Tag Archives: toxic debt

Almost £215bn of Lloyds £260bn toxic dump on state can be tracked to HBOS

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The first of a double whammy on the Scottish taxpayer is our share of the debt burden of £260 billion of toxic ‘assets’ (as expensive mistakes are known in the upside-down world that is banking) that Lloyds have just dumped on the state for ‘insurance’.

The second hit is on pride rather than pocket. It is the traceability of around 5/6ths of this debt to HBOS – or what we still think of as the Bank of Scotland. This amounts to around£215 billion.

And in doing this neat transfer, Lloyds have arranged a valuable bonus not given to RBS in its own dump of £365 billion on the ‘state asset protection scheme’. In exchange for its generosity in this ‘asset’ insurance, Lloyds has negotiated a tax concession likely to cost the exchequer at least £7 billion in lost corporation tax.

The deal is that Lloyds ‘pays’ (and yes, this is no more a payment than the ‘assets’ are assets) the Government £15.6 billion as its insurance premium to protect the £260 billion of assets now lodged in the ‘scheme’ (now there’s an accurate word).

Lloyd’s will then be responsible for the first £25 billion of any – inevitable – losses but will be allowed to offset these losses against taxable income, a revenue loss to the exchequer of £7 billion.

Lloyds will also bear 10% of losses over £25 billion, with the state carrying the other 90%.

And the ‘paynent’ that isn’t a payment? Well, it’s payment in kind. Lloyds is giving the Government new ‘B’ shares in the bank with the right to convert these later into ordinary shares.

Quite how £15.6 billion can be translated to any particualr number of Lloyds ‘B’ shares in today’s gravity-affected market in banking shares is another matter.

The UK Government is burying bad news by making Sir Fred’s pension the headline issue – and Peston is the Patsy

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The row over Sir Fred Goodwin’s pension is the distraction the UK Government’s spin doctors literally ordered in the leaks they engineered yesterday. The real story is not Sir Fred’s £693 THOUSAND annual pension but the £24 BILLION annual loss that RBS declared yesterday (the biggest in UK corporate history), the £300 BILLION of toxic debt RBS insured yesterday with the taxpayer (us) and the £2 TRILLION national debt we now carry.

This was yesterday’s real story – and today’s – and for more tomorrows than we dare count.

But the Government threw Sir Fred into the road – a meaty bone the news media hounds seized on savagely, too blinkered in the rush for blood to see the real carrion, the carcase in the shadows – as the spin controllers knew they would. The carrier pigeon for news on the road-kill decoy was the government’s new trusty, the BBC financial journalist Robert Peston who makes John Redwood – aka The Vulcan – seem normal.

Peston blew the whistle on Goodwin’s pension on cue on Wednesday night’s 10.00pm news – in good time to lessen media interest in the profoundly bad financial news to be released the following day.

There are major issues of policy and principle around what we are learning of the way people in certain sectors are paid and rewarded but these are far less pressing than the genuinely frightening level of debt the UK is now committed to carrying.

Even Mervyn King, Governor of the Bank of England has now said that if Britain had not gone into this recession with the level of public borrowing it had already taken on under the Blair/Brown governments, the Treasury and the Bank would have had more scope for effective action to resist the economic slide. This criticism of Government performance by the head of the Bank of England is unprecedented and is a sign of the seriousness of the UK’s current position.

Sir Fred’s pension is not the issue. His unregulated actions on behalf of RBS are the issue. The UK Government decided to go for ‘regulation with a light touch’, which of course meant little or no regulation of the banks by the feeble FSA. This was a tacit invitation to the banks to go bald-headed for profit – which led to the current collapse of the banking system.

This collapse resulted in the government going in for panic-driven progressive borrowing, all caution thrown to the winds in the interests of political survival. And the presses of the Royal Mint are due to start rolling next week in the interests of ‘quantitative easing’.

So let’s keep Sir Fred in our sights for later on but let’s not take our eyes off the cosmic cloud of ordure that’s hovering above our heads.

And by the way, it’s  not over yet. The Lloyds Banking Group will only say that it is in discussions with the UK Government, which are progressing well. These discussions are thought to relate to the group’s wish to follow the RBS into insuring another welter of toxic assets with the taxpayer. And what they want to ‘insure’ (Alistair Darling’s term for this liberating manoevre – ‘asset protection’ – is even more laughable) is said to be around £250 billion of toxic debt.

£2 trillion of a national debt already looks like a very conservative estimate.

RBS restructuring may lose 20,000 jobs as Brown prepares to print money and insure toxic debt

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Stephen Hester, the new CEO of the Royal Bank of Scotland is dividing the bank into two main elements – today’s core business which is profitable and will carry on; and a peripheral cluster of ‘assets’ which will be sold as soon as buyers can be found. These ‘assets’ are the £300 billion debts – mostly toxic – acquired during the disastrous investment banking adventures that have brought the bank low.

Hester needs to show his shareholders that the heart of the RBS can succeed. Splitting the structure in this way means that he can point to one and try progressively to dispose of the other.

The identification of assets to be put up in a fire sale will inevitably mean job losses and industry experts are predicting that these may run to 20,000.

This news comes as Gordon Brown announces a plan to spend £500 billion in insuring the so-called toxic debt acquired by UK banks while at the same time pumping £15 billion, much of it new money, into the mortgage market by 2011 via Northern Rock. This is being done in an attempt to reverse the movement of the economy towards a settled recession.

Experts predixct that this move will itself create a twin track mortgage market, even within Northern Rock itself. Current mortage holders will continue to face repossession while new mortgagees will see much more favourable terms under the proposed injection of ‘new Government money’.

The national debt is now at a frightening level. Last week it was independently estimated by the Office of National Statistics at £2 trillion, when the value of the banks’ toxic debts are included.

Brown’s latest gamble – in insuring these debts and in going for what is called ‘quantitative easing’ – or printing money, as it is less ambiguously known to most of us – is also frightening. It may be too little too late.

On the one hand the UK is borrowing on an unimaginable scale and one which will bring real and widespread pain in the repaying.

On the other hand, Brown’s response pattern from the start of the collapse of the banking system has been to do as little as possible and to leave that until he had no alternative.

This means that none of the moves to date – however much they have cost us – have achieved the necessary stabilisation of the economy. From the reluctant, progressive upgrading of the bank guarantees to savers onwards, each move has been too small, too late and too indecisive. In effect, it has largely been wasted money.

Since early last Autumn when the financial industry began to unravel, there has been an argument that Brown’s best strategy was to make an early, large and bold move. But that is not his character.

The real nightmare is that the current massive debt will be our long term burden without achieving anything significant. It has been accumulated progressively, in fire-fighting dribs and drabs, each of which has vanished without impact.

However mad it seems, printing money might work in hands other than Brown’s but, with his track record throughout this crisis, hope that he might get this right would fly in the face of the evidence.

Brown has also set his face openly against a course recommended by many experts – dividing banking into two functions: the normal high-street retail banking and the high risk investment banking sector. The decision to carry on with the current twin-function banks will leave the taxpayer, now the owner of so much of the UK’s banking stock, liable for the risk-taking sector which could otherwise be hived off as purely private sector ventures.

Extent of real HBOS debt beginning to emerge – For Argyll covered this months ago

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The UK financial world reeled under shock waves yesterday (13th February)  as accountants pronounced that the situation demonstrated by the HBOS  books was considerably more serious than they had previously thought. HBOS revised its loss forecast for the year upwards from around £8billion to almost £11billion. Lloyds TSB shares took a 32.5% dive after the news.

For Argyll has twice warned about HBOS’s significant exposure to Alternative A mortgages (Alt As) in the USA – mortgages which have proved more toxic than the better known Sub-Prime variety.

It is unlikely that today’s announcement is the end of this story. The eventual outcome is increasignly likely to mean the new Lloyds Banking Group joining Northern Rock as a whoilly nationalised bank. Chancellor Alistair Darling has refused to rule out this option.