By Andrew Hill
Published: January 20 2009 20:19 | Last updated: January 20 2009 20:19
They must be out of practice, but those in favour of rapid nationalisation are making some terrible arguments for sweeping British banks into public ownership. Here are the three worst:
1. I’ve started so I’ll finish.
The government’s action so far has been condemned as “creeping nationalisation”. But the good thing about creeping, as opposed to sprinting, is that it’s easier to stop and reverse course if obstacles are in the way. It’s true the government took time to conclude in 2007-08 that nationalisation of Northern Rock was the best way out of its predicament. Some Labour supporters believe the Conservatives might have done the deed more quickly, because they carried less ideological baggage about previous failed nationalisations. But the conclusion of that sad affair is not that the government should nationalise at the first sign of trouble but that it should move more swiftly to try other options.
2. Put shareholders out of their misery.
Equityholders’ misery is indeed profound. Insofar as they were active backers of the expansion drive pursued by some banks, notably Royal Bank of Scotland, until the credit crunch hit, they deserve to suffer the consequences. But apart from the risk of full nationalisation, few believe RBS shares are really worth 10.3p, down more than three quarters since last summer. Those still invested in the bank and its listed rivals presumably want to retain an option on recovery. To “put them out of their misery” would also be to put them out of their potential profit, however far off that seems. Retribution, yes, but also expropriation.
3. It may be messy, but it won’t last long.
Nationalisation can’t easily be executed and then unwound, private equity-style, whatever Guy Hands or Jon Moulton may say. As they know well, that trick is hard enough for buy-out firms to pull off these days, let alone governments.
Let’s make no mistake: public ownership would be for the long haul. The longer it took to refloat the banks, the more obvious the disadvantages and dangers would become: distortion of competition (either too much, under government protection, or too little if the whole system were nationalised); politicised lending; the withering of the City as a contributor to the UK economy; the ravaging of sterling; the potential destruction of Britain’s sovereign rating.
Some of these threats are already evident. Lloyds TSB, down an extraordinary 31 per cent on Tuesday, is already pricing in a domino effect that could be triggered by full nationalisation of RBS. Having crossed the ideological Rubicon with Northern Rock, there are good reasons why the government should not rule it out. Pricing toxic assets is hard, but with the full backing of the state’s balance sheet, the non-toxic assets could be distilled from a bank without having to set a perhaps artificial value for the rest. If there were evidence of a run on RBS or Lloyds, experience suggests nationalisation would be the best way of calming the panic. But outside the stock market, there is no run. The latest and most comprehensive package of government proposals remains untested. If there’s a need for speed, it is in fleshing out those plans. To jettison them now in favour of action that would be hard to reverse would be impatient and imprudent.
IG hedges its bets
OK, so it is not quite comparable to burning the fingers of every taxpayer in the country. But the slow-motion crash that is Royal Bank of Scotland caused a dent of its own in IG, the spread betting company.
Yesterday, IG confirmed a well-trailed, but still hefty £14.7m doubtful debt charge – nearly 12 per cent of revenues at the interim stage. Much of it was as a result of clients wrong-footed by the collapse in RBS stock back in October. But here is what the world’s banks could learn from IG: keep it simple and protect your downside.
After the autumn’s fun and games, IG has cracked down on credit risk. It now moves more quickly to close out deteriorating positions before they drag clients down. Imagine if Wall Street had forced its prop desks to shut down positions in subprime mortgage derivatives before it was too late. As for market risk, IG has come through a wild ride without falling off. It hedges where it needs to – when clients’ trades do not offset each other – and monitors its exposure to different sectors. It helps that you don’t need a PhD in astrophysics to understand IG’s products. Indeed, the recession does not seem to have dented people’s confidence in their own trading abilities: the company opened more than 36,000 financial accounts in the six months to November. IG may even benefit from job losses in the City if unemployed traders, free from compliance rules, keep their hand in by using its products.
In short, in times of trouble for most financial services, IG offers a little consolation.
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