More Losses coming from RBS and Lloyds

The UK taxpayer owns about 84% of RBS. We didn’t ask to own it we had that money forcibly taken from us. That 84 % is around 90.6 billion shares.  We paid about 50 pence per share for them, meaning you and I had around £45 billion of our wealth expropriated for the sake of this one bank.

Yesterday RBS’s share price dropped by about 8% which meant the value of our ‘investment’ fell by about £1 billion.  Today it is down a further 10% at time of writing.  Over the last year it has lost about 22% of its value. At the moment the shares we bought at 50 pence we could offer for sale at 27 pence. But hurry because tomorrow they will likely be worth less.

So when bank apologist tells you how the bail out was actually a sage investment from which we will do very well, can I suggest you summarily punch them on the nose and then tell them it was in fact a warm greeting they will, in the fullness of time, feel really good about.

You and I also own, having been bought them by our government, 27.6 billion shares in Lloyds/TSB which is about 41% of the total. We paid, when you average the various share issues, bail outs and cash injections for which we got shares in return, about 73 pence per share. Our ‘investment’ stands at around £20 billion.

The shares we bought at 73p are now worth around 33 p which is being reported as a 12 month low. This is rather economical with the truth. It is actually, as far as I can see, a 5 year or more low. It is lower than in the depths of 09 when the bank was ‘rescued’.

Just yesterday trading in its shares had to be suspended. And you and I lost a cool £1 billion of our ‘investment’.

Now back to RBS for look forward to what further losses we can expect from RBS.

Remember the government insurance scheme set up so that you and I could insure toxic and failed loans –  the loans for which RBS could not get insurance on the open market? Well that is where I think we can expect some more bad news.

The official story is that there is no risk to us at all. After all those mandarins in white hall negotiated that RBS would pay the first £60 billion of any losses. You and I would only have to pay out if the losses exceeded that amount.  Sounds great.

One little problem. RBS doesn’t have £60 billion and has no prospects of earning that much in the next decade. If RBS insured ‘assets’ were to decline to the point where the insurance had to pay out, would RBS say, “No need to worry, I’ve got a few billion to settle that bill right here”? RBS is insolvent. That was why we had to bail them out in the first place. Where are they, where were they ever, going to get that first £60 billion. Do I have “thick” tattooed on my forehead or something?

If the assets get in further rouble – more defaults – calls to settle deals contained within those ‘assets’ (many are swaps and currency bets) RBS will NOT have the money to settle them and will turn to us.

So the next question is how likely is it the insured assets are going to collapse further?

Well it turns out that over half of those loans were made to “foreign entities”.  A little digging and up comes this document from the Treasury’s Asset Protection Scheme, a rather detailed document showing what exactly RBS put in to the scheme for us to insure. At the time it was released, RBS and those to whom it had given the loans, were deeply embarrassed that so much detail was made public. I can see why, it’s a nightmare.

Here are a few of the details of what you and I are on the hook for.

£114 billion is UK based. £75 billion is EU based. £43 US based. The rest is ‘Other’.

£15 billion is residential mortgages. Now these would be the ones RBS knew were already in trouble. And latest figure for the UK are dire.  180K mortgages are already  in arrears.  300K – and this is a really bad news on mortgages have switched in just the last 3 months to interest only. That is what many people do when they can’t pay but don’t want to lose the house. For most of them it stores up more misery.

The biggest group of assets are £80 billion of “Loans” which include large proportion of Home Equity Loans. Money taken out against the value of a property ON TOP of the mortgage. These are home IED’s (Improvised Explosive Devices). (See page 18 of the report for all of the above figures)

And there’s also £39 billion of Derivatives. Of them, 39 billion are concentrated in one portfolio known as GBM -SAU which stands for Global Banking Markets – Strategic Asset Unit.  Those boys and girls who would have been paid tens of million in bonuses during the years they were making this unexploded device.

What they made it from are CDS insurance and CDOs with, and I quote, “assets with a particular high risk profile.” Most of it was originated in the lunacy years 2005 -07. So that will all be about as wholesome as a big bottle of Chinese baby formula.  (See details on P. 49)

There are also assets tied to currency swaps.

All in all, given what is now unfolding in Europe I think we can expect this portfolio to NOT be a wise investment.