As I write, Britain’s second-largest bank, the Royal Bank of
Scotland, which owns NatWest and has recently bought Holland’s largest bank
ABN-Amro, has announced that it lost £4bn in the last three months as a result
of the world’s great credit crunch. RBS says that it must write off £5bn in
loans and debt securities that it had on its books as worthless. And it now must ask existing shareholders to
stump up more money – as much as £10bn – to buy new shares in the bank so it
does not go bust.
And this is happening just a few weeks after the head of the
bank Sir Fred Goodwin had declared a whopping great profit for the bank and
made it clear to all and sundry that the credit crunch would not affect RBS and
it had no need for extra funds.
This news shows that the credit crunch is going to hit
Britain in a big way. Up to now,
Britain’s main high street banks had not seemed to have suffered much – they
were all announcing big profits and there was little talk of large ‘writedowns’
of worthless assets. The collapse and
subsequent bailout by the taxpayer of Northern Rock was an exceptional event
due to the ‘bad policies’ of one set of managers.
At the same time, the government of Darling and Brown, the
leaders of industry and the City of London
were arguing that the British economy was still growing well and while
the financial sector was on a ‘sticky wicket’ due the housing and mortgage
crisis in the US, Britain was well-placed to avoid the worst.
Well, that story now looks shot full of holes. RBS is not a small mortgage lender from the
north-east like Northern Rock that got too big for its boots. It is a major international bank with
interests in Europe, Ireland and the US. But when you delve into its accounts, you find that all was not well.
The bank is one the weakest in Europe. Relative to all its loans and debt
securities that made or purchased, it had the least amount of shareholder
investment. Indeed it had safe funds
worth only 4% of all the loans and assets on its books – the barest minimum
allowed under international banking regulations. And, more than anyone else, it had bought more of those ‘toxic’
mortgage securities from American banks that were backed by the value of
American homes. So much of its assets and
its profits were based on the now falling value of American houses.
At the same time, it had just bought another huge bank,
ABN-Amro, after a bitter merger fight for huge amount of money at the top of
the market before the share prices of all the banks plummeted in the credit
crunch. And RBS, like all the other
British banks, was now facing up to housing market slump in the UK in 2008 that
the US had seen in 2007.
And boy – is that housing slump coming. After peaking last summer, UK house prices
have been slowly sliding downwards. Now
the pace of decline is accelerating. Most expert analyses have come round to the view that house prices will
fall a minimum of 10% from their peak last summer – it is more likely to
15%-plus before the market bottoms some time in 2009-10. So a house worth £250,000 last summer will
be lucky to be worth £200,000 before the end.
And here is the problem. Over 50% of mortgages issued by the likes of RBS and Northern Rock in
the last few years have been for over 80% of the value of the property. And that does not include all those
mortgages made to people just trying to make money from renting out flats
(buy-to-let, as it is called). So if
house prices drop 15%, many homeowners are going be under water in what is
called ‘negative equity’, where their house is worth less than the mortgage
loan they have on it. If these
homeowners walk away or default on their payments, the banks are going to take
substantial losses.
And it is not just British homes. Many companies that bought their offices on loans from the banks
will also be under water and there will losses on commercial mortgages too.
It is often argued that a housing slump won’t have such a
big impact as it has in the US because British banks did not go in for reckless
lending to people who could not afford to pay it back as they did in America – the
so-called sub-prime market.
Well, the figures don’t agree. IMF and OECD researchers reckoned that the UK’s level of mortgage
debt to household income and level of house prices to income were so high that
UK housing is more overvalued than in any other in advanced capitalist world –
British houses are facing price subsidence.
A recent survey by a credit agency found that sub-prime
borrowers who had taken out mortgages on dubious income statements were ten
times more likely to default and there were plenty of places all over the UK of
towns where people desperate to get onto the housing ladder now faced
default. Places where sub-prime mortgages
were more than 10% of homes included Manchester, Cardiff and
Wolverhampton. While in London, more
than 25% of all homes with mortgages were buy-to-let loans, facing ‘negative
equity’.
A huge tsunami of unpaid debt is about to hit British
capitalism. What the RBS announcement
shows is Britain’s bankers are finally recognising that the tide is coming in
fast and they are battening down the hatches.
It is unlikely that any big bank will go bust – first they
will raise more money from their shareholders to finance their past bad
decisions and second the Bank of England (and that means us the taxpayers) will
bail them out if necessary.
The Bank of England, having put its head in the sand for
months and months, is now waking up to the disaster. It has finally started to cut interest rates (although it remains
worried by a rise in inflation that it cannot seem to control). But more, it has decided, on our behalf as
taxpayers, to start buying or swapping the bad loans and debt held by the likes
of RBS for UK government bonds. So the
banks get nice safe bonds for their rotten mortgages to put on their books and
they no longer have a problem. The
problem becomes one for the government.
Brown and Darling, after much kicking and screaming, finally
took over Northern Rock and had to recognise £50bn of loans to the bank that
are now the liability of the state. This new Bank of England measure will put even more liabilities on the
government books. But it has to be done
or there would be a major banking crisis in 2008.
Thus capitalism works its mysterious ways: the capitalists
don’t want any ‘interference’ from the state and democratic accountability when
they are making huge profits; but when things go pear-shaped, they demand funds
from the state but with no recourse and no control.
Who will suffer from the coming UK housing slump? Well, first it will be the workers in the
financial sector, the City of London. It is estimated that about 40,000 will lose their jobs for a start.
On the whole these won’t be the fat cats on the boards of directors
on the big financial institutions like Sir Fred Goodwin (they are always
‘knights of the realm’). No, if they
get the push it will be with a ‘golden handshake’ of millions and their
pensions intact. The head of Northern
Rock took nearly a million and a pension for presiding over a strategy that
brought the bank to its knees. Yet
thousands of Northern Rock employees are losing their jobs with no handshakes,
pensions or prospects of future work.
The job cuts in the City of London will be aimed at those in
the back rooms. They may be earning
£30-50,000 a year – not bad by most people’s standards, but not millionaires.
The government reckons UK economic growth will about 2-2.5%
this year well down from 3.25% last year.
But that is now regarded as very optimistic. The IMF, basing itself on the global credit crunch and housing
collapse in the UK, reckons growth will be closer 1.5% for the next two
years. It is likely to be worse than
that.
But all these forecasts lead to one conclusion – everybody,
not just City workers, is going to suffer. The UK is more dependent on the financial sector in its economy that any
other major capitalist country (unless you count Switzerland as major). Job losses and rising unemployment will be
the order of the day.
As I write, the government has announced another fall in the
jobless figures. Of course, this is
mainly a statistical trick. The numbers
who claim jobseeker’s allowance are under 800,000. Even in booming Britain, they cannot get a job because they are
so undereducated or unskilled that there are not enough low-skilled jobs
available for them (there are only 700,000 no skills vacancies at the last
count).
But this is not a true reflection of the real level of
unemployment in Britain. Indeed, the total
number of people in work has hardly changed in the last 30 years despite an
increase in population and in people of working age. There are millions who are in ‘fulltime’ education where they are
hopefully getting qualifications that will get them work. Also, there have been millions of women that
have come into semiskilled work over the last few decades while millions of
older unskilled men have just gone.
Where have they gone? Well, the Tory myth is that they have all signed on for ‘incapacity benefit’
claiming that they are ill or disabled and cannot work. This benefit is not means tested and worth
more. This myth that there are 2.6m
loafers and shysters not willing to work has been accepted by New Labour and
they are cracking down!
Interestingly, the 8% of the UK’s working population on this
benefit is not much higher than the 6% in the US where the rules are supposed
to be tougher. And when the government
did a survey of people on incapacity benefit, they found that half a million
were suffering from depression or had clinical mental illness. Only a small minority had alcoholism or drug
abuse. Moreover, only about 0.5% were
faking. Sure, many of these millions
were capable of doing some work, but most lacked skills, half were over 50 years,
or they had sick family members to look after, or needed transport to get to
jobs.
The reality is that if you added to the 750,000
claiming job seekers allowance another 1.5m claiming disability allowance who
could work but cannot get a job, then Britain’s unemployment rate is not 5% but
probably double that already. And the
hard times are still to come.
