IT now seems increasingly likely that the government is planning to launch a series of tax raids on the banks at next week’s pre-Budget report (PBR). The exact form they may take remains unclear; but I suspect that it is not only bankers that will be affected but everybody else deemed “rich”. We shall see – but the repeated attacks of the last two days, which have involved a range of ministers, including Lord Mandelson, smack of an orchestrated attempt at moulding the mood ahead of Wednesday’s PBR. When you add to that today’s much fairer report on the bail-out from the National Audit Office (NAO) – a report which is bound to be distorted – the populist case for “revenge” may start to look irresistible to desperate, vote-hungry politicians.
The NAO calculates that the total value of the support provided to the financial system is now at about £850bn, made up of purchases of shares, guarantees, insurance and loans to banks. Such a level of assistance is unprecedented (even though it is down by £320bn since Lloyds’ rights issue) but is not the actual cost to taxpayers. For that we need to consider cash outlays, which by the end of 2009 will have dropped from £131bn to £117bn. The government says the final cost will be a slightly less horrendous £20bn-£50bn; the NAO rightly says this will depend on the price at which banks are reprivatised and the extent of Asset Protection Scheme losses. Many of the estimates bandied about by newspapers seem to be excessively pessimistic.
Crucially, every 10p increase in the prices obtained for the shares, taxpayers would secure an additional £9bn from RBS and an additional £3bn from Lloyds. At last count, market prices implied a loss to date of £18bn on RBS and Lloyds.
This is why the row over RBS’s bonuses is so absurd: not only are investment bankers already taxed at around 50 per cent including national insurance – but what is really in taxpayers’ interest is to sell the bank off again at the highest possible price. Forcing RBS (now run by an entirely different board, led by Stephen Hester, to the bunch that destroyed it) to slash the bonuses it pays will prompt all its best bankers to leave, reducing the firm to a worthless shell.
Of course, we should never have been put in a situation where taxpayers were put at risk; banks that fail should be allowed to go bust in a careful, controlled manner, wiping out all stakeholders. We cannot rewrite history, however. The goal now should be to minimise the final cost of the bailout, not score cheap political points ahead of the PBR.
There is therefore only one workable solution: RBS should sell off its investment bank as soon as possible. That is where the bulk of the bonuses are paid; RBS should only retain its high street and commercial lending operations, where high levels of pay are not an issue. In an ideal world, where the goal was to nurture the firm back to health, this wouldn’t happen; but in the current charged atmosphere a break-up has become the only way to save RBS’s investment banking operations and generate some residual value for the taxpayer.
It is not sustainable for a failed bank owned by the public sector to pay large bonuses – and it not sustainable for an investment bank not to pay its staff competitively. If your choice were to make £50,000 working for a “reformed” RBS or £500,000 working for one of its “business as usual” competitors…well, I wouldn’t blame you.