Backroom battle rages: what do we get for £35bn?
This week I have taken a punt on two propositions in my work on Newsnight: first, on Wednesday night, in response to a bank briefing, I said that some banks would not take up the offer of state recapitalisation but some would ask for so much that the state could more sensibly buy them; then on Friday, a day off having failed to soften my prognosis for the world economy, I said - and believe me it was wierd saying it on Newsnight - that the world is on the brink of a system-wide economic meltdown. And that a socialised banking system was probably the only alternative to a slump.
The Sunday papers appear to vindicate both these calls. Here's David Smith & Dominic Rushe in the Sunday Times:
"Tomorrow the first of the British banks to be bailed out by the government's £400 billion rescue plan will reveal how much money they want. Royal Bank of Scotland (RBS), which has seen its market value fall to under £12 billion, is to ask the government to underwrite a £15 billion cash call. HBOS, Britain's biggest provider of mortgages, is demanding up to £10 billion, while Lloyds TSB and Barclays require £7 billion and £3 billion respectively.
Although existing investors will have the right to put up the new capital, and some may do so, the rescue could leave the government owning 70% of HBOS and 50% of RBS."
Just hold that thought a minute. The current market value of HBOS is 6.7bn. If it is demanding up to 10 billion then why does the government not simply use 6.7bn to acquire the company? ...
...There is an editorial in the Observer demanding contrition and a change of behaviour from the bankers. This shows it has now gone beyond money and into emotional territory:
"If the bankers will not volunteer to give an account of themselves, they must be compelled to do so before a public inquiry. It will take a forensic examination of how this crisis came about to design a regulatory system to prevent it being repeated. It will also take some show of contrition by bankers before public confidence and trust in the financial system can be restored."
Philip Aldrick, in the Sunday Telegraph seems to agree with my perception, that it would be easier to nationalise them than to bail them out without actually demanding behaviour change:
"Under the bail-out as proposed on Wednesday, the £25 billion recapitalisation would have been achieved largely through the issue of preference shares, a kind of debt that offers taxpayers' better protection than straight equity. Since then, it has become abundantly clear that the banks need principle equity - in other words cash for part-ownership - to meet regulatory demands and to restore desperately-needed confidence. Preference shares simply won't cut it any longer. As a result, the taxpayer may face the prospect of becoming a majority owner in the banks if the existing shareholders stay away."
To see the headline "Nationalisation - no longer a dirty word" in the Telegraph shows you that here at Newsnight we are not the only ones having to go through mind-bending leaps.
The Mail on Sunday places a different interpretation on the bailout plan: that the government will simply act as underwriter for new ordinary shares, hoovering up any that are not bought. This is a "market version" of the bailout and is what the banks would prefer, since they get effectively a free lunch. Instead of preference shares...
"it was understood last night that the banks would simply offer new shares to existing investors, with the Government agreeing to buy any shares not taken up, ensuring the banks would get the cash they wanted."
So, to translate all this, there is a massive political struggle going on with the banks. They want simply to be bailed out through state participation in a market mechanism that leaves them fundamentally unchanged in constitution; the reason is that two of them - HBOS and RBS - are in such severe difficulties that it is touch and go whether their shares could be traded tomorrow.
And one other detail: since the taxpayer has already waived the competition rules to allow Lloyds TSB to acquire HBOS, why should we now underwrite the takeover? Is it not cheaper to nationalise HBOS - and possibly bring a bigger upside for the taxpayer in the medium term as well?
All these arguments are going on way above the heads of the British people and behind closed doors. The Conservatives, a senior Tory says to me, are stricken by paralysis because they had an argument between George Osborne and David Cameron: Osborne reportedly did not want to give Brown carte blanche on the bailout and Cameron did; and Cameron won. Some senior Conservatives think this is as mistaken as Iain Duncan Smith's acceptance, on what is now perceived to have been a "false prospectus" of the Iraq war.
Meanwhile on the Labour back benches, again, paralysis: John McDonnell is the only Labour MP who is not a minister who is doing any business through the hallowed portals of 4 Millbank (where the TV studios are). He is, he says, gettting very little traction for his calls for outright nationalisation with heavy conditionality among the PLP.
However today's headlines might cheer him up. He is getting traction among the IMF, the G7 and the Eurozone it seems, plus the Telegraph, even if the PLP think he is bonkers.
Once this is over I predict soul-searching within both main parties as to why the elected politicians just stood there and watched it happen.
One final look-ahead. The news machine is so denuded on a Sunday that maybe nobody has noticed:
"Hungary's markets and currency took a particular beating, following a collapse in government bond trading Thursday and rumors of an impending state bailout of the country's largest bank, OTP Nyrt, which the bank and Hungary's government denied.
We already know the phrase "the Icelandic government stands behind all savers" is a joke. We are now about to find out how resilient the governments of East Europe are in the face of this. If they are not, given the strength of far right opinion in both parts of the old Austro-Hungarian heartland, I would see central Europe as the first place where economic collapse leads quickly to social unrest.