Where the U.K.'s bank bailout went wrong

The Pak Banker - - OPINION - Leonid Ber­shid­sky

The price at which the U.K. gov­ern­ment has sold a stake in the na­tion­al­ized Royal Bank of Scot­land sug­gests it will lose money on the bank bailout it con­structed at the height of the fi­nan­cial cri­sis, some­thing the U.S. has man­aged to avoid. At the time, though, Bri­tain's tough­ness on rogue bankers was praised and the le­niency of the U.S. -- which didn't fully na­tion­al­ize any big banks -- was con­demned.

So who was right? Here's the math. The U.K. gov­ern­ment, which owned 78.3 per­cent of RBS fol­low­ing its 2008 bailout, has just sold 5.4 per­cent of the bank for $3.3 bil­lion. That val­ues RBS at $66.1 bil­lion and the re­main­ing gov­ern­ment stake at $44.5 bil­lion. Yet Bri­tish taxpayers poured $71 bil­lion into RBS, mak­ing a net loss.

The U.K. did bet­ter na­tion­al­iz­ing a 41 per­cent stake in Lloyds Bank­ing Group, which had been al­lowed to buy dis­tressed Hal­i­fax Bank of Scot­land, and two other banks -- North­ern Rock, and Brad­ford & Bin­g­ley. The U.K. plowed $32 bil­lion into the bank at to­day's ex­change rate and has so far re­couped $21 bil­lion through grad­ual sell­offs that brought the na­tion­al­ized stake down to 15 per­cent. That stake is now worth about $13.8 bil­lion, so on pa­per, the Bri­tish tax­payer is bet­ter off.

Of course, these fig­ures only re­fer to the nom­i­nal cost of the stakes that Bri­tish taxpayers bought in the two banks, and not the fi­nanc­ing costs of the in­vest­ments. The Na­tional Au­dit Of­fice ex­plained last year that the cost of fund­ing the Lloyds bailout had not been re­couped. And over­all, the Bri­tish tax­payer faces a net pure loss on the col­lec­tive sale of the two banks: It is at this point un­likely that all of the gov­ern­ment's ini­tial cash out­lay of $190 bil­lion at to­day's ex­change rate will be re­cov­ered.

The U.S. gov­ern­ment, by con­trast, ac­tu­ally made a small profit (again, ig­nor­ing fund­ing and op­por­tu­nity cost) on its Trou­bled As­set Re­lief Pro­gram, or TARP. It in­vested $426.4 bil­lion and re­cov­ered $441.7 bil­lion by the time the bailout pro­gram shut down late last year. Only a hand­ful of small banks haven't yet paid back about $700 mil­lion in gov­ern­ment as­sis­tance.

At the time the two bailouts were hastily put to­gether, the Bri­tish one was praised for its de­ci­sive­ness. Economist Paul Krug­man wrote in The New York Times that the Labour gov­ern­ment of Gor­don Brown had "shown it­self will­ing to think clearly about the fi­nan­cial cri­sis, and act quickly on its con­clu­sions." He crit­i­cized U.S. Trea­sury Sec­re­tary Henry Paul­son for his slow­ness to em­brace bank na­tion­al­iza­tion.

The U.S. did even­tu­ally in­ject cap­i­tal into 707 banks, but in ex­change for non­con­trol­ling stakes and with­out re­plac­ing the banks' man­agers. The big­gest re­cip­i­ents of such aid -- the likes of Gold­man Sachs, JP Mor­gan Chase and Mor­gan Stan­ley -- felt hu­mil­i­ated and has­tened to exit the so-called Cap­i­tal Pur­chase Pro­gram, part of TARP, pay­ing back the tax­payer funds and div­i­dends. By the end of 2009, only small com­mu­nity banks, held to stricter stan­dards, re­mained in the CPP (stakes in these banks were later auc­tioned off, mainly to pri­vate funds).

The U.K. ap­proach was more strin­gent. At RBS, the gov­ern­ment has changed chief ex­ec­u­tives twice since the bailout as it tried to beat the len­der into shape. In the three months to the end of June, the bank showed a profit of $457 mil­lion, yet this turn­around took more than six years to ma­te­ri­al­ize. The U.S. had no taste for such ex­per­i­ments and has bet­ter re­sults to show for its seem­ingly more hand­soff ap­proach.

Of course, the hole RBS dug for it­self by buy­ing the Dutch len­der ABN Amro just be­fore the crash -- at the time the big­gest bank takeover on record -- was es­pe­cially large. And the U.S. ap­proach may not have been avail­able to the U.K. Still, in a pa­per pub­lished late last year, Pep­per Culpep­per of the Euro­pean Univer­sity In­sti­tute and Raphael Reinke of the Univer­sity of Zurich ar­gued that the U.S. bailout worked bet­ter for the tax­payer be­cause the U.S. had more power over its big, sol­vent banks and it used that power ef­fec­tively: Fi­nan­cially strapped banks could not chal­lenge the gov­ern­ment in ei­ther coun­try. They had to ac­cept what­ever pol­icy the gov­ern­ment of­fered, be­cause only with gov­ern­ment aid could they have sur­vived.

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