Tag Archives: George Osborne

Banking, Britain, Economic, Financial Markets, Government, Society

Statements by RBS are clear on two points…

ROYAL BANK OF SCOTLAND

A series of rash statements issued yesterday by the Royal Bank of Scotland is clear on two points. Firstly, the decision taken to create an internal ‘bad bank’ with toxic loans amounting to £38 billion will hardly provide an instant cure. It will take a further three years of write-downs and bank disposals before the institution will even be considered to have recovered from its 2008 financial collapse and taxpayer funded rescue.

The second relates to serious deficiencies in the day-to-day management of RBS – from its chronic failure to meet targets on lending to small and medium sized firms, through shortcomings in service to personal customers, and to the provision of £250 million made by the bank for mis-selling payment protection insurance.

It is extremely unlikely there will be any start to the sale of the bank back to the private sector until well after the General Election.

RBS has announced a bottom-line loss of £634m for the three months to September. Far from the internal ‘bad bank’ resolution being hailed as a panacea, it is little wonder that shares in RBS have slumped. Even in its darkest hour of 2008, few would have believed that the recovery of what was then the UK’s largest bank would have taken eight years and a massive restructuring and shrinkage of its business. RBS has suffered a major curtailment in much of its global business and activities, not just the unwinding of the vainglorious acquisitions of the Fred Goodwin era but is also shorn of the overseas expansion delivered by his predecessor, Sir George Mathewson.

The protracted period of indecision on whether the bank’s bad loans – much of them incurred in Ireland by Ulster Bank – should have been left with the government or treated as a separate entity, is a nettle that should have been grasped in 2009 rather than allowed to have festered for the length of time it has. Chancellor George Osborne had had to recognise that RBS’ problems – structural and cultural – will take far longer to resolve than the government first anticipated before a share sale can be undertaken.

The traumatic legacy of its near-collapse remains problematic today. This induced a deep reluctance within the bank to lend, in particular to small and medium-sized businesses. A highly critical report by Sir Andrew Large found RBS was performing so erroneously it was not even in a position to meet its own targets. In the meantime, a review by RBS into how it serves its personal customers is scheduled to report next year.

The bank still has a mountainous task ahead under its new chief executive, Ross McEwan. There is much to do to overhaul the bank’s lending practices; by moving away, for instance, from the sales target-driven excesses of the previous era and by making major improvements to its overall service to customers.

RBS will eventually revert to being a domestically focused retail bank, stripped down to those core banking competencies it should never have deserted in the first place. The biggest challenge ahead will be to rebuild customer and investor trust. The bank’s widespread loss of confidence makes that a daunting and difficult task.

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Britain, Economic, Government, Politics, Society

How is it ‘socialism’ to say that market failure beckons on a grand scale?

CONSERVATIVE PARTY ETHOS?

Thatcher’s revolution of the 1980s led to politicians of all persuasions putting their faith in a new economic paradigm – a guarantee of prosperity for the majority, which has lasted decades. Today, however, following the ‘Great Contraction’ of 2008-2009, political parties can no longer offer that guarantee with the same level of confidence. Whilst economic growth in Britain has returned following three years of stagnation it is forecast that real wages will not increase until 2015 and will not return to their pre-crash levels until 2023. A fractious and defective energy market, in which just six companies control 98 per cent of supply, has left more than 4.5 million in ‘fuel poverty’. Extortionate rents within the inner cities have forced millions to rely on housing benefit. By any measure, this must amount to market failure on a grand scale.

The crisis in living standards is a challenge for all political parties but no more so than for the Conservatives, the natural defenders of capitalism. After Ed Miliband, the Labour leader, pledged to freeze energy prices until 2017 – and to build 200,000 homes a year by 2020 – the Conservative Party had a chance to offer its own solutions. Alas, as we witnessed from the conference in Manchester, it retreated to its comfort zone. Aided by an ever more right-wing press, speaker after speaker derided Mr Miliband as a ‘socialist’ and ‘Marxist’, as if concern at deteriorating wages were comparable to a belief in world revolution.

The Conservative Party conference failed to recognise that when Margaret Thatcher assailed her left-wing opponents in the 1980s, she did so in the confidence that her free-market policies retained popular support. David Cameron does not enjoy that luxury: polls show that some two-thirds of voters support a 50p top rate of income tax, a mansion tax, stronger workers’ rights, a living wage that is more consummate with actual day living, and the renationalisation of the railways and the privatised utilities. If Mr Miliband is a socialist, so must the public be if these polls are anything to go by.

George Osborne rebuked the Labour leader for suggesting that ‘the cost of living was somehow detached from the performance of the economy’. But this was a remark that betrayed Mr Osborne’s failure to appreciate that the crisis is not merely cyclical (a problem most certainly exasperated through his austerity programme), but structural. It was in 2003, way before the crash, that wages for 11 million earners started to stagnate.

Other than a pledge to freeze fuel duty until 2015, what else did the Tories have to say on the question of living standards? The most important announcements were the earlier than intended introduction of the Help to Buy scheme and Mr Osborne’s commitment to achieve a Budget Surplus by the end of the next parliament, both of which risk further depressing incomes. By inflating demand without addressing the fundamental problem of supply, Help to Buy will make housing less affordable, while the Chancellor’s promise of a balanced Budget is likely to be met by imposing even greater cuts to benefits and services for the poorest in our society. Osborne’s ideological fixation with the public finances, particularly in relation to interest payments on the government’s debt, ignores the greater crisis in people’s finances.

On the fringes of the party, though, there was some positive thinking. The Conservative campaign group Renewal, which aims to broaden the party’s appeal among northern, working-class and ethnic minority voters, published a strategy for the building of a million new homes over the course of the next parliament, a significant increase in the minimum wage, a ‘cost of living test’ for all Acts of Parliament, and for action to be taken against ‘rip-off companies’. Yet, there is little sign that the Conservative leadership is prepared to embrace the kind of reformist, centrist agenda that secured the re-election of Angela Merkel in Germany.

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Banking, Britain, Economic, European Union, Financial Markets, Government, Society, United States

What the banking crash five years ago has taught us…

BANKING FIVE YEARS ON

THE last five years have been the most nerve jangling and traumatic in the modern history of the British economy and for the City of London.

It is only now, on the 5th anniversary of the collapse of the 158-year-old investment firm Lehman Brothers – and after intensive ministrations from the Bank of England – that the UK economy has started to splutter back to life.

However, the banking sector, which should be a bedrock of the economy, remains vulnerable and susceptible to external shocks, and to scandals of its own making.

The Central Bank administered strong economic measures, namely in the form of a staggering £375 billion of extra cash into the UK financial system.

It has held the official bank rate at a historic low level of 0.5 per cent for more than four years and it is currently heavily subsidising the cost of buying homes as well as supporting smaller enterprises through its Funding for Lending scheme.

Finally, it appears to be working, and forecasters are quickly revising their predictions upwards as every part of the economy – from the dominant services sector, to manufacturing and construction – has begun to take off.

In the Chancellor’s March Budget, the independent Office for Budget Responsibility (OBR) predicted that gross domestic product would expand by a miserly 0.6 per cent this year.

The Paris-based OECD has doubled its forecast to 1.8 per cent and some City forecasters say the economy is expanding by as much as 3 per cent.

House prices are moving up firmly in many areas and not just in overcrowded and overcooked London and the South-East.

The jobless rate is currently 7.7 per cent and falling more rapidly than many critics could have imagined.

But it would be wrong to get carried away. UK output is still 2.8 per cent below where it was before calamity struck in 2008. In contrast, the German economy has expanded by 2 per cent and the United States by 5 per cent.

Despite the new born optimism of many British forecasters, it is safe to say that the whole edifice of the UK upturn is built on worryingly fragile foundations.

No doubt, the most important lesson of the terrifying events five years ago is how important a functioning banking system is to the creation of wealth.

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ACCORDING to the former Chancellor, Alistair Darling, Britain was ‘on the brink of what could have been a complete and utter calamity’.

Cash machines at the Royal Bank of Scotland and Lloyds Banking Group came within two hours of running dry. The economy’s restoration to full health cannot possibly happen until these two banking High Street giants have been restored to the private sector.

Yet, half-a-decade on from the near collapse of these two banks, the struggle over how to re-privatise them is nowhere near being resolved.

Consider RBS. Stephen Hester, the man brought in on a salary of £1.2 million by Gordon Brown to turn the bank around, resigned after a fractious relationship with Chancellor George Osborne. At the behest of the Parliamentary Commission on Banking, merchant bankers NM Rothschild is investigating how to split off RBS’s flawed investment-banking arm from the retail operation that serves the public and small firms.

Until it reports, the important job of extending credit to new and growing businesses has been put on hold and the process of returning the Government’s 80 per cent in the bank to the public has been suspended.

Lloyds, though, does look in far better shape. Under an EU ruling, it has separated out 632 High Street branches and relaunched them under the revised TSB banner.

But its return has been less than smooth.

In the aftermath of the financial crash, the bank emerged as one of the biggest providers of Payment Protection Insurance (PPI) policies in which customers were mis-sold expensive insurance schemes to cover debt repayments. It was required to spend £4.3 billion in compensation, part of an industry wide bill of some £14 billion.

PPI is just one of the egregious scandals to emerge since the financial crisis. In June of 2012 Barclays Bank agreed to pay a fine of £290 million for rigging the LIBOR interest rate that helps to set the cost of corporate loans, mortgages and other commercial transactions.

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BRITAIN’S highest paid banker, Bob Diamond – who earned more than £100 million in his years at Barclays – was forced to resign.

Even the most respected and safest names in British banking have found themselves in the dock.

The mighty HSBC admitted it had been involved in money laundering activities for Mexican drug cartels and Middle East terror groups.

London-based Standard Chartered was forced to own up to billions of pounds of sanctions-busting transactions with Iran.

And to top it all, the world’s largest and most blue-blooded bank of all, JP Morgan lost $6 billion in 2012 at its London branch after engaging in high risk trading in credit default swaps.

There are now signs, at least, that regulators in the U.S. and Britain have forced a clean-up of our banking system by imposing heavy fines and penalties and by forcing the errant institutions to accumulate fresh capital.

But looming over the City is the spectre of the eurozone, which is caught in a ‘doom loop’ – a self-perpetuating cycle that relentlessly racks up both national debts and those of banks.

The recovery, then, at best is being built on the most fragile of foundations.

Even if our banks manage to overcome the already formidable problems, the medicine itself already used poses its own future dangers in the shape of surging inflation and higher interest rates that could eventually be as frightening as the events of five years ago.

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