Unsure insurance
It's been an astonishing week in Scottish finance.
On the broadcast front, I've been at risk of drowning in red ink, with £24bn of losses for on Thursday and £9.9bn pre-tax losses for .
Due to past trading statements, neither has come as a surprise, but the figures should still give some pause for thought.
I was given even more pause for thought while interviewing .
While much of the media attention was shifting to his predecessor's pension, he wanted to be forward-thinking about his radical plan to turn around the bank, from bottom up and top down. How could we be confident that it will work?
"I don't think we can be confident," he replied.
This will be a difficult few years for the Royal Bank of Scotland, he went on, which will require "a lot of work and a lot of luck".
There's a lot of British government capital riding on him getting lucky.
The latest addition to the public bill for banking failure is the risk that the British public are taking on with the insurance of the most toxic assets.
RBS and the Treasury agreed early on Thursday morning that it would insure £325bn of the bank's assets, in return for a 2% premium, and the first £19bn being paid by the bank.
A similar announcement was expected from Lloyds Banking Group on Friday, but there has so far been no agreement on terms.
If this is insurance, it's not as we know it.
The premium is paid in new 'B' non-voting shares in the bank.
But as the government already owns much of RBS, it seems to be paying itself.
And the excess on any default is ultimately borne by the shareholders, so the risk comes back again to the government.
Also, if the government is injecting up to £19.5bn more into RBS, it seems to be only an accounting technicality that allows them to claim that this does not dilute the private shareholding.
A more fundamental problem is that the fundamental idea of insurance is that you spread risk.
But any way you look at this, the Asset Protection Scheme concentrates risk from several banks into one place - the Treasury, and therefore the British taxpayer.
It doesn't seem the kind of insurance policy to which Churchill, RBS's nodding dog, would say: "ohh yesh".
Hullo, I'm Douglas Fraser, and I'm business and economy editor at Â鶹¹ÙÍøÊ×Ò³Èë¿Ú Scotland. Welcome to my blog, where you can read my take on money matters, viewed from a Scottish perspective.
Comment number 1.
At 27th Feb 2009, thatotherguy2 wrote:ie look forward to a run on the pound Douglas? It is the most fantastically awful outlook isn't it? Reading Steph Flanders macro economic outlook for Europe makes you feel even queasier. What a hellish week it has been but at least we don't have to stand outside in the freezing cold in Gogarburn doing live pieces to the studio. Have a good week-end and thanks for this week's highly considered pieces.
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