Billions And Billions

There was a time when a billion was a big number.

Orders of Magnitude

I worked at a Computer Distributor called Frontline many years ago and when I left there, the revenues were around £100m per annum. That year the company got taken over by a larger German Distributor called Computer 2000 and when I arrived back at the company just a few years later they were celebrating breaking the £1bn per annum in sales in the UK for the first time. It had been a tenfold increase in sales in a short space of time and the company became one of a handful of UK companies at the time with revenues over £1bn a year.

Even today, even though the FTSE250 is going up and down like a yo-yo, the 100th company on the list has revenues less than £1bn per annum. So from a point of view of product or service sales, to have a turnover of over £1bn a year in the UK you would be part of a relatively small and elite group of companies.

Billion Becomes Old Hat

One of the consequences of the Credit Crunch and recession is that the word 'billion' is being used in almost every other sentence. Suddenly, it has become the only number that expresses the order of scale of the extent of our economic woes and the monies required to put it right. We are even beginning to use 'trillion' to describe the scale as billion no longer seem to cut it. The current estimate of the scale of the global bank bail outs are around $5 trillion and rising. This is measured against an annual global output of around $50 trillion.

The numbers are immense and they are being flung at us so nonchalantly these days that we are beginning to lose all sense of proportion. The fact is, £1bn is an awful lot of money.

So when we are told that £2.3bn to bail out the car industry is not enough, it no longer strikes us as a big number when compared to the fact that we have had two bank bail outs in the last few months at £600bn and £300bn a piece.

We are no longer impressed or depressed that £30bn was pumped into just one bank, RBS, in order to save it. But the worrying thing is that RBS has a funding gap of around £161bn and total liabilities of £1.3 trillion - larger than the UK's GDP, yet its market worth is around £7-8bn in total.

Making Sense of It All

This week's Euromillions Lotto Jackpot is around £26m and I think you would agree that's an awful lot of money. It could buy you several houses, nice cars for everyone in the family and you would still have plenty of money left over in order to live in luxury for the rest of your life and probably leave a sizable legacy to your offspring.

So imagine if you had £1bn. This is 1,000 times £1m or around 40 times greater than this week's Euromillions. It's more money than you could imagine.

Well so far around £900bn has been pumped into the banking system to shore it up and only yesterday a Treasury committee thinks it is not enough claiming that the Government is acting in a piecemeal fashion to tackle the problems in the financial system.

£900bn is 900 times that £1bn I talked of and 36,000 times the Euromillions Jackpot this week. It is a stupendous amount of money.

But it's not enough. Over the course of the last few years, the value of the open derivative positions in global markets is over £500 trillion and rising and there is a further £400 trillion of associated insurance positions and £1 trillion is 1,000 times £1bn. This derivative value is the approximate roll up of all the idiotic trades of debts between institutions that amounts to the total liability the world faces for the mess that the banks have put us in. Unpicking the complex web of bargains and trades is the nightmare associated with this and although a good proportion of all this is underpinned by assets of some value, no one any longer has any idea what the true position is. And as markets and asset values fall, the problem is getting worse and worse.

Equity for Debt

As Governments in the US and UK underwrite bad or toxic debts with the bail outs and take equity positions in banks, there is a belief in financial circles that this is somehow good for all of us who have allowed our tax money to be used as collateral for the borrowing required to do this. The belief is that companies like RBS will recover and that the money we have pumped in will be repaid handsomely as the company grows in value.

Today. RBS is valued at around £8bn and we have pumped around £50bn into it so far for around a 70% shareholding. My maths may be rusty but it would mean that in order to break even from this current position, RBS would have to grow around tenfold in value as a company.

Do Not Be Fooled By Numbers

As everyone throws around numbers like a billion pounds as if it were pocket money, do not be fooled - it's a very serious sum of money.

But if you think that the £26m Euromillions Jackpot is too large a sum for one individual to be given, then just chew on this. In the last year alone, this was no more than double the annual gross monies received by the lowest paid CEO of a UK Bank. In the last week, a single Hedge Fund made £90m on betting that RBS shares would fall on the announcement of the second bail out. In a single day, Hedge Funds and Banks lost $30bn on single share (VW) on betting the wrong way.

If nothing else comes of this financial crisis, I hope that we get some perspective on the real earnings of a very thin slice of the population of this world that has squandered our savings, pensions and future. I hope also we get some perspective of the amount of money it will cost each one of us in future tax payments each time a Government Minister glibly announces some new 'Financial Stimulus' package or bail out.

You would have to win this week's Euromillions Jackpot over 1,200 times over just to have enough money to have propped up RBS that second time. I guess my point is that the executives of these banks were earning Euromillion scale Lotto wins EVERY year while we have to pay thousands of times that much in order to just stop their companies going bust.

For every £1 billion mentioned, think that there are only around 30m taxpayers in this country which means that we are each liable for around £33 - not much, eh? Well, at £900bn so far in bail outs, each of us are liable for around £30,000 and that does not include the liabilities of £1.3 trillion should just one bank like RBS actually fail.

This week at the Davos Summit bankers are getting vilified for their greedy stupidity in building up these kinds of liabilities. I think Governments are the stupid ones for allowing it and then exposing us all to the cost.