I’m sure there’s a mixed metaphor to be had here re a big fish across the pond.

But the RBS director with an equally impressive pension - according to RBS’s 2007 accounts - is one Larry (Lawrence) Fish, chair of the bank’s US operations. His pension pot was $24m at that point.

Fish was previously chief executive of Citizens, an RBS subsidiary in the US. Now a non-executive, he is set to quit the company before April.

Incidentally his pay in 2006 (£6.59m) was more than Fred the Shred (£3.99m).

Chris Giles chronicles Mervyn King’s faltering response to the credit crunch and the fading power of the Bank:

Success certainly bred a certain arrogance when it came to views about how the economy worked. Dismissing as “an old shoe” the idea that asset prices should be taken into account when setting interest rates, [King] said those who worried about the effect on consumer spending of rapidly rising house prices were peddling “mindless regressions” and should instead think about the economics. “Housing does not determine consumption; there are more fundamental influences on consumer spending,” he insisted.

Such confidence now looks like hubris. In his most recent speech, Mr King conceded: “It is clear that policy did not succeed in preventing the development of an unsustainable position.” Last week, presenting the Bank’s inflation report, he added: “I’m not pretending that everything worked – well, it clearly didn’t.”

The lack of attention given to the Bank of England’s grim forecast for the economy is bizarre. Mervyn King basically said the recession, from peak to trough, will be two times worse than the Treasury expects. That knocks about £30bn to £40bn off official GDP forecasts, hits the tax take by up to £20bn and raises the deficit from 8 to closer to 10 per cent of national income. You have to wonder why David Cameron decided to raise VAT in the Commons on Wednesday and ignored the big “gloom gap” between Gordon Brown and the Bank.

For those who are interested, the calculations are based on this Bank fan chart. It is not a straight comparison with the Treasury forecasts, so the figures have to be put into a spreadsheet.

Chris Giles, our economics editor, did the sums:

The Bank’s forecast, after taking account of “downside” risks, suggested the economy would shrink by more than 3.5 per cent in 2009 with only anaemic growth in 2010, according to Financial Times analysis. Its projections are far worse than the Treasury’s expectation of a 0.75 to 1.25 per cent contraction in 2009 and 1.75 per cent growth in 2010.

From peak to trough, the risk-adjusted estimate from the Bank predicts a 4.6 per cent economic contraction, about twice the latest Treasury forecast. The Bank’s prediction is that we are living through a period that is worse than the 1990s recession and on a par with the 1974 recession, but not quite as bad as the early 1980s. What is really terrifying is the Bank putting more than a 10 per cent probability on Britain seeing no growth until 2013.

What does this mean politically? Brown and Darling’s PBR estimates were far too rosy. The budget will be grim. Both parties may need to rewrite their plans to adjust. The chances of a noticeable upturn before the election are tiny. Labour will be fighting for votes on their response to the economy, without having the evidence to argue it has worked.

UPDATE: I forgot to add that one of Brown’s team said Cameron’s performance at PMQs on Wednesday was a “bit of a Ronny Rosenthal”. Watch the video to see the great Ronny in action.

It’s the question being asked today - and the best explanation I’ve seen is in this morning’s Lex column:

Britain came off the gold standard in 1931 and sterling devalued by 28 per cent. The economic crisis that followed marked the end of the UK as a global power. It also led to an effective default on almost half the national debt, which was restructured into bonds still outstanding. Parallels with today are eerie. Since the middle of 2007, the trade-weighted pound has fallen by 27 per cent. Furthermore, as the government shoulders contingent liabilities for ever greater amounts of delinquent bank debt, worries are growing about the state’s finances.

British banks have about £4,000bn of assets on their balance sheets, equivalent to 2.5 times gross domestic product. If losses on these assets accelerate, the banking bail-out could segue into a sovereign debt crisis. Investors might push up borrowing costs, then, if rattled, refuse to buy UK government debt altogether, triggering another run on the pound.

So far it has not panned out that way. Spreads of 10-year UK government bonds over German bunds tightened up to Christmas. This year, though, spreads have widened and the cost of insuring against sovereign default has risen. In the credit default swaps market, the UK is viewed as a riskier borrower than France and similar to Spain.

A back of the envelope calculation illustrates why. Assume the state takes ultimate responsibility for all of Britain’s banks. Further, assume that 15 per cent of those banks’ assets are worth nothing. The write-off would be equivalent to about £600bn or a third of GDP. Britain’s debt to GDP ratio is about 54 per cent; add in these and other bail-out costs and the ratio could easily double. That would make the UK comparable to Belgium, Greece and Italy - none of which, as Merrill Lynch notes, has a triple A credit rating.

A downgrade could cost the UK dear. Investors obliged to hold only triple A paper would have to sell - as Spain may soon discover following its own rating downgrade yesterday. In another world, this might cause a run on the pound. In this world, however, sterling’s saving grace is that no other currency, even the euro, is in a much better situation.

UPDATE

Latest news: sterling plummets

A politically explosive economic policy was smuggled into the bank bailout today. With little fanfare, the Bank of England was given a green light to start printing money, should it deign it necessary to do so. Welcome to the world of “quantitative easing”.

Alistair Darling insists he has not yet embarked on the economic equivalent of alchemy: creating money to prop up the economy. But, while we have not started printing the bank notes, the presses have certainly been primed.

The framework for it is a £50bn fund, created today, which allows the Bank to buy corporate bonds, among other assets. It effectively allows the Bank to lend directly to big companies.

This falls short of “quantitative easing” because it is financed through the issuance of Treasury bills. In other words, the supply of money would not increase. But make no mistake: this is one gigantic step towards a policy of printing money.

The Bank now has the power to create money to buy assets, should it decide that cutting interest rates is insufficient to meet its inflation target. The asset purchase scheme basically provides the means for it to push money into the economy.

Quantitative easing is so politically explosive, it has acquired the status of “a banned phrase” at the Bank. Given this, it is little wonder the measures have been so downplayed.

Nevertheless, there are plenty of rather important questions to answer, not least over the decision making process. Who, for instance, will take the decision on whether to “ease”, the Bank or the chancellor?

And how will the Bank decide which companies to lend to? Will they be betting against the market by backing companies that fail to raise money? What experience do the Bank officials have of judging the worth of corporate paper?

We should hear more about it in a speech tomorrow by Mervyn King, the Bank governor and Alchemist in Chief.

This blog asked yesterday morning whether Gordon Brown really meant what he said when he demanded that banks should quantify all of their toxic loans.

A research note put out on Friday by analysts - at RBS, ironically - points out that “the domestic UK banks are technically insolvent on a full marked-to-market basis” (although it adds that this is not unusual at this stage in the economic cycle). Is the prime minister sure that he wants them all to come clean?

Meanwhile here is the reaction from Capital Economics to this morning’s package:

“It will now be hard to criticise the UK Government for lacking the initiative seen so far in the US. The
Government has also tackled criticisms of its so far piecemeal approach. However, as we have argued
before, there is no magic solution to this crisis and even these measures may not be enough to get
banks lending at reasonable levels again, at least for some time.

“We continue to think that state-decreed lending controls, perhaps via widespread nationalisation, may ultimately be required. While we are not there yet, today’s measures are a crucial step in the right direction. But we still think that a contraction, or at least sharp slowdown, in bank lending will lead to a prolonged period of economic weakness.”

*

Yesterday I didn’t bother to comment on Margaret Beckett’s daft* comments in the Sunday Times that the government needed to brace itself for the next housing boom and that first-time-buyers “shouldn’t delay” (“when the upturn comes, there will probably be a mad rush”).

Beckett sympathises with the view that renting is money down the drain: “Why is it that people in places like France or Germany or the Netherlands, or wherever, don’t want to, don’t care, about owning their own homes? Maybe it’s they who are the people whose attitudes are a bit surprising.”

The obvious answer lies deep in the RBS report.

“Debt servicing affordability is the best measure to predict property price levels, if not theoretical ‘fair value’…..It is currently cheaper to rent than buy UK residential property. To generate a rental yield 1 per cent higher than the average mortgage rate would require a further 20 per cent drop in house prices.”

* William Hague described the housing minister as “divorced from reality”.

This morning’s papers were full of info about the new insurance package which will help out any British bank which accepts the government’s offer. Here is the story on ft.com.

The real news to emerge since then is the fact that banks will be able to pay for this insurance using either cash or equity. In other words, we may see taxpayers taking an even bigger stake in RBS or Lloyds/HBOS. In theory the state may even take stakes in other banks - such as HSBC or Barclays - although this seems unlikely for now.

A scheme to ring-fence toxic assets on individual banks’ balance sheets and insure them against default looks set to be the centrepiece of the latest bank bailout - which could be announced as early as tomorrow*. Read more about it here.

This has the advantage that bad loans would not have to be marked to market. That would not have been the case under the more generic “bad bank” idea, which would have meant all banks tipping their toxic debt into a single which the government would then have to value.

But wouldn’t this undermine Gordon Brown’s claim - in an interview with the FT on Friday - that banks must admit how many “toxic assets” they have on their balance sheets?

Continue reading "Does the government want toxic assets marked to market: or not?"