£1.3TRILLION: New cost of banks' bail-out equals the value of our economy for a year

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£1.3TRILLION: New cost of banks' bail-out equals the value of our economy for a year

By Benedict Brogan
Last updated at 12:16 AM on 25th February 2009

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Royal Bank of Scotland and Lloyds will be given taxpayer protection worth an eye-watering £500billion tomorrow in a desperate attempt to pump more cash into the economy.
Gordon Brown’s latest gamble to stem the financial crisis will push the total of Government cash poured into the banking black hole to £1.3trillion.
It means the amount of public cash devoted to ending the credit crunch now matches the total value of what the British economy produces each year.

Gamble: Gordon Brown, with wife Sarah yesterday, will secure £500bn of bad debt


The Tories accused the Prime Minister of behaving like ‘a headless chicken’, claiming his policy on the banks was confused and marked by repeated U-turns.
The Treasury was last night locked in final negotiations over how much RBS and Lloyds should pay to have their toxic assets guaranteed by the taxpayer.
In exchange for underwriting bad debts and other investments worth £250billion for each stricken bank, Chancellor Alistair Darling will impose strict conditions.
The banks will have to agree to pay a fee of up to £10billion each, and will have to pledge a dramatic extension of their lending to homebuyers and businesses, although there was uncertainty over how much would be generated.


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The complex arrangements are designed to free-up the banks, which are struggling to lend money because they do not know the scale of the liabilities they accumulated during the boom and may now have to repay.

By offering to underwrite these so-called ‘toxic assets’, the Government is acting as an insurance company of last resort.

Liability: RBS – 70% state-controlled – will announce its annual results tomorrow

The £500billion on offer is a guarantee that will be paid only in the event that any of the assets default. If the money is not called on, the taxpayer will make a profit from the fee charged by the Treasury.
Government officials played down concerns about the £1.3trillion scale of the different guarantees offered since the crisis began by claiming the majority was in the form of insurance that would not have to pay out.
'Headless chickens': George Osborne's criticism of the Government's plans


But the Government’s response drew a scathing reaction from Shadow Chancellor George Osborne, who said: ‘The whole banking policy Gordon Brown put in place last autumn is now unravelling before our eyes.
‘He told Northern Rock to run down its mortgage business and now to build it up again. He said RBS would return to 2007 lending levels and now they are negotiating new levels.
‘He charged Lloyds a hefty fee for the first Government bail-out and now the fee is being written off.
‘Britain’s recession is made worse by the fact that there is no coherent Government plan, no clear sense of direction and no confidence in a Prime Minister who is behaving with the frenzy of a headless chicken.’
RBS – 70 per cent state-controlled – will announce its annual results tomorrow, when it will confirm the biggest annual losses by a British company on record.
The Treasury plans to announce how much it will offer RBS in guarantees at the same time.
Lloyds, which announces its results on Friday and is 43 per cent owned by taxpayers, will hear then how much it can hope for from the Asset Protection Scheme.
RBS in particular is said to be resisting attempts by the Government to impose a one-off fee of up to £10billion for a five-year guarantee. It is more than the bank’s total worth.
Bankers calling for 10% pay rises if they don’t get bonuses

Bankers are demanding pay rises of up to 10 per cent to make up for the clampdown on the bonus culture, a leading City head-hunter said yesterday.
Shaun Springer, chief executive of Napier Scott, said many executives were renegotiating their financial packages in favour of higher salaries.
He predicted that basic wages could double over the next few years as bonuses are gradually withdrawn.
Someone previously earning £150,000 with a bonus of ten times that amount might switch to a basic pay of £300,000 with a bonus of two or three times that, he added.
Already the Royal Bank of Scotland has raised salaries by 10 per cent this year after failing to pay employees their guaranteed bonuses for 2008.
Vince Cable, the Liberal Democrat Treasury spokesman, said: ‘The laws of supply and demand suggest that this is completely perverse as there is a currently a considerable reduction in the demand for bankers as the sector contracts.
‘If members of the financial services community are managing to pull the wool over the eyes of their shareholders, this suggests that the problems of governance in the sector are even deeper than we imagined.’

Years of change

Rupert Murdoch has warned his international media empire that the global economic downturn will ‘redefine’ the world stage.
In an internal memo to News Corporation staff he wrote: ‘We are in the midst of a phase of history in which nations will be redefined and their futures fundamentally altered.’
The media mogul, 77, added: ‘Many people will be under extreme pressure and many companies mortally wounded.
‘The direction of the business now and over the next few years will define the character of our company for decades.