Peter Sharkey

Peter Sharkey - the 2008 bailout was British banking’s Lance Armstrong moment

Friday, January 25, 2013
3.00 PM

The Governor of the Bank of England, Sir Mervyn King, strikes me as an avuncular cove, a chap possessing a patrician air, completely shorn of airs and graces. He’s a man who enjoys his cricket (he’s a patron of Worcestershire CC) and, as he approaches retirement in June, is probably looking forward to spending a little more time gracing cricket grounds across the globe.

His professional life, working as an economist, is rightly considered a huge success. Few become visiting professors at MIT and Harvard, while even fewer are capable of holding down an LSE economics professorship.

So it was disappointing to read Sir Mervyn’s recent comments in response to questions regarding the likelihood of our already bailed-out banks requiring even more money, up to £30 billion according to one MP.

“The sad truth is,” said Sir Mervyn, “in 2008, the idea of focusing efforts on recapitalising the banking system was a UK idea. We got there first but, like many UK ideas, the Americans developed it faster and better.”

Unfortunately, this comment is best interpreted as: “the Government was guilty of commercial naivety on an industrial scale.”

While Bank of England officials were warning recently that RBS and Lloyds (respectively 82% and 41% taxpayer-owned) had until March to shore up their balance sheets by tens of billions, so the painful truth regarding the original bank bailout finally emerged.

It was what might be called British banking’s ‘Lance Armstrong Moment’.

You see, regulators have admitted that the Government massively overpaid when coming to the bank’s rescue in 2008. Furthermore, they have finally revealed that taxpayers (for it’s our money, dear reader) will not only never make any profit from saving the banks, they’re unlikely to even cover the cost of the initial investment.

By contrast, the US government has made average returns of 15% for saving their banks from imminent collapse. How did this happen?

As Sir Mervyn highlighted, the Americans looked at what Gordon Brown’s government had done in respect of banking recapitalisation and immediately recognised Britain’s enormous mistake.

Unlike the situation in the UK, American officials insisted that all major banks must accept state money – Uncle Sam then bought banking stock at around half its book value. It has already sold most of those stakes and trousered a 15% profit.

By contrast, the Brown government paid around double the book value for its shares in just three banks, which also happened to be the worst affected, RBS, Lloyds and HBOS. The latter of this toxic trio was effectively bust when Lloyds reluctantly took it over. The current share prices of RBS and Lloyds remain well below what we, the taxpayer, paid for them.

On top of this, investors face further anguish as both banks will probably need to sell part of their operations to reinforce their respective balance sheets.

Meanwhile, the ‘Funding for Lending Scheme’, established to provide banks with cheap taxpayer-backed funding to be used for lending to house buyers and small businesses, has also come under fire as the benefits of cheaper money do not appear to be getting passed on in full.

As Sir Mervyn slips into ‘demob happy’ mode, it’s a pity his legacy will likely be determined by a group of senior politicians who did not have an ounce of commercial nous between them. Whether matters have improved since 2008 is open to debate.