A tax payer rip-off of surprising boldness

The Treasury’s deal with RBS under the Asset Protection Scheme is even more disadvantageous to the tax payer than I had feared.  The government will insure £325 bn of RBS toxic assets, with a first loss for RBS of only 6 percent (£19.5), and with RBS taking only 10 percent of any loss in excess of the first loss limit.  The fee paid by RBS is just two percent of the amount insured (£ 6.5 bn), much lower than the market (and I) had anticipated, and it is paid in RBS B shares.  This means that if and when RBS goes bust, an event that is not altogether unlikely, the cumulative value of the insurance fees already paid to the government will be zero.

The government also agreed to inject up to £25.5bn of additional capital into RBS. Of this, £13 bn has already been subscribed by the Treasury as preference shares. The Treasury is also committed to buy an additional £6bn worth of (non-voting) B shares.

For reasons that are hard to fathom, the Treasury has decided to cap its holding of RBS voting stock at 75 percent (it currently stands at 70 percent).

RBS reported the largest-ever British corporate loss for the year 2008, with an annual net loss of £8.13 bn before goodwill write-offs and a total net loss of £24.1 bn.

I have used the Monty Python parrot sketch before in this blog, so I will not drag it out again, but there is no doubt that RBS is a dead bank.  It isn’t even a dead bank walking any longer – more a dead bank stumbling and fumbling around.  The government should stop playing ostrich, extract its head from the sand, observe that RBS is no longer viable and either nationalise it or make it the first bank to enjoy the rigours of the Special Resolution Regime for banks created earlier this month in the new Banking Act.  Through the SRR it could even implement the ‘good bank’ solution for RBS.

The penny hasn’t dropped yet for Lloyds, but that cannot be long in coming.  The government should act courageously and decisively and put the non-viable banks out of their misery, in the process saving the tax payer some misery.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website