How should the banks thank taxpayers for their help?
When the fire-fighting is finished and the rescue completed, there are serious questions for what remain of the world’s banks. Capitalist countries must ask whether banks can again be trusted.
If banks do badly and only their shareholders lose money, that would be a containable problem. But the victims of a bank under pressure are far wider than its equity investors and their highly-paid executives. The current credit crunch is impacting on companies unable to borrow and homeowners unable to remortgage their properties.
The effect on stockmarkets has damaged workers’ pension prospects and hit the property values the banks inflated. It has contributed to recession.
If a bank actually fails, innocent customers can lose their life savings. And the contagion that spreads from one collapse causes confidence to wane in the wider banking system.
Governments have thus had to concede that banks are too important to be allowed to pay their own price for bad decisions. The economic implications of their self-inflicted downfall are too great.
But it is a one-sided bet for the banks. In the good years they prosper, paying high bonuses and spending lavishly. Yet in the bad years, governments intervene to rescue them to save the economy.
Taxpayers’ money has been, at best, risked – and more likely spent – to keep banks solvent. It seems not unreasonable that taxpayers should reap a reward more direct than simply having a banking system that ensures they are paid each month and can shop with plastic.
Taxing the banks more severely now is a non-starter because ailing lenders have nothing to tax and no means to pay.
Stricter regulation may prevent new crises but there is no direct financial benefit to the state and the risk of preventing banks taking legitimate risks with their own cash. Banking regulation works on risk-ratios, not limits on types of loans or instruments.
With Northern Rock the Bank of England at least charged the ailing lender a premium interest rate on the funds provided to keep it solvent – but that reflected the bank’s poor creditworthiness, not a penalty.
Nationalisation means any upside in Northern Rock’s value accrues to the state as a reward for rescue, but it also meant additional liability fell on government, which has had to swap £3.4bn of debt for equity to keep it afloat. That money may never be seen again and certainly mitigates against any compensation for the bank’s former shareholders.
The US government has demanded 80 per cent of the equity of Fannie Mae, Freddie Mac and AIG as the price of rescue. It is a good principle but it assumes not only that there is value (100 per cent of Lehman Brothers would be nil) but also that such bodies can flourish under the heavy hand of state ownership.
Yet it is unfair that banks return nothing for the help provided over the past year. When they are back on their feet – nevermind dreaming up new ways to bring about their next downfall – it would not be unreasonable to discuss a windfall tax to reward the taxpayers for their support.
