Bank bailouts and banker bashing

From the same Channel 4 piece

Also from the Channel 4 piece which jambalaya seems to think makes his point :

It seems fair to conclude that the government isn’t quite telling us the whole story here.

The cost of the borrowing that financed the bank bailouts appears to wipe out the gains being publicised today and leave the taxpayer in the red.

@jive the £17bn is an estimate and no one is really sure what it includes and whether its really relevant to this calculation. As I posted I can find £5-£7bn of costs in funding the RBS and Lloyds equity stakes. Everything else was loans or guaranty fees and loans are profitable and the guarantees where not called upon.

I don’t dispute there are some questions to be answered here. I’d also say we (Labour and the Tories) did not do as good a job managing the bailout as did the US who’ve made much more money. They’ve been more pragmatic and avoided the same level of bashing/taxation of banks and thus their equity stakes where worth much more and they where able to exit at a profit more quickly. Those profits are much more than any tax revenue they could have made in the same period.

Who are loans profitable for?

The state, ie all of us.

Can you explain how profits are for all of us, yet the rich have got considerably richer?

yet the rich have got considerably richer?

A lot of that is paper bollocks though – if you had ten acres of potential development land that you bought in 2005 for, say a million quid, then it would have been quite possible for you to have halved your personal wealth in 2008, (value 500k) doubled it again by 2012, (back to a million) quadrupled it by 2015 (2m) and very possibly half it again by next year (1m again). Reports of people’s ‘Wealth’ are all rubbish.

Two separate things. The super rich don’t really care that much about the banking system, their money isn’t in banks it’s in other assets/businesses. The value of those assets have generally increased since the crises, hence they are richer. Even a super rich person who’s “cash” is in a private bank it will be invested in equities or debt of companies – both sectors fairly healthy, European equities are up nearly 20% YoY. If the bank fails it makes little difference. Certainly many in the upper middle tier lost a lot of money and where ruined (eh Lehman, Bear Sterns or Merrill Lynch employees with millions in shares, Madoff investors etc) but we don’t hear so much about them.

Most of the super rich in the UK aren’t British, they chose to live here whilst their wealth is/was generated elsewhere.

The £17 billion comes from the OBR which is also the ultimate source for the table you post above. There are two main differences between this and the original analysis you posted by Rothschilds. First it includes the results under the FSCS, which are irrelevant to the profit side as it is estimated to wash its face before funding, but does involve £20.9 billion of funding. The second difference and swing factor is Rothschild’s valuation of UKAR at £6.9 compared to 0 for the OBR. So that’s the figures you posted.

If we stick to your original post to compare apples to apples, the £17 billion figure is probably overstated because it presumably includes funding the FscF of £20 billion as it is the same report. So we have an overstatement of borrowing of £21 on £134. Therefore the interest cost attributable to the Rothschild analysis can be estimated to be £17 x (134-21)/134 = 14.3 so essentially wipes out the profit you claimed.

The next question is how reasonable is that. Well we have £107.6 of funding, some of which has been repaid, so lets assume an average life of 5 year (2008 to 2013), £14/5= £2.8 which implies an average rate of 2.6%. If you look at the path of 10 year bond rates from 2009 (when they were close to 4%) onwards that smells about right.

So the conclusion is that the analysis that you originally posted claiming it led to a profit does no such thing, no matter how much you witter on about it.

Reports of people’s ‘Wealth’ are all rubbish.

Given conflicting reports which are manipulated to support whatever view someone wants to portray, is the world of finance in general ‘rubbish’ in your view, or does it have a massive impact on peoples lives locally, nationally and globally?

mefty thanks for that, I’ll keep digging into this. We only needed to borrow £66bn for the Lloyds/RBS equity investments. Bradford and Bingley and Northern Rock it got for free (I believe). The rest is loans/guarantees which are profitable, the government lends out at a higher rate than it’s cost.

But the tables you have posted include interest received, not net interest, so you have to include the funding on the £40 billion. It is really not very complicated.

EDIT: You would make it easier for yourself if you actually looked at what you post. The Rothschilds analysis clearly shows funding required of over £100 billion.

Whatever the outcome, it’s a grubby business- playing with fire, playing with other people’s quality of life. I wish it had never happened.

More regulation please.

Jambalaya – seeing as you’re doing a good job of putting your point across and kindly bothering to explain things as you see them… What about Iceland? I understand they did things differently there. Thoughts?

BTW @ernie I posted that piece as its another analysis and yes of course it raises questions and ponders whether the bailout was profitable overall. I contend it was and it certainly should have been, the US has made many tens of billions in profits. We definitely got into RBS at the wrong price but even then we could have done a better job of managing our way out.

Thinking it through, most human activity these days is controlled by money.

Say for example war… who finances it and who profits?

How much of a factor is financial gain in motivating war?

jambalaya – Member

BTW @ernie ……..ponders whether the bailout was profitable overall.

Which also ponders the question why 12 hours ago you were posting this :

jambalaya – Member

@mefty in the UK and the U.S the governments/states have made huge profits from the bailouts

Posted 12 hours ago # Report-Post

More regulation please.

I agree with this, I would have added credit controls too (ie making it much harder to borrow, eg compulsory deposit and proof of income on house purchase. Controls on credit card debt and sharing of debtor information between companies) but I understand they are politically very very controversial.

Iceland. My 2 cents is they had no choice, their banks where too big for the country to save so it wasn’t an option for them. They did the best they could in the circumstances and where helped out by various neighbours/IMF. As its a small country this was feasible. I just read up that the UK has got back 85% of the money it gave UK savers in Icelandic banks after they failed. I suspect most of the money deposited by UK local authorities (£500m odd) was lost. My local council in Guildford idiotically had £10m with Icelandic banks. Their failure was well flagged in advance, I cannot imagine why this money was not withdrawn. I did make that point to them in writing, never got a reply !

You had a similar situation in Cyprus where banks failed and depositors were charged a haircut, initially this was going to include many locals but in the end I think they charged mainly foreigners, mostly Russians I understand after widespread protests from locals. Again they could do this due to the nature of their banking system which was dominated by foreign money.

Our economy is overweight banking/financial services so letting such an important part of the economy fail would not have been an option and would have been out of step with the US, Germany, France etc which would have been difficult to do politically. There was certainly co-ordination between central banks on the rescues/bailouts.

@ernie we are having a discussion, I believe the UK bailout was indeed profitable. Osbourne stated it was to the tune of £14bn and this is being challenged including the in the piece I posted. What is clear is that there is not a lot of clarity in the numbers, certainly not yet.

You had a similar situation in Cyprus where banks failed and depositors were charged a haircut, initially this was going to include many locals but in the end I think they charged mainly foreigners, mostly Russians I understand after widespread protests from locals.

The problem there was that the whole banking system, as well as being saddled with the problems everyone else was encountering, was basically just a front for a huge money-laundering operation favoured by Russian Gangsters.

Of course we wouldn’t have any problems with that kind of thing with our nice, respectable banking industry, would we?

*cough*

HSBC

*cough*

Mexican drug cartels

*cough*

What is clear is that there is not a lot of clarity in the numbers, certainly not yet.

Sorry you didn’t make it clear that there is a lack of clarity when you said 12 hours ago that the UK government had, quote, “made huge profits from the bailouts”

Co-incidently Cyprus bank account haircuts just came up in the Guardian feed on Greece. Anyone with more than euro 100,000 in the bank lost 60% of that amount 😯

@ernie that was my view then, I see it’s challenged here and elsewhere and we will get to the bottom of this. I still believe profits will be over £10bn. We actually won’t know until all the RBS shares are sold, everyone is making guesses as to future asset sale prices but we do know the schemes which have come to an end have delivered £7bn in profits. The runoff bad bank mortgage books from Bradford and Bingley and Northern Rock will be around for years but are profitable (another obvious reason to keep the housing market firm as we the tax payer have exposure). There are potential buyers circling but the govt thinks the prices are too low.

everyone is making guesses

Fair enough. You didn’t make it clear that you were only guessing when you said that the UK government had, quote, “made huge profits from the bailouts”

🙂

An educated guess though 😀 based on the US experience and my understanding of the bailouts. I’m still struggling to see how the numbers like £17bn have been calculated.

For the avoidance of doubt I could be wrong on this ! I’m not giving up yet though.

everyone is making guesses

Nope it is simply a balance sheet analysis, valuing at current market value.

Nope it is simply a balance sheet analysis, valuing at current market value.

I meant about the funding costs, both historical and future.

FYI I am not sure why you’d borrow money to invest in RBS/Lloyds using long term gilt rates of 4% when you are pretty damn sure that rates are going to be low for a long time.

For the avoidance of doubt I could be wrong on this ! I’m not giving up yet though.

a) you almost certainly are wrong and
b) why on earth are you so keen to prove that the worst recession since the 30s is somehow a good thing, unless you work in PR for a bank?

FYI I am not sure why you’d borrow money to invest in RBS/Lloyds using long term gilt rates of 4% when you are pretty damn sure that rates are going to be low for a long time.

I doubt they were sure of anything at the time, but as the analysis does not depend on this rate it doesn’t really matter. Arguably I have been too kind to you because I should have used a zero coupon curve as I shortened the average life to take into account the partial repayments and interest. This would reduce the funding rate by a further 12bps.

a) you almost certainly are wrong and
b) why on earth are you so keen to prove that the worst recession since the 30s is somehow a good thing, unless you work in PR for a bank?

a) I don’t see how you are so certain I am wrong about the key thing we are discussing at the moment, ie that the bank bailout was hugely (ie circa £10bn) profitable.
b) Where did I say the recession was a good thing, nowhere is the answer.

Arguably I have been too kind to you because I should have used a zero coupon curve as I shortened the average life to take into account the partial repayments and interest. This would reduce the funding rate by a further 12bps.

Why on earth would you bother will all that detail on the cost of funding when we don’t know how much has been borrowed or what funding strategy they used in terms of maturities. Focus on the big stuff eh ? In any case if that was the result you’d be helping my argument as overall CoF would be less. As an aside not sure how much you’ve followed various threads on here but I have a Mathematics under and post-grad degrees and started my finance career as a trading desk quant at Goldman so a bit of bond maths is right up my Sta?e. Even less relevant was I worked as a trader in New York in the late 1980’s with Dan Sparks who rose to head of the mortgage department and was featured in @gofaster’s linked film when he appeared before the Senate committee.

I don’t see how you are so certain I am wrong about the key thing we are discussing at the moment,

Because the analysis you use at the start and your terms of reference are so deliberately narrow that even if it does show a paper profit it’s completely meaningless.

Like I said before if someone mugged me and then offered to refund me for the bandages plus 5%, I wouldn’t consider the incident a profitable experience.

I don’t see how you are so certain I am wrong about the key thing we are discussing at the moment, ie that the bank bailout was hugely (ie circa £10bn) profitable.

Well 6 days ago you started this thread claiming that the bank bailout had delivered “a profit of £14bn to the nation”, that’s now changed to “circa £10bn”, perhaps at that rate if we give the thread another couple of weeks you’ll accept that it hasn’t been “hugely profitable” after all?

ah, your potted CV explains why you’re so keen to defend banks and their activities and behaviour.

Why on earth would you bother will all that detail on the cost of funding when we don’t know how much has been borrowed.

It is a 20 second calculation, the funding requirement is the amount injected which is shown in your OP.

In any case if that was the result you’d be helping my argument as overall CoF would be less

OMG, the final bit of my analysis was a reasonableness test. I looked at an interest bill derived from the “claimed” interest bill and compared it to the level of funding – therefore the lower the rate, the more likely the interest bill is to be right. So it does not help your argument, it does the reverse, it would appear your Sta?e is a dead end.

The “claimed” interest bill was from OBR figures, you know the independent part of government that have access to more detailed information and has statutory responsibilities. It is therefore a pretty solid foundation for any analysis.

Finally, thank you for your CV, unfortunately we have no openings at the moment.

I’m confused, the Tories told me that Labour ruined our economy by bailing out the banks, but we made a profit on it??? Surely that’s a good thing that Gordon Brown did then???

Get with the program bruv………the state making a profit is always bad.

That’s why for example East Coast rail line had to be re-privatised after it kept making ridiculous amounts of profit every year for the Treasury.

The triumph of Tory-dogma over commonsense.

Ernie, please don’t use “commonsense”, it’s a fallacy.

I get what you’re trying to say, though.

Been focusing on the UKAR – UK Asset Resolution – as listed in the tables. They published their annual report yesterday UKAR 2015

The UKAR was the entity which took the nationalised Northern Rock and Bradford and Bingley assets. The government paid zero for these entities. The £41bn listed in the table represents loans made to replace market funding.

How the UKAR was funded we don’t know but as it was nationalised it would not need capital just loans and these can be at a much lower cost to the taxpayer. UKAR does not pay interest as such but pays all cash flow to the government to reduce loan balances as fast as possible. Effectively this means all the profit is realised at the end as once all debt is repiad the government owns the debt-free business.

The annual report shows some different figures than do the OBR and Rothschild for payments to the government in taxes and fees and higher debt outstanding.

Also both OBR and Rothschild record the UKAR at book value whereas it seems much more likely the business/portfolio has a value above book. Thus more profit for the government/tax payer.

Annual profits are £1.4bn for 2014 vs £1.25bn for 2013. Pretty decent and these are of course taxable but in any case belong entirely to the tax payer.
Taxes and fees paid to the government where £4.4bn in 2014 and £5.6bn in 2013 = so a total of £11bn in two years.
UKAR has been selling mortgage loans at a profit (£55m profit last year) and plans a much larger sale this year I imagine after having successfully and profitably tested the market in 2014.

Overall I think the profits both current and future from the UKAR bailout are higher than shown in the tables. Also the funding cost of the support would have been much lower than for RBS and Lloyds equity stakes.

I still don’t reconcile a £17bn funding cost.

Surely that’s a good thing that Gordon Brown did then???

Yes, bailing out the banks was a good thing to do. Not popular but correct.

JY apart from betting Man U would finish out side the top 4 I can’t think of an argument on here with you I’ve been on the wrong/losing side of ? So given how poorly you think my arguments are constructed you’ve done a mighty poor job putting your side, no ?

We are going to make £10bn plus net of costs on the bailout and we’ve avoided a much worse outcome had we not bailed out the banks. We are not going to make as much as they’ve made in the US, partly as their bailouts where much larger and partly as government policy has focused on bashing / taxing banks instead of maximizing the value of the taxpayers stakes which is what they did in the US

Anyway off to the pub, will check in again later 8)

We are going to make £10bn plus net of costs on the bailout and we’ve avoided a much worse outcome had we not bailed out the banks. We are not going to make as much as they’ve made in the US,

Disregarding your fluctuating figures for a moment… when you return in a wobbly state with a few less braincells, any chance you can you define ‘we’ and ‘they’ please?

Say for example the many people in the US who lost homes to foreclosure in the subprime mortgage crisis, are ‘they’ now rolling it in?

JY apart from betting Man U would finish out side the top 4 I can’t think of an argument on here with you I’ve been on the wrong/losing side of ? So given how poorly you think my arguments are constructed you’ve done a mighty poor job putting your side, no ?

The other conclusions that can be suggested is its impossible to convince you that you are wrong and/or even when you are wrong you fail to see it or acknowledge this no matter how many posters suggest it.
Perhaps you can re read some threads and decide for yourself as sometimes you are the only person who thinks you are correct, or even has that view, and the overwhelming majority are disagreeing with your view. I would cite this thread as but one example of this.
What about the recent thread where you claimed that Knights “protected” the queen

Knights are there to protect the Queen. Seems quite normal for her son to be made one. I can’t see what the fuss is.

Really you think this is what Sir do today?
FWIW you are also claiming harry is her son in that post.
http://singletrackworld.com/forum/topic/arise-sir-harry#post-6959199

There is not much point debating this with you as you never admit you are wrong and then present this as proof that you were right.

Odd to read all the aggro here – ok not really it’s STW

But (1) we don’t know the actual cost (yet)

And (2) a little silly to consider it in isolation anyway since that ignores the cost of not doing anything – what we economists call opportunity cost 😉

Still for some rationale analysis, one can easily look here

Taxpayer support for UK banks: FAQs