Tuesday, May 19, 2009

BANK SHOT - January 22, 2009

The Royal Bank of Scotland is one of Britain’s biggest banks and has been a recipient of major government money, to the extent that the Government now more or less owns 70% of it, but that is not enough to keep them in business. They just announced losses of another L 5B, and the Government is going to bail them out some more, to the point that it does not make sense to allow them to remain in private ownership. The stocks, which up to a few months ago were selling for over L 5, have sunk to just 11p, which is just about 15 c. In fact, it is the opinion of most financial commentators that their actual value is negative, but the price represents a gamble that the Government can be harassed to pay more than that as the cost of buying them out instead of seizing them. Seizure is a lengthy and messy business and the Labour government is very touchy on the issue of whether they are sufficiently friendly to business. An example of this was seen in the collapse of Railtrack, the company that was created when British Rail was split into a number of separate companies, one to own the rails and real estate and others to run trains over them. BR had run a deficit of L 2.5 B per year, and Thatcher had told the nation that private ownership would make a profit instead. In fact, all those companies required subsidies to keep in business, with Railtrack alone getting L 6.5 B yearly. So instead of letting them run into the ground, which would have meant a discontinuing of train service while that company pretended they could get things together, the Government pulled the plug and renationalized them. They screamed so loud and long that finally Gordon Brown, then head of the Treasury, gave in and paid them a hefty ransom to shut them up, and even that didn’t do it. So now everybody knows about the ransom game and the Government has the reputation of being a pushover. All the commentators agree that if they are too fierce on the bank, all the country’s banks will collapse as soon as the bankers start yelling Nationalization, which they use like a magic spell whenever their hostage game is about to be trumped by government action. You’re supposed to fear the ghost of Joseph Stalin and give up. It works like a charm. The British people can’t afford that kind of superstition, and neither could we.

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