Get Your Cheque Books Ready

As you sip your tea or coffee over breakfast this morning you may just want to check your wallet as some day soon we may all have a nasty cash call on us and the numbers aren't pretty.

Asset Protection Scheme

As part of the bank bail out scheme, the Government has introduced the concept of an insurance underwritten by you, the reader and taxpayer, which in return for a premium paid by the bank insures their future losses. Whether those losses are solely linked to the 'toxic debts' everyone talks about or losses in general no one really knows but there are some things that may make us pause for thought.

Of course, we haven't been consulted over this but then again we really do not understand the mechanics of modern banking nor have we either the intellectual capacity or a calculator large enough to cope with the astronomic numbers. We should just sit back and applaud the PM, Treasury Ministers and the retinue of finely paid advisers for their sheer genius to do the mathematics for us.

Not to worry anyway - at RBS and Lloyds Banking Group, our liability is a mere snip at £500bn. The good fellows at these two banks have until the end of the week to agree the terms but the points at issue are what strings the scheme comes with and the cost of the insurance policy which even makes bonus payments seem cheap at an alleged £8bn for RBS. As the deal completes, it is reckoned by the BBC's Robert Peston that the total amount we are in for is a cool £1.3 trillion.

That may seem like a lot of money to someone as intellectually challenged as me but I have it on reliable oath that this figure, made up of loans, insurance, guarantees and investments is equivalent to the entire annual output of the UK economy. So no worries there, then.

Poor Banks

Naturally, the banks are negotiating hard. They certainly do not want, under such a scheme, to have to take losses themselves - surely isn't that what the insurance pays for? Not so - there will be a proportion of the loss that has to be taken by the banks anyway - a sort of pathetic 'skin in the game' and a constant reminder that they cannot just forget the debts they created.

Also, the fees, at such astronomic heights themselves, would be self-defeating if they had to be paid in cash. So the Government is negotiating that the fees are paid in preference shares and carry no voting rights so effectively the Government stakes in RBS and Lloyds, already at 70% and 43% respectively, are not increased. In reality, they are and it is just one short step away from full scale nationalisation of banks - a far cry from the harmonious free-market enterprise at the heart of Gordon Brown's dreams for the UK.

It also means that private investors in the banks are pretty much left high and dry in terms of having a stake over the profits and assets of the banks, making their shareholdings close to worthless. It is most likely to be greeted with yet another fall in share price.

There is just a chance that one day we may get some news that does not increase our future tax liabilities - that should be worth waiting for.

Action & Reaction

I was not particularly enthusiastic about the Government's latest additional £350bn bail out and I was a few quid short of the predicted loss at RBS which hit £28bn but despite a drop in inflation today to 3.1%, it seems the markets are now turning their attention to Britain's economic health with great scepticism.

Blankety Blank

Despite Gordon Brown taking on the role of master blank cheque writer, it could not stop a fierce run on shares in banks yesterday as RBS plunged 67%, Lloyds TSB by 34%, Barclays by 10% and HSBC only 6.5%. Worse still, our currency also plummeted to below $1.40 after being $2 last Summer.

After such a massive second bail out, why are the markets reacting so badly? What is it that they know that the UK Government does not know?

Debt

The rumours alluded to on the front page of today's Telegraph talk of a leading agency is about to cut its rating on Britain's sovereign debt. Edmund Conway, Economics Editor at the Telegraph, explains that while this does not mean Britain is much worse off, what it does underline is a growing opinion that Britain is inching toward Insolvency.

I have to say it's all a bit scaremongering. Yes, there is a lot of gloom in Britain, High Street names are dropping like flies and major industries are cutting back in the face of a dramatic slowdown, but realistically we have been here before, have we not?

I guess the argument revolves around the massive borrowing Britain has embarked upon. From targets of 37% of GDP, pretty soon Britain will have upped its borrowing to 58% of GDP. And the money to service this debt is tax revenues which are set to fall sharply as unemployment goes up and the strain on the State grows. The outside concern is that Britain is borrowing more and becoming less able to pay back the money.

A Realistic View

58% of GDP is not that harsh and is more in line with the borrowing of Germany and France, so we cannot be that badly off, despite our own concerns. And there is always the prospect that things will get better when the recession ends - tax revenues will start to grow as business picks up and unemployment comes down. Also by actually not being too hemmed in by currency and not being part of the Euro and fixed interest rates, our depreciating pound may help us.

The fact is, even if Britain's rating is changed it does not affect our ability to repay the debts but it is a measure of external confidence in our ability to do so.

Confidence

The issue is confidence. While the British Public seem satisfied enough with our PM's performance in the crisis, the external markets are mildly terrified. For the second time in less than a few months, Britain has come up with a botched bail out, having reassured us that the first one was more than enough to save the world. This time around the cost is equally large and potentially more so as now we are proposing to underwrite to toxic debts that no one seems to be able to quantify but some optimistically put it at £200bn, yet RBS has liabilities of £1.3 trillion alone. The taxpayer is faced with a liability which is equal to 90% of the disastrous bank lending of the last 10 years.

The biggest question from yesterday's announcements that perhaps has spooked the markets the most is, now that the toxic debts are underwritten, how does the Government propose to sort them out?

The almost inevitable outcome of yesterday's announcements and market reaction is that the Government took a further lurch toward nationalisation of banks and in some ways their dalliance on the subject will only fuel further concern. Banks are now having a hard time raising funds and if their shares are scuppered much further they almost certainly will have no place to turn. If we nationalise the banks and our ratings go down, the banks will have further difficulty in raising money.

It's a vicious circle that needs to be broken as soon as possible.

'Forgotten Victims'

As we all look at our failing Pension Plans as the stock markets whirl madly, analysts pointed out that many Pension Funds are highly dependent on bank shares. There was a time in the past that 'Bricks & Mortar' and Banks were the safest investments but this year has proved a savage exception. Well over 10m people own shares directly and many more own them via Pension Schemes - and as bank shares constituted about 21% of the FTSE value 2 years ago, many Pension Schemes are highly exposed to these shares - now those same shares will be only 10% of the FTSE value and most of us don't know how exposed we are.

With the collapse of bank shares and the looming possibility of nationalisation, it means widespread losses for pension scheme participants. In many cases, not only will people not be aware of their exposure but they may not be able to do anything about it, as the only time they get a chance to gauge it or do something about it is when their annual statement arrives. With over 90% of bank shares by value being held by institutions, it's clear that the exposure is huge.

The UK Shareholders Association has warned that private shareholders will be the 'forgotten victims' if nationalisation occurs and compensation will be a long time coming and will not cover much of the losses, certainly if Northern Rock is anything to go by.

It may already be too late, but a call to your Independent Financial Adviser (IFA) may clarify what your options are. Try Haymarket Associates at www.haymarketifa.co.uk if you do not have one.

Pre-Pack Bonanza

I am no financial expert, as my blog will attest to, but even I know there is a nasty whiff about these 'Pre-Pack' bankruptcies which conveniently allow companies to dump their creditors and start again under new ownership. So nasty is that the Government are stepping in to legislate.

Funny then that the first big case from dumped shareholders is that of Northern Rock and the culprit in this case is none other than the Government itself.

Echoes of Byers

In the fashion of the fiasco on the railways when Stephen Byers left shareholders in the lurch, Alistair Darling has repeated the behaviour. In his defence on behalf of one shareholder, Hedge Fund SRM Global, Lord Pannick QC claimed the Government set out the terms for shareholder compensation which dictate that the bank was treated as though it was in administration when it was nationalised. SRM are not the only ones wanting a judicial review to look into the Government's seemingly heavy-handed behaviour and should they be successful then the Government might have to pay out compensation of around £1.8bn to investors should they win.

It's an amount that almost makes Ron Sandler's fees palatable.

Upside?

Bizarrely, Lord Pannick's argument is that the Government is set to make a packet when it sells off Northern Rock when the market takes off again. A secret report by Goldman Sachs for the Treasury supports this view and reckons the Government would make a 'substantial' gain in such a case.

I wouldn't start rubbing your hands as a happy taxpayer as by the time we have paid off 'Happy Gilmoure' Sandler and his army of 'expert' consultants we should have about enough left over to pay the interest on the debt required to do all this. All this assuming Northern Rock will be worth something in the future. I am sure this will really cheer Richard Branson and his consortium who offered to buy the defunct Rock. Not the first time he has been rebuffed by the Government - the last time being when he failed in his bid to run the Lottery but in that case he had not laid on enough free air tickets and cowboy suits for fat Politicians who were ludicrously entrusted to make such decisions of national importance objectively.

So what should be good for the goose should be good for the gander - if the Government doesn't like the 'Pre-Pack' dodginess, it should lead the way by being clean itself. Anyway, I would have let the whole thing go down the toilet properly before rescuing depositors and mortgage-holders and left the shareholders to wallow in their wisdom of buying into a poor business model and plan.