to use an commercial underwriter to insure your deposit with a bank. If folks are worried then let them use such a service rather than weep upon the shoulder of the taxpayer to bail them out after a loss has occured.

    What should happen is that all failed businesses must be allowed to fail, not propped up by making the taxpayers assume the loss that belongs to the depositor.

  • LJS

    By letting the profits be private and nationalising the losses a terrible moral hazard is being introduced.