Britannia Radio

FINANCIAL TIMES     21.1.09
1. Let us have public ownership of Lloyds and RBS

By John McFall and Jon Moulton

The government announced last week its loan guarantee scheme to 
encourage fresh lending to small and medium-sized businesses. The 
scheme is a little complex and will take time to be much used. Will 
it be enough? Or will it have the impact of an air rifle pellet, 
rather than the artillery barrage we now need? The credit crunch is 
causing severe pain and is generating unemployment and impoverishment 
at an alarming pace. This first step may be too small to achieve the 
government's ambitious aims.

Things are bad - unprecedentedly bad - so we need to consider radical 
actions and actions that would have been thought lunatic a year or so 
ago.

Royal Bank of Scotland and Lloyds Banking Group are now in an 
uncomfortable position. The government is their dominant shareholder, 
with the taxpayer having 100 per cent of the downside in these banks 
- even guaranteeing the pensions - but less of the upside. The 
markets are nervous of their shares. The markets clearly believe that 
there is a high chance more capital will need to be injected into 
these banks and this will almost certainly have to come from the 
taxpayer.

These banks have split and incompatible objectives - maximising 
profits (there was a time when they used to make them) for their 
shareholders on the one hand, and obliging the latest political 
desires on the other. Should they husband capital or should they try 
to solve the credit crunch for the nation with the lavish levels of 
lending that caused the crisis in the first place?

The likelihood of success for this "nearly nationalised" model is 
low, as the conflict of aims is irresolvable. As long as they remain 
nearly nationalised they will remain subject to difficult questions 
of capital adequacy and governance, and uncertainty as to their future.

These banks also need to cleanse their balance sheets of toxic assets 
and bad loans. The new insurance scheme will help but until this 
happens no one will trust them enough to lend freely to them or place 
deposits with them ?without a comprehensive government guarantee.

There is much talk of the heavily lossmaking Citigroup ending up 
nationalised in pieces in the US, Anglo Irish Bank has just been 
nationalised and there seems to be considerable expectation that the 
UK will follow by nationalising at least RBS and Lloyds Banking Group.

If it is to happen, the sooner the better. Let us get it over with - 
nationalise the pair of them. With public sector backing, we can use 
these banks to restart the flow of credit. And they could lend a lot, 
since the government can provide a better assurance of adequate 
capital than anyone else. This would temper the recession in the 
short term.

The banks could also sort out their toxic stuff in an unrushed and 
orderly process that would minimise both losses and market dislocation.

Over a few years, it would be possible to clean up and simplify these 
banks and return them to private ownership in a good state.

In some ways, it would be similar to a private equity investment. It 
would allow for more decisive management, doing away with the short-
term targets and reporting of PLCs. But unlike a private equity deal, 
the banks would go from being publicly listed to being publicly owned 
- so public accountability and transparency would be maintained.

There are obvious areas of uncertainty. Could a publicly owned bank 
lend prudently - that is, could it say "No" to hopeless but 
politically desirable cases? Will the government print even more 
money to capitalise the banks, with the future inflationary risks 
that generates? Will these banks spoil the market for real private 
sector banks by lending too much and too cheaply? Will the banks get 
the wrong management? Will it hurt the UK's own credit rating to own 
such large balance sheets?

These are serious risks and, to some extent, they will probably all 
happen.

But things are so bad that the least worst course is to accept 
nationalisation of these banks. And then to do everything possible to 
restore both the nationalised banks, and the in effect government 
guaranteed banks not nationalised, to the private sector as soon as 
possible.

For the sake of financial stability, it could simply be Hobson's 
choice for the government.
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John McFall is chairman of the Commons Treasury committee. Jon 
Moulton is founder of Alchemy Partners
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2. Bank of England to buy up corporate bonds
By Chris Giles, Economics Editor

The Bank of England will start to buy corporate bonds in large 
quantities within weeks, Mervyn King, its governor, said on Tuesday 
night as he explained the next steps to be taken to limit the 
severity of the recession.

Borrowing from Donald Rumsfeld, the former US defence secretary, he 
said such purchases would be "unconventional unconventional measures" 
designed to increase liquidity and trading and reduce the spread of 
corporate bond yields over government bonds.

These differed from "conventional unconventional" policy, in which 
the Bank created money to buy assets with the aim of increasing the 
stock of money in the economy and the availability of credit while 
also raising spending. Although the Bank's monetary policy committee 
was not ready to use this weapon yet, he said, if inflation was 
likely to remain too low the MPC "might wish to adopt these 
unconventional measures as an instrument of monetary policy".

Speaking to employers at a CBI dinner in Nottingham, Mr King followed 
the prime minister's lead in turning up the heat on the banks. He 
insisted that all the official efforts to restore health to the 
banking system "are not designed to protect the banks as such. They 
are designed to protect the economy from the banks."

"A pronounced contraction in spending and output is under way," he 
added, predicting "in the first half of this year, the rate of 
contraction is likely to continue to be marked".

The banks needed to reduce the size of their balance sheets, but he 
insisted this reduction should not come at the expense of lending to 
non-financial companies and deepening the recession. Instead, he 
hoped banks would reduce their loans to other parts of the financial 
system.

"There is scope for a reduction in the leverage of banks without 
restricting lending to the 'real' economy," he said, insisting that 
the necessary "netting" of exposures needed to take place in an 
international setting, since many of banks' assets and liabilities 
were foreign.

Mr King acknowledged that recent policy from the authorities had 
appeared contradictory, with officials urging banks to reduce the 
size of their balance sheets while continuing to lend freely. 
Consumers had been urged to spend while encouraged to reduce their 
dependence on debt. "Almost any policy measure that is desirable now 
appears diametrically opposite to the direction in which we need to 
go in the long term," he said.

Unusually for the Bank governor, he even came close to a mea culpa, 
for policy mistakes the Bank had made. "It is clear that policy did 
not succeed in preventing the development of an unsustainable position."

But this failure was more one of circumstance than one of error in 
setting interest rates, he continued. To prevent the build-up of 
credit while inflation was under control in future, Mr King called 
for the Bank to be given "an additional policy instrument to 
stabilise the growth of the financial sector balance sheet". [What 
instrument? -cs]