The UK National Audit Office yesterday confirmed that taxpayers have £850 billion at risk through government guarantees, subsidies, shareholdings and other support for the banks. This is a generous way of working out the figures. In practise taxpayers are on risk for £3 trillion of banking liabilities at Lloyds and RBS, as we all know it will be taxpayers who pay their losses if they make more. If we equity accounted for these two banks as private sector companies do, attributing some of the risk to the other shareholders, it is still a £2 trillion plus taxpayer commitment. On the NAO's figures public debt and financial risk is double the old figure, thanks to the banks. It now exceeds National Income on their figures.
The NAO also revealed that the cash cost of the banks so far to taxpayers is £117 billion plus refundable fees, producing a gross total of £131 billion. That is larger than either the Health or the Education annual budgets. Readers know that I recommended a far cheaper and less risky way of seeing the bad banks through the crisis. Now we are where we are, there are still cheaper and better options for taxpayers from here.
The overriding priority should be to cut the risk to taxpayers. Selling off foreign banks from within the RBS and Lloyds group would allow taxpayers to get cash back from their forced investments, and would reduce the risk of future losses. Winding up or selling on much of the investment banking business would also cut the risks. It would have the happy political effect of removing the highest paid executives with their bonus pools from the taxpayer. It would mean that next time a Dubai World stops making payments it will just be private shareholders and their bank executives who have to sort it out, not the hapless UK taxpayer and the state bank executives.
It is unlikely the government will do this. Their strategy seems to be based on carrying out the modest disposals required by EU competition law, and then waiting until they can sell shares in the banking Groups at a better price. As a result the UK state will continue to be very stretched not just by its running deficit and accumulating public debt, but also by the large additions to its financial risk from its ownership of two large banking groups.
This week the Bank of England announced that it might in the future sell some of the corporate bonds it has bought as part of its Quantitative Easing programme. As it has only bought around £2billion of corporate bonds compared to a planned £198 billion of gilts, it is a small sum. It is interesting, however, that it might wish to do this. The Bank added that it would buy additional gilts with any money it raised from the sales.
The Bank is not saying it wishes to start to reverse its QE programme. It is saying it thinks selling corporate bonds on yields in excess of 6% to buy gilts on yields between 1% and 4% is a good idea. It is difficult to see why. Most portfolio investors are going the other way, apprehensive about what happens to gilt yields when the Bank’s own massive buying programme ceases. It looks as if the Corporate Bond policy is another attempt to have enough fire power to keep gilt prices up for a bit longer. The given reason was the Bank wished to assist liquidity in the corporate bond market.
These developments reinforce our view that investors should sell gilts to the Bank whilst they are still buying.