Stock exchanges in Britain and the USA have been on the slide over the past few days. The reason is not hard to seek. The FTSE has been spooked by bank shares collapsing. Barclays, for instance, saw 25% of its share price shaved off in one hour last Friday (16.01.09). This was the day after the bank announced 2,100 job losses.
It’s starting to look like the time back in October when it seemed that banks such as Barclays and the Bank of Scotland (now HBOS) that had been in existence for hundreds of years would be destroyed by a share collapse in a matter of hours. Then executives of the big banks pinned Alistair Darling against the wall and demanded, “Get your finger out!” Finally forced into action to organise a bail-out, Brown later claimed his ‘bold, decisive’ vision and action made him the ‘saviour of the world’. Not for long.
The current slide started just after the government lifted its ban on short selling –speculators betting on shares going down. As we pointed out when the ban was introduced three months ago, the government can’t pass laws against capitalists betting on corporate failure. But it was really stupid to lift the ban when banks were in such a fragile state. In the panic-stricken atmosphere of last October, or last week, speculators can make things happen. By spreading rumours, short sellers can cause share prices to collapse. In effect this is like shouting ‘fire’ in a crowded theatre, going back later on and looting the bodies of those trampled to death.
Why have bank shares on both sides of the Atlantic been on the slide? Because they’ve been losing money hand over fist – quite often our money, given to them by that nice Mr. Brown or by the US authorities. The reason the banks have been posting up startling losses is because the fail-safe activities of taking in our wages and passing them over to landlords or as mortgage payments (commercial banking, as it is called) has been completely overshadowed by their involvement in investment banking (or casino banking as Will Hutton justifiably calls it).
Investment banking, remember, recalls that time just 18 months ago when the banks were busy slicing and dicing exotic financial instruments, rolling up mortgages and other liabilities from all over the world as financial assets, and selling them on. These ‘assets’ included US sub-prime mortgages that were foreclosed on long ago and won’t be paying out any income to the banks or anyone else they can fob them off on. As they now admit, like the sorcerer’s apprentice, the bankers didn’t have the foggiest ides what they were doing – and millions of people are now copping it, by way of losing their livelihoods, because of these stupid and incompetent people and the toxic assets they created that poisoned the entire banking system.
Last week the first bad news came from across the pond. Citigroup shares fell by 23% earlier in the week. Citigroup, Bank of America and Merrill Lynch announced that together they had lost a record $25bn in just 3 months. Meanwhile Bank of America and Merrill Lynch have also been leaking $11m per hour in losses. They too have their hand out to the American taxpayer – they are looking for another $20bn injection – more than the price of a cup of tea.
Citigroup admitted it had $600bn in ‘unwanted’ (toxic) assets on its books. They are demanding a hand out where the rescuers go through the banks’ balance sheets, identify the toxic assets and deposit them in the financial equivalent of a toxic dump. One way to do this is to create a ‘bad’ bank with all the garbage in it. This is called a Troubled Assets Relief Programme (tarp). The obvious question is who will take charge of the loss-making bank. The bankers naturally assume it will be the US government - and the taxpayer.
So did the banks apologise for their failure last time? No, they demanded our money. And they got it. American banks got an unprecedented $800bn bail-out to see them all right, to the general fury of US citizens. In Britain there were direct pay-outs of £50bn to shore up the balance sheets, plus another £450bn in the form of guarantees etc. Now £50bn for the UK banks seems to most of us to be quite a lot of money. You could have a pretty decent night out with the boys and girls with that. So what happened to it? Apparently it’s all gone.
And they want more. HSBC has announced a write down of £15bn of its assets, RBS of £13bn and HBOS of £11bn – nearly £40bn of our money. And there’s talk of £200bn in ‘non-performing’ loans. They are after our money again – no doubt about it.
Where has the first lot gone? Well, we’ve been told £5bn of British taxpayer’s money has been literally lost for ever. It hasn’t just fallen down the back of a sofa. It has disappeared in a puff of smoke. Much of the rest of our money has gone to recapitalise the banks, that is to build up the balance sheets after the ‘masters of the universe’ blew all their assets in effect buying scotch mist. But the intention of the financial authorities in throwing vast sums of our money at the banks was not for them to squirrel our money away, but to keep lending, and keep the economy moving. That is what banks are supposed to do, and that is what they’ve stopped doing.
There is a now headlong rush into state-isation all over the capitalist world. That propaganda about risk-taking, standing on your own two feet, and markets deciding who wins and who loses – that’s all for the birds. The capitalist class may be quite happy to let working class people’s jobs and livelihoods go to the wall when things go sour. But when it comes to establishment figures like the bankers at risk, then it’s all hands to the pumps.
And you know what? They have a point. As Will Hutton writes (Observer 18.01.09), “Unless we are decisive, Britain faces bankruptcy.” The credit crunch is dragging down all shares. Just as dodgy investment banking dragged down ‘safe’ commercial banking, so the banking crisis threatens to drag down the whole of the British economy with it. Barclays has been particularly exposed because, like Bank of America and Citigroup, half of its profits formerly came for ‘investment banking,’ or high risk gambling.
Yet Barclays has been the most ruthless in imposing higher interest rates on borrowers, in not lending at all, in demanding harsher terms and in pushing for repossessions of those in arrears. They don’t care how much they damage they do to the rest of us as long as they come out on top. And the banks are doing immense damage to the real economy. JCB laid off yet more workers last week, explaining that their customers could not get loans for love or money from the banks to pay for capital goods such as their earth moving equipment. The Confederation of British Industry is screaming is that this sort of thing is going on all over.
New Labour still doesn’t get it. The banks have failed the nation and are still a bottomless pit for taxpayers’ money. That is why they are not lending precisely when we are desperate for them to do so. It is because they are capitalist institutions.
So what is the government going to do? Let’s be clear. Their bail-out three months ago failed. Basically they are going to throw more of our money – and pray that it will work.
There has been much talk about a ‘bad bank’ for Britain. The idea is to identify the toxic assets and get them off the balance sheets. Checking out all the assets by painstakingly walking down a street in Pennsylvania and checking out if a ‘For sale’ sign is hanging on the mortgaged property is a hugely time consuming business. And the government, as representative of a stricken capitalist system, hasn’t got the time. So there is a danger that the government will pay the banks way over the odds for their dodgy paper. This is what has been happening in the USA. There is enormous anger at the way the banks are ruthlessly repossessing the homes of working class people at the same time they are guzzling huge sums of taxpayers’ money.
The British government has got round that problem by just chucking our money at the banks without even setting up a tarp. They bunged them £50bn directly, plus various expensive guarantees, in the autumn. That didn’t work. So here comes some more. Why should it work this time? British banks are likely to declare awe-inspiring losses of £40bn for last year. They are probably sitting on – wait for it - £200bn in dodgy assets if you count the whole caboodle. That is the extent of the mess New Labour is getting us into.
The way in which this money transfusion is being implemented is through a loan guarantee scheme. So the government (that’s you and me) carries the risk. The banks pay a fee. In return they get a completely risk free business activity When the scheme goes into effect it is likely that RBS will be 70% publicly owned. What is the point of pretending that this is still a functioning capitalist institution?
Then there’s a special liquidity scheme to guarantee mortgages, taking them off the banks’ balance sheets. It looks like 2 million people, through no fault of their own, will be in negative equity by 2010. That means their house is worth less than when they bought it – but they still have to pay the mortgage at the original price. Aren’t the banks supposed to guarantee mortgages? There are (still) plenty of people with jobs who need a roof over their heads. The banks won’t do it if there’s any risk. Once again the banks can never lose and the rest of us can never win.
Finally the government has decided to get nationalised Northern Rock up and running like a proper bank. When the Rock was nationalised a year ago the government made sure it didn’t do the usual ‘bank’ stuff like lending money and taking in deposits in case, heaven forfend, it competed successfully with the privately owned banks. Instead they ran its operations down. Since the capitalist banks were demonstrating how useless they were at meeting social need that was madness, and expensive madness too.
The government is frothing at the mouth, insisting that the banks lend to those in need. They’ve been doing this for months past, to no effect. The banks will take our money and then do what they want anyway.
Commentators are saying that this is the last throw of the dice. The plan won’t work. Don’t throw good money after bad! The banks must be taken into social ownership and run as public institutions, not as bodies whose only interest is to turn a profit for their shareholders. The only way to make them lend and run their activities on our behalf is for the government to take ownership of the banks under workers’ control and management.
The alternative is clear. Ernst and Young report that the economy is now in freefall, confronting its sharpest decline since 1931. The only way to stop the slide and offer everyone a job, a job which could lift living standards all round, is to take over the banks together with the big manufacturing companies and run society on socialist lines.