Here we go...who's next..?

[gez]

My understanding of the Special Administration being proposed by OFWAT is that it's basically temporary nationalisation. It's not the administrators rocking up to your lock-up with the bailiffs.

People will still be needed to fix leaks, pump poo around and do all the other stuff a water company does. They're not going to just send everyone a P45 and turn the taps off for a quarter of the UK.

I've been in a company under administration. Whatever form it takes, yes they'll need to keep a core number of staff for critical operations. The rest will be made redundant immediately. Who ever takes it on, be it private or gov are going to want it as cheaply as they can. Plus as the article states they are in huge debt. People want their money back, and there's no way they'll be able to get anything at all back unless some huge savings are made, either by literally selling off assets or reducing costs (i.e redunancies).

 

[paulfromcamden]

The shareholders are, by a very large margin, Pension funds etc. Not individual people. Whenever a companies shares drop to zero it makes some tiny impact to everyones pension pot growh. So just taking that position on all companies negatively impacts an asset that a very large proportion of the working population are reliant on for their future security.

Some discussion on this in previous thread on TW I linked to above.

As you say, the impact to most people's pension pot will be tiny.

 

[davidsrsb]

Pension funds etc

Pumping tax payers money in to save pension funds is a dubious theory when so many of the shareholders are overseas

 

[gez]

Don't misundstand me, I have no love for the high paid execs. But whatever is done to rectify the situation should focus on getting them out. Not just letting the company go to the wall.

 

[gez]

Some discussion on this in previous thread on TW I linked to above.

As you say, the impact to most people's pension pot will be tiny.

Yes tiny on an individual case basis. But if every company is treated in such a way as it's shares just become valueless, then it starts to add up. So as a way to solve such issues, it's not the correct way forward.

 

[paulfromcamden]

I've been in a company under administration.

I assumed as much tbh as this has clearly struck a chord.

Whatever form it takes, yes they'll need to keep a core number of staff for critical operations. The rest will be made redundant immediately. Who ever takes it on, be it private or gov are going to want it as cheaply as they can. Plus as the article states they are in huge debt. People want their money back, and there's no way they'll be able to get anything at all back unless some huge savings are made, either by literally selling off assets or reducing costs (i.e redunancies).

I'm not sure that's quite what is being discussed. We're talking about a large national monopoly utility. The infrastructure will stay in place. The people needed to operate that infrastructure will stay in place. The management will be out on their ear. Investors will take a haircut.

 

[paulfromcamden]

if every company is treated in such a way as it's shares just become valueless

Well run companies prosper and benefit their shareholders. Badly run companies fail and lose them money.

It's the job of an investor to distinguish one from the other.

How could it be otherwise? Should the taxpayer bail out every badly run firm that goes pop? What happens when they do it again the following year?

 

[gez]

I assumed as much tbh as this has clearly struck a chord.


I'm not sure that's quite what is being discussed. We're talking about a large national monopoly utility. The infrastructure will stay in place. The people needed to operate that infrastructure will stay in place. The management will be out on their ear. Investors will take a haircut.

Yeah it did. It's always the common worker that loses out when companies collapse, the high paid execs just move on to their next job with their fat bank balances intact.

If that's what does happen, that's of course fine. I'm not convinced it's achievable in reality. Can but hope I suppose.

That said, it's not that uncommon these days for employees to be shareholders in their own employers business. Particularly in large companies.

 

[Sue Pertwee-Tyr]

I assumed as much tbh as this has clearly struck a chord.


I'm not sure that's quite what is being discussed. We're talking about a large national monopoly utility. The infrastructure will stay in place. The people needed to operate that infrastructure will stay in place. The management will be out on their ear. Investors will take a haircut.

I think the model here is probably a bit like when failing rail companies get transferred to the ‘operator of last resort’.

 

[Sue Pertwee-Tyr]

Yes tiny on an individual case basis. But if every company is treated in such a way as it's shares just become valueless, then it starts to add up. So as a way to solve such issues, it's not the correct way forward.

You only need to do it to a couple, ‘pour encourager les autres’.

 

[Jubal]

Well run companies prosper and benefit their shareholders. Badly run companies fail and lose them money.

It's the job of an investor to distinguish one from the other.

How could it be otherwise? Should the taxpayer bail out every badly run firm that goes pop? What happens when they do it again the following year?

You kindly linked the older thread which I skimmed. Someone made the great point on there that this is special case. Critical national infrastructure. And increasingly more so with climate change.

 

[davidsrsb]

Critical national infrastructure. And increasingly more so with climate change.

So the management shouldn't have been allowed to recklessly borrow to fund big dividends - basically looting the company

 

[Jubal]

So the management shouldn't have been allowed to recklessly borrow to fund big dividends - basically looting the company

On this we’re in violent agreement. I feel naive now, it’s glaringly obvious with hindsight that this was the point or consequence of privatisating something that can’t be allowed to fail.

 

[Ponty]

Right, because the ONLY people who would suffer in such a situation would be the mega rich that we all hate so much.

The stupidity of such beliefs is that it's so full of loathing for those considered unacceptably priviledged it totally ignores the tens of thousands of people who would likely lose their jobs who are on average salaries. But I suppose we don't care about the common worker as long as the rich get what they deserve right?

It’s a failed PLC. It shouldn‘t be bailed out at vast taxpayer expense to keep jobs in said failed organisation. Anyone with any ability will walk into another job in any case. There’s no job for life.

 

[Ponty]

The shareholders are, by a very large margin, Pension funds etc. Not individual people. Whenever a companies shares drop to zero it makes some tiny impact to everyones pension pot growh. So just taking that position on all companies negatively impacts an asset that a very large proportion of the working population are reliant on for their future security.

If people want no risk, don’t hold equities. Thames water going to zero will have an absolutely minuscule impact at an individual level. It follows that you’d simply plough taxpayer cash into any failed business to indemnify shareholder loss?

 

[Graham B]

You’re in the too big to fail camp then. All banks have interdependencies. The failure of any bank is nothing which shouldn’t be able to be handled effectively by regulators. They could be insolvent but still be operational until sold. As happens with companies in administration.

Northern Rock, Lehmans etc went pop, so should have RBS. Nothing to do with the origins of certain key politicians at the time, I’m sure.

No, almost all of the above is wrong.

You are correct that banks have dependencies for their funding, that is completely normal, and is intended to spread risk.

But, at the time, RBS were the biggest bank in the world in terms of assets (whether they were genuinely assets is moot at this point), and had achieved fast and aggressive growth by funding themselves and almost all of their lending on a daily basis.
Small c conservative banks fund their lending full term, i.e. if they grant a $100m loan to a client for 5 years, then they borrow $100m for 5 years from the market at a slightly lower rate, and will generally have a mortgaged asset such as a factory or aircraft that can be sold if the client can’t pay. The failure of one or even multiple deals is therefore unlikely to quickly destroy even a small bank.
RBS by contrast totted up their funding needs daily, and borrowed whatever they needed on an overnight basis. This gives a lot of flexibility, and is obviously cheaper for the bank. Some capital was reserved in cash, but only a very small percentage compared to most other banks. Of course, not all loans and other instruments are repaid in full every day, so every single day they had to borrow from the markets the same as yesterday, plus or minus whatever deals had repaid or drawn down. The total amounts they were borrowing had gone up in a huge leap when they paid €67Bn (£49Bn) to take over ABN Amro, and unknowing ownership of a large number of poor quality assets. The total outstanding loan book was around or possibly over £500Bn, I can’t recall exactly.

On the 7th October 2008, RBS were unable to borrow enough from the markets to cover their daily funding requirements. A combination of their weakening share price, other bank and client defaults, plus awareness spreading of the likely risk that RBS could not cover it’s losses meant that other banks were unwilling or unable to provide sufficient liquidity. They would therefore have been unable to pay back what they owed on that day, and without Darling and the BoE stepping in with an immediate £20Bn, RBS would have instantly and totally collapsed on the spot. It would not have been possible to operate a collapsed and defaulted bank even on a skeleton basis, as they would literally have had no working systems or money to pay anyone, least of all their thousands of employees.

All the other banks that were owed billions would have suffered significant if not fatal damage as the contagion spread, and the systems that RBS directly operated such as WorldPay (card payment transactions, card machines, all Link, Mastercard and Maestro ATM’s, online transactions) and SWIFT (payment instructions between financial institutions, bank secure messages, Letters of Credit & Guarantees) would have failed worldwide, instantly and completely.

All RBS, NatWest and Ulster Bank customers would have been unable to use their accounts for an unspecified amount of time, and may have lost everything as there was no deposit protection scheme at the time. Lehmans, Bradford & Bingley and others had already collapsed, but losses to the public and banks were tiny by comparison, and they did not operate global payment systems. RBS most likely would have crashed all the other banks and therefore the entire global economy if it had failed.

I do not however think that they were too big to fail. There’s no reason even such a huge lender could not bear the very worst financial storms, as long as they are sufficiently capitalised and regulated.

This is why deregulation in this field (Thatcher, tories in general and brexit) are not always good things, whereas ‘EU red tape’ including the ever-tightening Basle capital adequacy requirements, most certainly are.

 

[Graham B]

No company should be too big to fail. It went bust through board arrogance and negligence. Shareholders should have gone to zero and operated by regulators / administrators until elements worth having, such as payment systems, were sold off, no doubt to other banks. There was nothing wrong with Lloyds by the way, they were / are a solid bank. Their problem was having that other crock of 5#1te which was HBOS forced upon them. Spotting the theme here?

Nope. Regulatory inadequacy ALLOWED board arrogance and negligence to take them to the brink.

 

[Colin L]

On this we’re in violent agreement. I feel naive now, it’s glaringly obvious with hindsight that this was the point or consequence of privatisating something that can’t be allowed to fail.

it’s call asset stripping. Macquarie are past-masters at it and the Tories have been doing it to the UK since Thatcher days. Their motto is privatise the profits and when the inevitable bail out is needed, socialise the losses.

 

[kendo]

The Thames Water executives future planning department...

 

[Ponty]

No, almost all of the above is wrong.

You are correct that banks have dependencies for their funding, that is completely normal, and is intended to spread risk.

But, at the time, RBS were the biggest bank in the world in terms of assets (whether they were genuinely assets is moot at this point), and had achieved fast and aggressive growth by funding themselves and almost all of their lending on a daily basis.
Small c conservative banks fund their lending full term, i.e. if they grant a $100m loan to a client for 5 years, then they borrow $100m for 5 years from the market at a slightly lower rate, and will generally have a mortgaged asset such as a factory or aircraft that can be sold if the client can’t pay. The failure of one or even multiple deals is therefore unlikely to quickly destroy even a small bank.
RBS by contrast totted up their funding needs daily, and borrowed whatever they needed on an overnight basis. This gives a lot of flexibility, and is obviously cheaper for the bank. Some capital was reserved in cash, but only a very small percentage compared to most other banks. Of course, not all loans and other instruments are repaid in full every day, so every single day they had to borrow from the markets the same as yesterday, plus or minus whatever deals had repaid or drawn down. The total amounts they were borrowing had gone up in a huge leap when they paid €67Bn (£49Bn) to take over ABN Amro, and unknowing ownership of a large number of poor quality assets. The total outstanding loan book was around or possibly over £500Bn, I can’t recall exactly.

On the 7th October 2008, RBS were unable to borrow enough from the markets to cover their daily funding requirements. A combination of their weakening share price, other bank and client defaults, plus awareness spreading of the likely risk that RBS could not cover it’s losses meant that other banks were unwilling or unable to provide sufficient liquidity. They would therefore have been unable to pay back what they owed on that day, and without Darling and the BoE stepping in with an immediate £20Bn, RBS would have instantly and totally collapsed on the spot. It would not have been possible to operate a collapsed and defaulted bank even on a skeleton basis, as they would literally have had no working systems or money to pay anyone, least of all their thousands of employees.

All the other banks that were owed billions would have suffered significant if not fatal damage as the contagion spread, and the systems that RBS directly operated such as WorldPay (card payment transactions, card machines, all Link, Mastercard and Maestro ATM’s, online transactions) and SWIFT (payment instructions between financial institutions, bank secure messages, Letters of Credit & Guarantees) would have failed worldwide, instantly and completely.

All RBS, NatWest and Ulster Bank customers would have been unable to use their accounts for an unspecified amount of time, and may have lost everything as there was no deposit protection scheme at the time. Lehmans, Bradford & Bingley and others had already collapsed, but losses to the public and banks were tiny by comparison, and they did not operate global payment systems. RBS most likely would have crashed all the other banks and therefore the entire global economy if it had failed.

I do not however think that they were too big to fail. There’s no reason even such a huge lender could not bear the very worst financial storms, as long as they are sufficiently capitalised and regulated.

This is why deregulation in this field (Thatcher, tories in general and brexit) are not always good things, whereas ‘EU red tape’ including the ever-tightening Basle capital adequacy requirements, most certainly are.

Worlds biggest bank, unfortunately with ‘growth’ built on sand and egos, the ABN deal being peak ebullience and fantasy. I remember a meeting with a NR exec in 2006 who was explaining their amazing funding and growth model which Applegarth was driving. Similar strategy (short term money market funding) and massively risky. Of course, it went bang. They just weren’t big enough to be bailed at taxpayer expense. Sorry, RBS (and HBOS) should have disappeared, without gouging the taxpayer (or Lloyds shareholders). Protect depositors, yes, sell whatever assets of value they could, but shareholders to zero. They failed and went bust.

Not sure the EU is a paragon of stability. DB is another basket case. Besides, it was Brown’s deregulation which opened the door for the shred to place such huge bets which went wrong. He then rode in with tax payers money to the rescue. Total scandal IMHO.