RBS & The Stupid Club


Talking of stupid people, oh look there's RBS back on the radar again. Just when you thought the circle of insanity couldn't possibly strain credulity any more than it has over the last couple of years, we learn yet again how laughably naive it is to underestimate the capacity of this organisation to undershoot even the most modest expectations.

In this instance, we learn via David Malone of an article in the Irish Independent that RBS are thought to have lent financial basket case Bank of Ireland €2.9bn in fresh short-term funding.

As Malone points out, (here), "of course RBS is owned by you and me. So a British bank which was nationalised to save it from insolvency, is now lending to an Irish bank to save it from insolvency and being nationalised."

Importantly, Malone goes on to speculate, " we have to entertain the possibility that RBS is lending to cover larger losses if BoI was to fail. RBS is one of the British banks I have long suspected was heavily exposed to Ireland. I think RBS is trying to save itself via this deal. The banks call it a loan. I see it as a bail out. The two states are using private banks as cover."

Now the common or garden taxpayer, he's the majority owner of RBS and convenient backstop when RBS blow up again, knows little about any of this; he ought to, a few more alert people on the Outrage Bus just might help restrict some of these activities. 

The same common or garden taxpayer, that would be you and me, are the very individuals that RBS are enthusiastically charging up to 17% APR for personal loans which, by any standard, borders on usury when the Base Rate is 0.5%.

George Osborne and David Cameron can wring their hands about growth as much as they like but the economy will not grow when it is being strangled at birth. Lending to barely solvent Irish banks at 2.76% above LIBOR while charging much better risk individuals 17% is just stupid. Add penal tax rates, galloping inflation in essentials, (food, energy, travel etc), and cash in short supply and you have all the ingrediants for big political swings not just here but across the EU. With youth unemployment mushrooming across many member states, and apathy reigning amongst the older generations, cash in very short supply, conditions are moving rapidly towards those in Germany in the 1930s.

As for RBS, they ought to be firmly in the business of derisking and breaking themselves up into their constituent parts, none of which was particularly special on their own before but my goodness 2+2 didn't make 4 never mind 5 when added up by Goodwin. Separating investment banks from retail banks is about the only crusade that Vince Cable has got right. 

We can only hope then, that there are no more rocks out there for................ oh bugger!



Barclays; Anyone See an Iceberg?

The hand wringing class warrior liberals, led by Rusty Cable and the Boy Clegg, joined by innumerable Tories who are torn by a deep seated sense of self need and corrosive envy of their contemporaries in the City cannot help but focus on "Bankers Bonuses."

As we have discussed here before, this is the wrong target for legislators and regulators to be aiming at. They need to be closely examining the origin of the "profits," on which the bonus payments are based. In fact, not much has changed since the crisis, which has thrown ordinary decent people into penury, and precious little has been done to stop a reoccurance of a bad thing happening. Some might say the system is even less robust now than before.

Not to worry though, I'm here to help them ask the right questions.

When I joined the City the compensation system was very simple. Everyone was paid a reasonable basic salary and in good years the bonus pool was distributed by partners. In bad years  the bonus pool was reduced or cut to zero. Typically, the partners went unpaid and perhaps, might have put something together to give the junior staff a modest lift. That culture is dead, gone and buried. Now, individuals are compensated come what may. Their inflated sense of self worth has long ceased to have any correlation to actual profitability.

Indeed, Barclays is a case in point. By their own internal measurements BarCap, (the investment bank), actually made a loss so why they are paying anything is something of a challenge for the enquiring mind. If though, you want one scary statistic to mull over then think about this. BarCap's Gross Notional Derivative Exposure is growing again, up 24% year on year to £48.8 trillion.................................

Our old friend and contributer, Bankvilgilante has been looking under the skirts of Barclays and is somewhat troubled:

"The Barclays stock price performance on results day, and YTD, reminds me of 2010. Surging upwards on rumours of "good" FY 2009 results and then well-crafted FY results that drag in momentum investors. And then a long slow slide as actual results for the year show up a far less rosy, less spun reality. This might well have applied to all Euro-banks in 2010 and is what may be occurring in 2011 for the sector again.

Barclays is not an attractive entity to own. Eighty (80%) of 2010 PBT was from BarCap, £4,780mn. And this is more or less normal situation at Barclays Group these days. Some very high loan losses from something called "Barclays Corporate" led to that unit showing a negative PBT of £631mn and possibly inflated the BarCap relative contribution to group profits, but not by much.

The "Corporate" loan losses came from what was once the Spanish unit inside what was once "Global Retail and Commercial Banking". It's not easy to keep up with the constant re-shuffling of operating units at Barclays, itself a bad sign from any company, especially a bank. What the heavy losses in that unit illustrate is that non-organic, non-BarCap growth at Barclays is very challenging and not such a priority anymore.  There were also losses in Western European Retail, falling Pre-Provision Profits in UK Retail (8% down), flat profits in Barclaycard (quite recently a major growth story) and in ABSA (a recent, expensive acquisition).

So Barlcays is BarCap, and BarCap is Barclays. Mysteriously BarCap has 80% of the PBT but only 35% of the "economic capital". This ratio doesn't seem right, but then the head of BarCap is now officially running the bank and all the best paid, best brained, people are in BarCap. Those BarCap guys effectively run the capital allocation and it is no surprise it massively favours them. Thus, BarCap is the growth pole inside the group as it shows the best return on economic capital, by far.

It's just that no one should want to own Barclays as BarCap's real, market-tested, economic capital would be 2x or more what it gets allocated internally, and the cost of that capital  (COE) would be above the group's own 12% COE calculation. BarCap returns would then be below the COE and,logically, it should shrink severely. Barclays itself showed an "economic loss" for 2010 of £2,488mn an increase from the 2009 "economic loss" of £1,890mn. The loss is calculated by deducting a capital charge at a 12.5% COE from net profits. More "losses" going forward would be a problem, surely, for the group. However, the new CEO, approved by the FD and the Board, is going to lower the COE to 11% in 2011 and 10% in 2012.

This should help.

I note that that old bugbear of mine, the Gross Notional Derivatives volume is growing again, up 24% YoY to £48.8tn (yes, trilliion). Obviously this is not a risk, according to banks, as the positive replacement values (the asset) are just £420bn  and the negative replacement values (the liability) a handy £15bn lower at £405bn. The accumulated, unrealised gain (sorry, positive balance) on derivatives, was up by £1.5bn in 2010. These derivatives are mostly interest-rate derivatives. The £420bn assets is subject to bilateral "counterparty netting" that reduces the net exposure to £80bn, and £37bn of collateral is held for the gap, leaving £43bn of "net exposure less collateral" according to Barclays. There are many risks in all this: the valuation of the gross notional derivatives to get the replacement values only a small minority of the contracts are traded on exchanges or even centrally-cleared; the quality of the counterparty netting, especially its legal enforceability across subsidiaries and jurisdictions in the event of a group-wide default; the quality of the collateral.

In my view, Barclays is operating in something of a fantasy-land, egged on by brokers at similarly structured investment banks and seemingly unconstrained by the regulators. However, market reality does eventually assert itself as all the investment banks compete hard with each other, driving returns down, leading to higher (largely hidden) gearing, and much volatility in results. They can't help themselves while they are able to arbitrage the benefits of sitting in (on?) a core Too-Big-To-Fail retail bank."

Icebergs Ahead?

Bloody Trains Rant

Coalition Transport Spending Plan

I don't believe for a moment that any of us war weary infantry in the trenches are in the least bit surprised in the supposed revelation that Vince Cable believes that he could bring down the coalition at any time of his choosing. The only surprise is that Vince Cable might think that any of us care in the least what he says. We're all just too familiar with the massive egos and arrogance of these people to be surprised which is not news given one of the people who has least earned the right to ego and arrogance is Mr Cable. Greatness doesn't come from just regurgitating the last thing you read on the internet.

Unfortunately for the rest of us, there is indeed no limit to the ego of all these people for they all leave humility at the front door of Westminster the moment they walk inside. The way they like to project their largesse and public spirit is, somewhat tragically for the long suffering taxpayer, by embarking on huge vanity projects at our expense. That we neither need not want them is irrelevant as they seek to concrete themselves in the public conciousness Oh you will lads, but for the wrong reasons.

£800m on the Millennium Dome would be a good place to start in the lesson, "How not to do it," but Westminster missed that and hurtled on to drive a coach and horses through what taxpayers wanted by throwing what will end up costing £20bn to keep Lord bloody Coe quiet on the Olympics. £20bn? Let's just stop for a moment and question this insanity. Yesterday a great big PR fuss was made of the floodlights being switched on and £65m being given to sport for schools. Here's a reality check - for £20 bn we could give every secondary school a top class gymnasium and small stadium. In fact, all our schools could be equipped just like those cutsy American High schools you see in the movies. Instead, we're spending an absolute bloody fortune on a bunch a minority sports that no one ever pays to watch. The utter waste is criminal and the servitude to the IOC is demeaning to every Briton that has ever drawn breath. The Russians got the World Cup; let's just give them the Olympic fools errand too, in fact, we should pay them to take it and retain some dignity and cash flow.

But political vanity projects are the order of the day for every administration and so the Coalition have theirs....... fast trains to bloody Birmingham. Well, that's a good way to spend £34bn isn't it?

Here's a little bit of context for you from our friends at Think Defence; despite all the drum beating about the Military Covenant, this is what the Coalition have achieved to date,

  • Reducing the planned purchase of 22 Chinooks to 12
  • Cancelling Nimrod MRA4
  • Reducing armour and artillery
  • Reducing surface vessels
  • Reducing Tornado
  • Withdrawn Harrier GR9′s
  • Withdrawing Sentinel
  • Slashing allowances and expenses
  • Setting up the armed forces for a post Afghanistan change in terms and conditions of service
  • Implementing a 2 year pay freeze
  • Reducing pensions
  • Reducing service personnel by 17,000
  • Reducing the MoD Civil Service by 25,000 which will likely result in more work for service personnel

Moving swiftly back to the £34bn we're about to hose on getting to Birmingham marginally more quickly than we already do, these people, well the Government I guess, (they could be aliens for all the familiarity they demonstrate to the lives of taxpayers), need a reality check. Obviously, I'd like the reality check to be a swift kick up the rear but instead I'll make this as simple as I can,

"We don't want to travel at 250mph, we simply want to travel at reasonable cost and with a reliable service."

My season ticket costs £5256, plus £800 a year to park my car at the station; that's after tax. Given we subsidise South West Trains anyway,  the true cost to the traveller can only be guessed at. I won't bang on about the wanton exploitation of the travelling public by South West Trains because I've talked before about them stripping out lavatories on trains to cram in more seats, about using small suburban trains for inter city services and that rather special couldn't give a damn attitude to snow clearing on their premises.

The point here, is that the Coalition should stow their egos and focus on just what would help the travelling public and the workforce and it isn't fast trains to Birmingham. Indeed, if I were a betting man I can almost guarantee that it will end up costing £50bn and the rest of us will enjoy fare increases to compensate for their utter stupidity. Muppets.

 As a postscript, I found this comment on a post on Andrew Gilligans blog interesting and exactly the sort of thing the government should be making their business to explore. They won't, it doesn't massage the ego enough and strangely, I can't now find the comment on the blog; here it is anyway:

"My favourite suggestion that went nowhere, was from a South-West Trains driver who had noticed that if you were to build a mile-long spur from a point a mile south-west of Feltham mainline BR station up between the Bedfont Road and the Primary school and past the Clockhouse Roundabout into Terminal 4, you could have a very cheap Heathrow Express, going into the surplus international-spec Eurostar platforms at Waterloo once the cross-channel trains started going into St. Pancras."

Stand up whoever you are and find that bloody driver; we can't afford to let original thinking like that fall by the wayside.


Vince Cable; Business Terrorist

I see that senile, gibbering old socialist Vince Cable, who made his name by regurgitating whatever he last read in the Economist during the bank crisis, has been playing to the gallery again.

"“The Government's agenda is not one of laissez-faire. Markets are often irrational or rigged. So I am shining a harsh light into the murky world of corporate behaviour."

Don't bother presenting any facts to substantiate slandering an entire industry, especially when much of the City was for years very vocal in criticising the very banks that were rescued. That'll bring foreign investors flooding in then. Well done Vince boy......... you're doing a better job than Harold Wilson in driving our best away and keeping foreign investment out.

The basic problem that British citizens face is a growing environment of inflation in the things they need, ie food, energy, consumables and basic services, whilst they will increasingly struggle with deflation in the things they own such as houses, cars and collectables. All this against a backdrop of rising unemployment and falling real incomes means life is going to get very uncomfortable. Mr Cable's task is to address this by unleashing the latent energy and potential of our business sector by attacking bureaucracy, political intervention and reducing taxes to free up our business sector to create wealth. It's not to demonise and hunt down hundreds of thousands of productive people, simply to get the unwashed at his conference who cut their own hair and wear clothes made from rafia clapping.

The shadow banking system is quietly being deleveraged and that leverage is going straight onto the taxpayers balance sheet. The middle class will be eviscerated in paying for it. The poor will be poorer and will eventually take to the streets and those who can get out, will get out. There is still time to arrest the problem but the clock is ticking. Vince Cable is chasing made up monsters and yet again, we'll all suffer for it.

Cable is not a business secretary, he's a business terrorist. The sooner he's fired the better; muppet.

Liberals = Bonkers

Matt gets it about right in the Telegraph today when he asks, "Is it me, or does May 6th seem to be getting further away."

Traditionally, I look to the tofu munching Liberals to provide a bit of light hearted entertainment during the whole drawn out election thing. I'm pleased to report that this time round they are determined not to disappoint and have come up with some truly bonkers ideas that put them nicely on the edge somewhere between the pre war Politburo and Arthur Scargill.

Send for the men in flapping white coats in the van with the blue light on top.

This morning the Liberal Democrats have shown themselves to be a real threat to the UK economy with their delusional policy on the banking industry within the City of London . 

Let's just summarise what Mr Clegg and Dr Cable said this morning:
- No cash bonus over £2,500.    
- The rest to be paid in shares that cannot vest for 5 years and cannot be traded.
- No bonuses at board level.
- Full disclosure of any individual that is earning more than the UK Prime Minister - approx £200,000
- A desire to have a strong banking system in the UK.
So, are the Lib Dems just referring to banks that needed Government cash or all banks/brokers that operate in the City of London? What happens when a bank that did seek financial aid from the Government(Tax Payer) has extracted itself from the public sector and returned to the private sector?
What happens to a payment in shares if an individual wished to leave one bank to work for another?High fliers may find a new employer will make a payment to compensate...but then what becomes of the monetary value of the abandoned shares? 
Workers that are not high fliers count on their annual bonus... it can ease the cost of Christmas and for young workers or middle ranking officers they may not be able to walk away from shares in the current employer.
Is this a restraint of trade...is this in breach of the employment rules of the European Union?
How are board members to be rewarded? Watch the share price ahead of vesting date!
What is it with the level of income that the PM makes...how about we adjust for inflation the income earned for the 5 years after leaving office of Baroness Thatcher, Sir John Major and Tony Blair...the latter has truly coined it since leaving No 10.
Can the Lib Dems really believe that their polices have any merit in making the banking system or the City of London strong? As capital is international so talent can be so as well. Do they not have any concept of the multiplier effect that resonates through London and ripples out across the land?
This was playing to to masses on the grandest of scales. It is sadly in reality a very naive policy. Lending targets should be missed if the target can only be achieved by lending to untenable/uneconomic causes.
The net result of this nonesense will be higher salaries yet again, as I described in an earlier post, producing higher fixed costs which will be passed to the customers.  The banks will then be less competitive against international banks. Oh, and yes, more people will leg it abroad reducing the tax take.
Yes there is a need for reform, we have to celebrate and reward the intelligence and innovation in the City, not give it a dose of euthanasia.  You could hammer six inch nails into their foreheads without causing any damage: I'll say it once more for these stupid people; look through the compensation issues and seek out the leverage and concentration of risk that generate unusual returns. Both Bear Stearns and Lehman had extremely high levels of employee ownership and long term share lock in periods. Didn't help much there did it? Unfortunately, Mr Cable now appears to believe his own PR and has said goodbye to reality. These stupid people are avoiding doing the right thing and enacting good reform to create a more stable banking platform because they are either too stupid, too idle or just like to break things.

God help us if we have a hung parliament and this shower have any say in matters of any import.