Shafting the taxpayer second time round

At the annual dinner held by the bigwigs in the City of London, British finance minister (still called the Chancellor of Exchequer), George Osborne, gave his ‘Mansion House’ speech.  The meat of his self-congratulatory words was to announce that the 34% state holding in Britain’s largest bank, Lloyds, would be sold off as soon as possible.  He drew back from announcing a similar sale of the state’s 86% of Britain’s second-largest bank, RBS.  But he made it clear that the government would do so as soon they thought they could.  In the meantime, they may well break the bank into two: one good bit with no debts; and one bad bit with unrepayable debts (up to £130bn!) to be wound down.

This ended a week in which the head of RBS, Stephen Hester, appointed by the government to run the bank when it had to be bailed out in the global financial crisis, was sacked; when the deputy governor of the Bank of England resigned in a huff because he did not get the top job to replace Mervyn King who has retired; and when a huge parliamentary Commission report was released on the causes of  the UK’s banking collapse and what to do about it.  Also the new banking regulator announced that Britain’s big five banks still needed to raise more capital as a buffer against any possible future failures, at a time when the Cooperative Bank (a mutual coop entity) was forced to go the stock market and renege on its junior bondholders to avoid bankruptcy.  The Coop Bank, like many others, got too big for its boots.  It bought a mortgage lender, Britannia, which turned out to have huge dodgy mortgage debts on its books and then the Coop tried to buy loads of Lloyds bank branches.  This hubris brought a fine cooperative institution to its knees and and heavy losses for its bond investors (often associated with the labour movement).

The reason that Hester was sacked was that he argued that the privatisation of RBS should be gradual and also he wanted to preserve investment division of the bank and thus not sack enough people.  Within hours of his sacking, it was announced that RBS would cut 2000 jobs in the investment division.  But don’t worry for him; Hester will receive a £1.6m pay-off and £3-4m in shares.

Britain’s banks were bailed out with billions from the taxpayer.  They have failed to reform, they have failed resume lending to businesses and households; scandals have mounted.  And yet the government is going ahead with selling off state assets in Lloyds even though the taxpayer is set to lose on the deal.  Lloyds shares have reached 61p, the average price at which the stake is booked in the state accounts. But to get back the full government injection of £20bn the price would need to rise another 20% to 73.6p.  RBS is even further behind with its share price at £3.16 compared to the rescue price of up to £5.

I have explained in various posts how Britain’s banks came into this sorry state and how the reckless and corrupt owners and managers of these banks brought the British economy down with them (https://thenextrecession.wordpress.com/2013/04/20/why-sell-back-the-viable-banks/)  and (https://thenextrecession.wordpress.com/2013/02/01/the-never-ending-banking-story/ and (https://thenextrecession.wordpress.com/2013/02/07/a-right-royal-banking-fiddle/).

As the Commission puts it: “Recent scandals, not least the fixing of the LIBOR rate that prompted Parliament to establish this Commission, have exposed shocking and widespread malpractice.  Taxpayers and customers have lost out. The economy has suffered. The reputation of the financial sector has been gravely damaged. Trust in banking has fallen to a new low…lack of personal responsibility has been commonplace throughout the industry. Senior figures have continued to shelter behind an accountability firewall. … Risks and rewards in banking have been out of kilter. Given the misalignment of incentives, it should be no surprise that deep lapses in banking standards have been commonplace… The health and reputation of the banking industry itself is at stake. Many junior staff who may have done nothing wrong have been impugned by the actions of their seniors. This has to end.

The clear alternative is to turn the banking system into a public service for businesses and households and end activities in speculative financial investments (see my post, https://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/).  But the only way that could happen is if they were fully in public ownership and run democratically by their workers so that they could be integrated into a national plan for investment and jobs.  They should be ‘people’s banks’, not global monsters of capital.  But no, the government kept out of the running of these state-owned banks even though the taxpayers are invested in them.  The government allowed the top executives to continue with their grotesque bonuses, speculative investments and rate-rigging.  Now the government wants to return them to the private sector as soon as it can get away with it.

Any unbiased observer would conclude that a financial sector collapse and another bailout could happen again if the banks are left in private hands.  But the commission does not reach that conclusion.  Instead, it wants to go back to the failed way of ‘regulation’, but this time better, through “making senior bankers personally responsible, reforming bank governance, creating better functioning and more diverse markets, reinforcing the powers of regulators and making sure they do their job.”   The Commission proposes  a new law to make it a criminal offence and a custodial sentence for ‘reckless misconduct’ by bankers.

Naturally, this has been roundly attacked by the right wing ‘free market ‘press who say nobody can define what is ‘reckless’.  It would mean locking up bankers who make a ‘mistake’.  But they need not worry because such a law will never be passed by parliament or enforced by the courts.  We won’t see the scene as in the cartoon below.

FT on bankers

The City of London wants to end the role of the state in banks and return to ‘business as usual’.  Some even argue that the financial collapse was caused by the government anyway!  It seems that because the “state promised to bail out bank creditors, that was why banks and their employers took high risks.”, says Andrew Lilico, fellow of the extreme free market right wing think tank, the Institute of Economic Affairs.   As if the bankers would not have pursued ‘high risk’ anyway in the search for extra profits and big bonuses.  What about sub-prime lending?; what about the speculation in derivatives and ‘financial instruments of mass destruction? ; what about the shadow banking scams?  Did the likes of Goldman Sachs, JP Morgan, Barclays, HSBC and Fred Goodwin at RBS act recklessly and corruptly because they knew the government would bail them out?  Traditional bank robbers don’t rob banks because they expect to get off any sentence but because they don’t think they will be caught.  It’s the same with our suited executive bank robbers.  The bank scandals and bankruptcies happened because of the failure of regulation and ‘light touch regulation’ not because of “too much relationship with the state” as Liloco claims.

We now find out that five years after the financial collapse and the bailout that British banks are still short of the capital to be ‘safe’ .  RBS is £10bn-£12bn short, Lloyds £8bn-£9bn, and Barclays £3bn-£5bn according to the Prudential Regulation Authority.  One FT columnist asked the question: “is the UK economy now protected from the City? The simple answer is No… when the authorities intervene in banking, their aim is to protect the economy from the banks rather than the banks from the economy. This turn of phrase, borrowed from Sir Mervyn King, the outgoing Bank of England governor, should be the yardstick for progress.  The move from rescue to recovery is a question of degree and there is quite some way still to go.  Sir Mervyn talked about “the work of a generation”.

At the same time, the banks have failed to revive lending to the small businesses and households who need it.  UK bank lending continues to contract at a 2-3% annual rate.  This is partly because the big corporations don’t need to borrow as they have huge stockpiles of cash.  But small businesses do need support and the economy is crying out for investment.

As socialist economist, Michael Burke put it in a recent piece (http://socialisteconomicbulletin.blogspot.co.uk/2013/06/why-do-we-have-austerity-and-what-is.html)“As the private sector’s refusal to invest is because they cannot be certain of making a profit it falls to the state to invest on its own account. It can make successful large-scale investments which are not profitable to the private sector because uniquely it derives its return from taxation. Any general increase in economic activity will see tax revenues rise and social protection payments automatically fall.   The vast level of uninvested profits is now sitting idle in state-owned banks which failed because they made unprofitable investments. It is simply a matter of political will to tap these vast resources for investment in housing, energy, transport, infrastructure and education. This would lead to economic revival.   The reason it is so fiercely resisted is because it runs counter to the whole thrust of austerity, which is to restore profits. But increasing state-led investment is the only feasible road out of the crisis which does not lead to the further immiseration of the overwhelming majority of the population.”

While the banking sector remains in capitalist hands, it cannot provide a service to the people and it won’t be willing to support a plan of investment for jobs and economic recovery.

The PRA have released a document containing UK bank and building society capital shortfalls. Currently, RBS is short £13.6bn, Lloyds Banking Group £8.6bn, Barclays £3bn, the Co-op bank £1.5bn and Nationwide £0.4bn.

RBS have released a statement in response:

 As indicated in its earlier release, dated 22 May, RBS expects to continue to improve its Core Tier 1 capital (“CT1”) ratio during 2013 through continued delivery against its established business plan.

RBS continues to target a ‘fully loaded’ Basel 3 CT1 ratio of around 9% by year end 2013, after including the provision of capital to fund anticipated future loan growth.

Barclays and Lloyds have also released responses, with both saying they are “confident” they can meet the required seven per cent ratio.

It’s worth noting that Lloyds is the only stock up on the FTSE this morning following George Osborne’s announcement at the Mansion House meeting that it was ready to return to the private sector. James Barty of Policy Exchange tweeted the following:

– See more at: http://www.cityam.com/live-blog#UK-banks-have-a-capital-shortfall-of-%C2%A327.1bn-(%C2%A313.6bn-is-RBS%27s)

11 Responses to “Shafting the taxpayer second time round”

  1. vallebaeza Says:

    Reblogueó esto en Econo Marx 21.

  2. sartesian Says:

    “The clear alternative is to turn the banking system into a public service for businesses and households and end activities in speculative financial investments (see my post, https://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/). But the only way that could happen is if they were fully in public ownership and run democratically by their workers so that they could be integrated into a national plan for investment and jobs. They should be ‘people’s banks’, not global monsters of capital. But no, the government kept out of the running of these state-owned banks even though the taxpayers are invested in them. The government allowed the top executives to continue with their grotesque bonuses, speculative investments and rate-rigging. Now the government wants to return them to the private sector as soon as it can get away with it…..

    ….While the banking sector remains in capitalist hands, it cannot provide a service to the people and it won’t be willing to support a plan of investment for jobs and economic recovery.”

    And this “marxist approach” differs exactly how from the everyday populist approach…. or that of social democrats…. or that of Proudhonists…….or that of say Dennis Kucinich and his chairman- of-the-council-of-economic-advisers in waiting, Michael Hudson?

    • M. Protenic Says:

      sartesian – the meaning of any argument for “public banking” can be taken two ways – either as a purely economic move to tie banks to the existing political bureaucracy, or (in a sub-rosa manner) to suggest that a government be elected that would support that maneuver (takeover of banking) AND MORE (socialization of production, distribution, and finance comes to mind). Maybe Mssr. Roberts is being careful to not be painted as a “radical revolutionary” so that these proposed measures can enter the political arena, where they can be “voted” into power? That would be a question for Mssr. Roberts, of course, not for you…

      • michael roberts Says:

        Yes, the second option is what I had in mind. I think the way that radical revolutionary Lenin explained the need for the public ownership of the banks is pretty close to what I was arguing. See his words in my post, https://thenextrecession.wordpress.com/2013/04/20/why-sell-back-the-viable-banks/

      • S. Artesian Says:

        Maybe, but maybe greater is the need for clarity, for saying directly and exactly what needs to be done, not trying to make it “acceptable” or “palatable” or less frightening, or less….communist.

        So….so arguing for “public ownership of banks,” or “nationalization of banks” without identifying the agency of change, the class that must exercise power to make that change, the course of actions required to make that change just doesn’t do the trick, cut the mustard…etc.

        Lenin to the contrary notwithstanding what MR’s remarks sound like is too reminiscent,too close to, the argument made by what’s that guy’s name? that Marx criticized so severely– you know that stuff about wanting capital, or capitalism, but without the capitalists. Like wanting banks without interest payments, that kind of stuff.

        Without identifying the class that can take those prescriptive actions, and the work the identified class has to undertake to make such actions… real, what we get is, IMO– best wishes.

        We don’t need “people’s banks” “nationalized banks,” no more than we need a “people’s money” a people’s capitalism..

      • S. Artesian Says:

        I would also point out that Lenin’s comments were written not as political platform for electing a workers government, and not as a sub-rosa text, but in the period following his return to Petrograd after the promulgation of his April Theses, and the demand “All Power to the Soviets”– the agency is defined, its organization already assuming power. Big differences.

  3. Charles Andrews Says:

    Michael Burke: The government “can make successful large-scale investments which are not profitable to the private sector because uniquely it derives its return from taxation. Any general increase in economic activity will see tax revenues rise and social protection payments automatically fall.”

    Can we demonstrate that such investments would at least break even?

    Also, would breakeven investments by the state cause contractions in some private industries, by drawing away demand or other mechanisms? That would undermine a portion of the “general increase in economic activity.”

    Such questions raise the more general issue of whether social democratic policies require more than the political will needed to subdue capitalist antagonism to them, an antagonism which intensifies the more successful such policies are. Purely economic “market” reactions will tend to require increasing economic restrictions on capital, too.

    • michael roberts Says:

      Charles, very good questions. Such investment can be shown to ‘break even’ for the economy but not for profitability. Any move to drive investment through publicly owned banks and state infrastructure companies would threaten the profitability of the large corporates in the capitalist sector – so a ‘mixed economy’ or ‘halfway house’ is not going to succeed for long.

  4. sartesian Says:

    ^^^The government can do that exactly to the extent that capital accumulation allows that, is sufficient to support that. When the rate of profit falls, kiss it good-bye– unless and until it is necessary to subdue, control the working class for the next act in this miserable drama of fools, war.

  5. Pat Byrne Says:

    There is one important contradiction here I would like to pick up on in Michael’s otherwise usually excellent postings. Michael states that:

    “The clear alternative is to turn the banking system into a public service for businesses and households and end activities in speculative financial investments… But the only way that could happen is if they were fully in public ownership and run democratically by their workers so that they could be integrated into a national plan for investment and jobs. They should be ‘people’s banks’, not global monsters of capital.”

    While I fully agree that the banking staff should have a major say in the running of the banking industry (and even more so of the day to day administration of their offices) I cannot see why the banking staff alone should be the only actors determining the direction of the industry. This would hardly turn the banks into ‘people’s banks’ as Michael expresses it.

    Surely, a truly democratic publicly owned banking service would need to be run by a directly elected and accountable board of representatives from the banking staff, the banking customers, parliament and other relevant bodies?

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