It should come as little surprise that the Government sell-off of some of its shares in Royal Bank of Scotland has apparently been accompanied by a billion-pound bung to the financial speculators who caused the crisis in the first place. That’s pretty much the story of the 2008-12 financial crash.
It is an astonishing tale of how vast reservoirs of taxpayer funds were devoted to bailing out an insolvent financial industry. The rescue left the banking kleptocracy largely unscathed despite their greed and irresponsibility having caused the deepest economic recession in 100 years. Tiny Iceland is still the only country that has actually prosecuted the bankers who caused the 2008 crash.
But how much did the bank bailout actually cost the taxpayer? Well, at the height of the rescue, it was widely quoted that the Treasury had put up £1.2 trillion in order to rescue the banks from the consequences of their own folly. That figure, which was the estimate of the former governor of the Bank of England, has been subject to much sophistry and revision.
This was, of course, the total liability and not an actual cash transfer. The actual injection of capital funds into the banks, some £120 billion, was much smaller than the headline figure, and most of that will come back to the Treasury as bank shares are sold off.
But this is to miss the point. The trillion-pound rescue involved the state taking on the risk for the banks’ assets, either by insuring them or by swapping them for securities to provide liquidity. It was the biggest bank rescue in history, and in Britain alone placed at risk a sum equivalent to three times the sovereign debt of Greece.
In 2008 the banks were insolvent as the mortgage credit bubble they had inflated finally burst. The value of their assets, in many cases dodgy mortgage-based derivatives, was collapsing. They couldn’t sell them for anything like their long-term value. So the state came in and took them into the public accounts.
An analogy would be a home owner in negative equity during an economic recession. You can’t sell the house at anything like its worth, yet you are stuck with a mortgage debt to finance. You are insolvent. You owe more than the value of your assets. Expect the bailiffs to arrive and force the sale of your home to raise funds and pursue you for the remainder of the debt.
In the case of the insolvent banking system, however, the Government – that is, you and me – came in and, as it were, bought the house at above its then value and held it on your behalf until the property market recovered. There is no long-term transfer of funds in this process, but make no mistake: the Government effectively bought the house.
But as long as no one is left with a loss at the end of the process, what’s the problem? Well, it is two-fold. First of all, the bank bailout will end up costing the taxpayer many billions of pounds in direct losses when items such as fees, discounts, insurance and other costs are taken into account, and after the state-owned shares are finally sold off at a loss. The bankers continued to pay themselves bonuses even in banks like RBS that had been nationalised.
Then there is the cost of the lost output in the longest recession since the 1870s. This is vastly greater than the losses in the cash injection. GDP has only recently recovered its 2007/8 level after falling by some six per cent. This leaves output losses of tens of billions of pounds in goods and services that were never bought and sold.
But the true impact of the trillion-pound bailout is that it effectively shored up a corrupt and dysfunctional system. Most of the problems of the banks were brought upon themselves. Banks such as Northern Rock had lent out many times their core capital and were fuelling a property bubble by handing out “suicide loans” – mortgages of 125 per cent of the value of the house.
British banks were also involved in the sub-prime mortgage lending in the US, or “liar loans” to people who could never pay back what they had borrowed. The calculation of the speculators who created the dodgy derivatives like collateralised debt obligations was that, in the long term, they needn’t worry because the Government would always step in to save them from themselves.
In the end, that is exactly what happened. Initially, the US government tried to force the banks themselves to pay the cost or go bust. But the collapse of the Wall Street giant Lehman Bros in 2008 showed that letting the banks go bankrupt would cause the entire financial system to crash. Credit simply dried up, placing at risk thousands of productive businesses.
So, in the US and UK, government stepped in with the various “troubled asset relief programmes” under which the taxpayer was forced to stand behind and guarantee the depressed bank assets. The programmes effectively took unsaleable bank assets onto the public balance sheet.
This was a colossal risk. Royal Bank of Scotland at the time of the crash had a balance sheet of nearly £2trn – greater than the annual GDP of the UK. But the banks held a gun to the Government’s head. The then Chancellor, Alistair Darling, could not risk collapsing the entire financial system and the great rescue was authorised.
But there was no quid pro quo for the £1.2trn bailout. The bank bosses were left in place. They were permitted to continue raking in bonuses even though their banks were only in existence because of taxpayer subsidy.
The Government isn’t in the business of running the banking system, so it is trying to get RBS quickly of its books by offering the first block of shares back to the private sector at a significant discount. This has been estimated at around £1bn.
But the lasting damage is not the financial loss to the taxpayer, though that is bad enough. It is the moral hazard of allowing the banking system to continue largely unreformed.
Regulation has been tightened a bit, and banks have been required to build up a stronger capital base to protect themselves in a future crash. But the system is still essentially the same, speculative free-for-all; which is why even members of the financial establishment are warning that the next crash is only a matter of time.
In the years following the crash, the Bank of England pumped up asset prices by printing money under “quantitative easing” worth hundreds of billions of pounds and by slashing interest rates, at their lowest level since the 1690s.
The stock market has been buoyant but since this is based on almost free money, many are questioning whether the valuations are sustainable. The US Federal Reserve is now talking about increasing interest rates.
It looks as if the credit bubble was replaced by an asset bubble. When that bursts, don’t be surprised if we taxpayers find ourselves called upon to mount yet another trillion-pound rescue operation.