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— View from the City —
Strangely, that's still the way many people think about traditionally state-owned operations, like the Royal Mail, which the government believes should be part-privatized. Even the National Health Service remains a target for the outsourcing and privatizing brigade. But in banking, we seem to have decided that the private sector's failures have been so epic that even government can do things better. Maybe it is a little too early to judge. After all, the Treasury's gluttonous binge on the meat of three of Britain's largest banks (and wholesale nationalization of a couple of the smaller ones) is as yet too fresh to have produced a satisfied belch, never mind the indigestion we all expect a little later in the economic cycle.
But some difficulties are already obvious. Part nationalization and even more partial political control at Lloyds Banking Group plc and Royal Bank of Scotland Group plc
have their own inherent flaws. The government has had to set up a
special office to run its banking investments but seems unable or
unwilling to impose its will on such politically embarrassing issues as
payoffs and pension funds for failed chief executives.
Yet bigger conflicts and confusion may soon emerge from the very programs the government itself has set in motion to rescue the banking sector from past follies. The government's so-called asset protection scheme has so far been rolled out to insure £260 billion ($365 billion) of toxic assets at Lloyds and £325 billion at Royal Bank. It could yet end up doing a deal with Barclays plc, although Barclays, under the leadership of CEO John Varley, is determined to hold the sum to a minimum and to keep the government out of its shareholder register. Other banks will likely attempt to stay outside the scheme altogether. Participants would undoubtedly benefit from insuring against default assets such as corporate and leveraged loans, commercial and residential property loans and structured credit assets, but the advantages may be less palatable than they initially appear. According to a study by Corinna Mitchell, a corporate and securities partner at law firm Dechert LLP, creditors in a particular default or distressed-debt negotiation may well have different interests according to whether their assets are protected. For example, says Mitchell, a creditor who participates in the scheme with respect to a particular debt may have less incentive to reach a quick resolution and realization of a distressed debt than other creditors. This is because the participants can rely on the government guarantee to minimize their losses and do not have the same time pressures to act. Indeed, that a significant default or bankruptcy event must trigger the insurance means participants in the scheme would actually have an incentive to push a debtor into default, while other creditors have exactly the opposite interest. Nonparticipants may often benefit from a debt-for-equity swap that might save the debtor from bankruptcy. The very possibility of such a swap becomes problematic if it would give a participant in the asset protection scheme control over the borrower. That is because the rules specifically restrict participants from having control over the obligor in any asset the scheme covers. What's more, the study adds, if a creditor committee does agree to
refinance a debt that is part of the scheme, the deal will require
approval from the government, introducing new delays and complexities.
Some of these difficulties can probably be dealt with in negotiation.
But they may also create moral hazard by encouraging banks to force an
otherwise salvageable debt into default, making bankruptcy inevitable
and increasing the burden on the taxpayer. That would counter both the
government's stated policy intention of getting lending back to more
normal levels and the banks' own obligation to increase lending under
the terms of The banks have shown they cannot run things better than the government. But they can still run rings around civil servants when it comes to looking after their own interests. |
Memories are short. How recently we were told, even by Britain's nominally socialist New Labour politicians, that the private sector was always more efficient. Governments were invariably clumsy. Outsourced services were the way to go.
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