Wednesday, 15 October 2008

Bank plan has so far lost taxpayer £2.8 billion in two days

Socialist Economic Bulletin does not welcome anyone making mistakes in the present economic crisis. Its view is that the economic situation is extremely serious and millions of people in this country, and very many millions internationally, are going to suffer a worsening of their economic position. For those at the bottom of the social system that will translate into terrible hardship, despair, blighting of childrens prospects, rising social abuse, increased crime, in a few cases suicide and all the other manifestations of economic recession.
It therefore gives it no pleasure to point out what is wrong with the government's economic approach. But it was shown yesterday when Gordon Brown justified the bank package by stating that the government was buying shares 'at the bottom of the market'.
This is exactly what the government should not be getting into. Neither the government, nor anyone else, knows whether the share market in general, or bank shares, are at the bottom - if any minister knows that bank shares are at the bottom then they should immediately purchase them in large quantities in their private capacity and become fabulously wealthy as a result.
The job of the government is to ensure that the banking system operates - as no economy can function without one. That means it should, if necessary, be prepared to take over the running of failed banks, as it did with Northern Rock and Bradford and Bingley, and it should be prepared to ensure liquidity in the market - which may involve, as the US state is currently doing, lending directly to viable companies.
But what the real value of RBS, Lloyds TSB, and HBOS - the three banks the government has taken shares in, is only the market will decide. It may be that the actual value of any, or all, of these banks is zero or even below zero. Certainly in the case of HBOS, the market capitalisation of which has fallen to below £5 billion, and whose share price has declined by 92 per cent since its peak, it is quite possible, indeed probable, that its actual value is zero - in which case it is economically disastrous, and would result in huge losses for the taxpayer, for the government to be pumping billions of pounds of taxpayers money into purchasing shares of a bank which may have zero value.

The scale of risk of losses for the taxpayer which is being undertaken can be seen clearly seen by market movements since the bank plan's announcement.
The government announced that it would buy LLoyds TSB shares at 173.3p, RBS shares at 65.5p, and HBOS shares at 113.6. Shortly before 9am this morning Lloyds TSB shares stood at 162.0p - 7.9 per cent down on the government price, Royal Bank of Scotland stood at 63.6p - 2.9 per cent below the government price, and HBOS shares at 87.0p - 23.4 per cent below the government price.
On the basis of share trading by the close of the markets on 14 October the government would have suffered a loss equivalent to £2.8 billion for the taxpayer - that is a loss of £1.4 billion a day.
This is stupendous risk for the taxpayer, which can severely damage the public finances for decades to come, justified by a belief that bank shares are 'at the bottom of the market'. If bank shares are at the bottom, that is the the market at present is underestimating the real future value of these banks, then they will rise and private capital will refund them. If, on the contrary, these shares are not at their bottom, that is the market is at present over estimating the value of these shares, then potential for large losses exists which should be taken by private shareholders not by the government.
The government should be standing ready to take over a bank's functioning for zero price if its real value turns out to be zero. It should not be speculating with taxpayers money.


Bemused economist said...

Presumeably SEB agrees that anyone seeking to invest in banking shares has better prospects with HSBC than with the likes of Lloyds?

Alun Griffiths said...

Can somebody tell me what this has to do with Socialist Economics? Why should the government be standing ready to ... why doesn't it just do it, if it's worth more than 0 than that would mean some of the excess dividends and bonuses would be recuperated.