Wednesday, 20 August 2014

Guest Blog: Bank Bailout Myths

Would you be surprised to hear that the biggest bank bailout of a British bank was Barclays and not RBS? Or that the USA contributed more to the bailouts of British banks than the UK? Finally did you know that banks are not bailed by the country in which they are headquartered?

Given all the newspapers, books and numerous investigations into the financial crisis have come to an opposite conclusion it was very surprising to read these points in “Scotland: Destroying Darling’s Bank Bail-out Myth” by Gordon MacIntyre-Kemp in the Huffington Post.

Before diving into the details it is worth just taking a moment to understand how banks were supported during the crisis. A big part of banking is about changing liquid assets (say a deposit in a bank account which can be withdrawn at any time) into an illiquid asset (say a 20 year mortgage where the bank cannot get the money back earlier).

Banks very rarely have an exactly balancing number of deposits and loans so they borrow and lend to each other on the markets. During the financial crisis these markets froze completely and had to be replaced by the central banks under schemes called Liquidity Support.

The US Federal Reserve’s rules for Liquidity Support loans were they had to be paid back within 90 days and banks had to pay a good rate of interest. The banks also had to supply security in case they were unable to repay. As a result the Fed made $14bn of profit from these loans, which went to US taxpayers [Financial Times, 31 August 2009].

Unfortunately some banks had made bad lending decisions or suffered actually losses. They did not have a liquidity problem, they had a solvency problem. These banks needed to receive bailouts, which have generally not been repaid. Rather than making profits for the taxpayers the bailouts have saddled us with huge national debts.

So in summary: Liquidity Support was profitable and safe to taxpayers; bailouts were risky and generally loss making.

The key claim in the article comes from this graphic (source given as Business for Scotland):

Bail Out at Barclays – an English-registered bank
US Federal Reserve:   £552.32bn
Qatari Government:   £6bn
UK Government:   £0

It is not at all clear what this table is showing. If it is about bailouts then it would be correct to show the UK Government at zero but then the US Federal Reserve should also be zero. If it is about Liquidity Support then the UK Government number should not be zero as Barclay’s participated in a £200bn Bank of England liquidity operation.

The author is trying to present the US Federal Reserve’s profitable short term loan to Barclay’s as a bailout and also conveniently avoids disclosing the reason for it. Barclay’s had just spent £1.75bn buying a chunk of the US bank Lehman Brothers and the Fed was keen to support the rescue.

Barclay’s had in fact wanted to buy all of Lehman Brothers but Alistair Darling blocked the deal on the grounds of risk to the UK [Darling ‘blocked’ Lehman takeover, Financial Times, 30 January 2010].

To present a UK partial rescue of a US bank as the reverse is really quite astonishing.

Another surprising table from the article is this:

UK government and US Fed Contributions to British bank Bail out packages
UK:   £124bn
USA:   £640bn
The source is given as “Business for Scotland”.

The only mention of £124bn I can find is in the National Audit Offices Update on the support schemes 15 December 2010 which stated that the amount of cash borrowed by the government to support the banks had declined from £955bn to £124bn on that date.

As already discussed the US Federal Reserve did not spend a cent on British bank bailouts. A more accurate table would be UK £955bn and USA £nil.

The irony is that the fund flows were actually in the opposite direction to the claim in the article. The UK’s largest bank bailout was RBS, which was triggered by losses on US subprime mortgages and the ABN Amro acquisition. The real flow of funds was from the UK out to the USA to repay these mortgage losses. Subsequently, huge losses emerged from property loans in the Republic of Ireland that once again landed with the UK taxpayer.

It really is a shame that the author’s central proposition is untrue. If banks really were bailed out based on where their operations are then the UK tax payer would have been landed with a much smaller bill.

Guest Author: Andrew Veitch


Anonymous said...

When I spotted the MacIntyre-Kemp article originally I thought it looked bunkum - I was doing a thesis at the time into the collapse of RBS, so I had a reasonable idea what I was talking about; just as I knew he didn't. I mean, as you rightly allude, the vast bulk of RBS's subprime loans were racked up elsewhere - by their offshoot Greenwich Capital Markets (Greenwich in the United States, that is), and by ABN Amro - so, following MacIntyre-Kemp's logic, the UK taxpayer should have been in the hole for, like, nothing! It's complete and utter balderdash, and this guy therefore has zero credibility. Bravo, sir, for pointing it out.


Anonymous said...

I'm so glad someone has finally debunked this complete and utter misleading rubbish from the self-declared experts at Business for Scotland.

Of course, Macintyre-Kemp's analysis also completely fails to take into account contagion in the financial system. Dunfermline Building Society had to be bailed out because it ran out of liquidity, in a similar way to what happened with the Spanish banks - despite not being exposed to US sub-prime debt.