British Banks Deemed "Technically Insolvent"

Of course, it takes one to know one. The no-doubt accurate call on the health of British banks comes from one of their own, Royal Bank of Scotland. Funny how no US bank is willing to make the same call.

From the Independent:

Britains biggest banks are “technically insolvent”, Royal Bank of Scotland said yesterday…

Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that “the domestic UK banks are technically insolvent on a fully marked-to-market basis”.

The warning does not mean British banks are about to go bust, because the assessment is purely theoretical, and RBS said the position was “not unusual at this stage in the economic cycle”.

However, it will add to pressure on the Government to provide more support for the country’s banks…

The value of Barclays fell by a quarter in stock market trading yesterday, amid a series of wild rumours about its finances, although the bank said it saw no need to comment on the drop.

City analysts said the bank had been targeted by traders after regulators lifted a ban yesterday on the short selling of financial stocks. Barclays’ share price, along with the value of other British banks, was also hit by dismal news from the international markets…

Treasury officials were still discussing plans to help British banks last night but the proposals are likely to include up to £100bn of new guarantees for the wholesale markets that underpin mortgage and other loans.

Other possible measures being considered include state support to help Britain’s largest companies raise their own funds. Another option is to launch a “bad bank” to remove tainted assets from the banks’ balance sheets, though while this policy is under consideration, it is thought to remain some way off.

Other proposals include ring-fencing the toxic assets within bank balance sheets. Lord Mandelson, the Business Secretary, has also talked of easing the terms of the Government’s £37bn bank bailout in order to kickstart lending. Downing Street made it clear yesterday that the Government remained committed to doing “whatever is necessary to help British businesses and families get through this global financial recession”.

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  1. Sandi Rubinspan

    No shit, Dick Tracy. So what, apparently, the everyday people don’t mind bailing these POS out. Too big too fail, emm emm.

    The question is too big for what ? Is there one thing they do that we would miss. Market manipulation ? uh No. What else ? I am perplexed. I cannot think of a single thing these guys add that could not be provided by an honest bank.

  2. tom a taxpayer

    Well, isn’t this RBS analysis so comforting, so reassuring: “the domestic UK banks are technically insolvent on a fully marked-to-market basis”, but RBS said the position was “not unusual at this stage in the economic cycle”. Looks like RBS is part of the Bird and Fortune School of Economics and Banking, as shown in this short video:

  3. lucifer

    £200bn to save banks from bad debt
    The taxpayer will be forced to underwrite up to £200 billion of bad banking debt under a government plan to take control of assets belonging to Britain’s major high street lenders, The Daily Telegraph can disclose.

    By Katherine Griffiths and Andrew Porter

    Last Updated: 11:30PM GMT 16 Jan 2009

    In an attempt to restore confidence within the financial sector, the Treasury will tell the banks of its plan on Saturday. It aims to announce details of the rescue package publicly early next week.
    The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders’ bad debts.

    Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government’s total commitment to solving the banking crisis to almost £1 trillion in taxpayers’ money that has either been spent or pledged.

    That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain’s annual GDP of £1.4 trillion

  4. Anonymous

    Well, we have had economic cycles before, and the banks may well have been technically insolvent before. But that was not (always) terminal for financial equity holders as there was always the prospect of recovery.
    Now that the shadow banking system is collapsing around us, there are grave doubts about the feasibility of returning to the business patterns of recent years. Thus, I fear, the prognosis for financial equity is correspondingly bleaker than it has been in the past.

  5. Anonymous

    Consumer confidence, the great oxymoron of the day.

    Where are my squid eyes when I need them, they don’t retain retinal images like ours, thus can defeat advertising and subliminal programing.

  6. Small l

    Oh come on less gets real here, the current market price is set by forced selling and no buying. People who aren’t forced to sell aren’t going to sell into it so the book value is irrelevant.

    I would also like to add market price is set by a small percentage of owners selling, to use the price set as book value has always been plain stupid.

  7. Anonymous

    Yeah there was a item in a London Times piece a few days ago noting that the big accounting firms were telling the government they would not be able to sign off on the big
    banks accounts under current regulations.

    So Darling and Brown invited the bankers and regulators in and decided what was needed was to ease the regulations. As the UK government now holds majority stakes in RBS, Northern Rock etc. closing them down and wiping out the shareholders is probably not an

  8. Anonymous

    There might be more to barclays story than meets the eye. Is it true that the auditors are at the bank and have suggested some revaluations. It seems unlikely in light of the statement from barclays that they will make a profit albeit a reduced one. What really caught my attention though was rumours that barclays was unloading some CDS or CDO’s. This suggested that Barclays was heavily exposed to a ptential credit event. The question then arises which institution or bank is likely to fail shortly.As for RBS then there is no love lost between they and the other UK banks after they won/lost on the dutch bank.

  9. Anonymous

    I couldn’t agree more with Small 1’s comment. The biggest tragedy of the make-it-up-as-you-go implementation of the TARP is that when Treasury chose not to use the funds to buy MBS they missed an opportunity to set a workable price for them with some relationship to actual payments being made on the underlying loans. Therefore the banks are still stuck with assets that are worthless only in the narrow sense that no one wants to buy them at the moment.

  10. gaius marius

    I would also like to add market price is set by a small percentage of owners selling, to use the price set as book value has always been plain stupid.

    were bank assets still of the traditional variety — whole loan mortgages, for example — i’d entirely agree with small1.

    but the fact is that mark-to-market was put in as a response to the systemic change in bank balance sheets wrought by the securitization revolution. a 30-year mortgage is a much different asset than a mortgage-backed security, with a different horizon and different volatility — much less a CDO based on MBS. no one argues that equity portfolios should be marked to market because of their inherent characteristics of volatiity and marketability; these MBS portfolios have vastly more in common with equities than with whole loans; so why should they not be marked to market?

    what’s more, as is now becoming apparent, accounting rules don’t affect ultimate cash flow — and cash flow impairment is showing up everywhere in this round of bank quarterly reports. there’s no asset in the financial world that doesn’t get marked down heavily on cash flow impairment. the emergent effect of the devastation in housing and now commercial real estate on these securities is little less than a validation of mark-to-market accounting.

    i wouldn’t argue that there is no liquidity premium being extracted from sellers under these conditions. but the fact is that such premia are not the only or even primary source of writedowns on them — it is the probable cash flow impairment driving valuations. criticisms of mark-to-market are a red herring.

  11. Michael Fiorillo

    “… the banks are still stuck with assets that are worthless only in the narrow sense that no one wants to buy them at the moment.”

    Given that the time frame that seems to govern these characters makes a 7 year old seem far-sighted, is this supposed to be a comfort?

    No one wants to buy them at the moment because no one knows what percentage – a large one, no doubt – are fraudulent and essentially worthless.

    On another, but related issue, could Yves or readers of the site answer the following for me: setting aside the so-called sanctity of the contract, why should we not consider declaring all CDSs owned by parties that do not own the underlying bonds null and void?

    It seems to me that the holders of these instruments have a built-in incentive to benefit from the distress or demise of the underlying companies, and that some of them will inevitably act upon that.

    While it can be argued that holding a CDS on a company whose bonds you own is a legitimate form of insurance, these instruments are otherwise highly destabilizing and should be nullified.

    Again, absent arguments about these being contracts freely entered into, shouldn’t this be explored?

  12. Anonymous

    Aren’t banks always technically insolvent? Don’t they always rely on Ponzi scheme like financing. New investors/depositors are always required as existing investors/depositors exit. What is different is the extent of the leverage this time.

    The fact that this crisis is likely to hit New Labour Great Britian extremely hard (threatening really the very existence of the country) indicates the extent to which this crisis ensares both Left and Right.

  13. Hank Paulson's Mom

    I can’t seem to get to the original story from The Independent. Even a search brings up broken links. Was the story pulled?

  14. Hank Paulson's Mom

    I can’t seem to get to the original story from The Independent. Even a search brings up broken links. Was the story pulled?

  15. Eric L. Prentis

    Mr. Joe Nocera in today’s NYT piece entitled, In Search of One Bold Stroke to Save the Banks says, “A quick reminder for readers who wonder why the banks shouldn’t be allowed to go bankrupt, like any other company that made the kinds of mistakes banks made. The answer is that the banking system is the engine of the economy; if banks stop functioning, economic activity will grind to a halt. Indeed, at least some of the pain we are going through now is the result of the banking system’s not functioning properly.”

    Mr. Nocera offers a specious argument while his assumptions, premises and facts are suspect. The banking system is important but not the individual companies themselves. The US is over banked and needs to shrink this sector, recently approximately 40 percent of S&P 500 profits came from banking while the long term average is only seven percent. The financial ruling class, as represented by Federal Reserve Chairman Bernanke, wants to purchase all toxic bank assets to save all banks and their managements. Taxpayers have no interest in saving the managers of failed banks or their stockholders/bondholders. The banking system will operate much better without these bankrupt institutions, i.e., they are not too big to fail as long as the government nationalizes them. The Bernanke approach dooms the American economy to the Japanese disease of a lost decade of poor economic growth while the tried-and-true Swedish model allows the government to administer a controlled liquidation of bad bank assets, support the good banks and return the US to strong economic growth.

  16. Anardchus

    Gaius Marius – while you’re absolutely correct from a truth in accounting perspective, mark to market or fair value accounting is pro-cyclical and takes away any leeway that regulators and bankers might otherwise have in managing through a crisis.

    Former FDIC Commissioner William Isaac has been the most informed critic of fair value accounting, see here, for example:

    Don’t mistake this as defense of the bankers in any way – I wouldn’t waste a single breath on that forlorn effort, and frankly I don’t think that Sheila Bair would know what to do with accounting leeway if you served it to her on fine china – but fair value accounting has definitely worsened this crisis relative to past cycles, most notably relative to the 1980s’ Latin American Loan debacle.

    I do think I’d disagree with the observation that a 30 year mortgage is a much different asset than a plain vanilla MBS, especially to the extent that you’re claiming that the volatility of plain vanilla MBS is more similar to equities than a 30 year mortgage. Because the fact is, a single 30 year mortgage or small group of 30 year mortgages from a localized geography on the books of a small bank has a value that’s much more volatile that a plain vanilla MBS. The MBS are clearly more liquid and have more observable prices in the market than raw mortgages, to be sure, but why should the accounting on those be more conservative (ie, fair value accounting in a downturn is more conservative treatment than hold to maturity) than whole mortgages just because the values are observable? Seems to me that the greater underlying volatility argues for more conservative accounting on the whole mortgages than on the plain vanilla MBS, except of course that it’s much harder to implement fair value accounting on whole mortgages.

  17. doc holiday


    Lessons from the global credit crisis for social democrats

    There can be little doubt that, faced with the choice between sovereign default and an unexpected burst of inflation to reduce the real value of the government’s domestic-currency-denominated debt, many countries’ governments would choose inflation. They would instruct their central banks to produce the required inflation. I expect the US (where the Fed has little operational independence) and the UK (where the operational independence of the Bank of England can be suspended instantaneously by the Chancellor invoking the Reserve Powers of the Treasury, and ended through a simple amendment of the Bank of England 98 Act) to fall into this category of inflation before sovereign default.


  18. doc holiday

    Treasury’s reserve powers

    Reserve powers

    (1) The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances.

    (2) An order under this section may include such consequential modifications of the provisions of this Part relating to the Monetary Policy Committee as the Treasury think fit.

    (3) A statutory instrument containing an order under this section shall be laid before Parliament after being made.
    (4) Unless an order under this section is approved by resolution of each House of Parliament before the end of the period of 28 days beginning with the day on which it is made, it shall cease to have effect at the end of that period.

    (5) In reckoning the period of 28 days for the purposes of subsection (4), no account shall be taken of any time during which Parliament is dissolved or prorogued or during which either House is adjourned for more than 4 days.

    (6) An order under this section which does not cease to have effect before the end of the period of 3 months beginning with the day on which it is made shall cease to have effect at the end of that period.

    (7) While an order under this section has effect, section 11 shall not have effect.

    Danke Schoen

    (If they need my fuc-ing help, they should call me)

  19. doc holiday ranting & raving

    It almost seems as if the problem at hand is that banks simply don’t want the potential future cash burn attached to the investments they made, i.e, these banks managed the risk and made choices to take on contracts and to assume risk. The problem now seems to be that they all want new and improved terms and they now want the taxpayers to subsidize the future losses attached to the risk they took on. These banks that are in trouble today had no problem taking profits and being independent as they played at the casino, but now that they’ve lost, they simply want better terms, as in not being accountable for being stupid.

    Any bailout at this point should be attached to accounting regulation that has strict criminal penalties, which will place CEOs and insiders in prison, without question. The lack of regulation to this point is a matter where leverage and risk were ignored and the people that should have been accountable are in positions to walk away from what amounts to criminal activity — that mentality has to stop dead in its tracks in 2009, and we need to see investigations into why these bankers were allowed to destroy the financial system!

    If we fail to find accountability in 2009, we will see a global depression for decades — and I would much rather see 20 or 30 bankers in jail and a hint of justice that begins to restore confidence; these people that have caused destruction need to be treated like war criminals, because this is essentially WW lll …

    Amen and goodday

  20. Anonymous

    “these people that have caused destruction need to be treated like war criminals, because this is essentially WW lll …”

    Amen, Dr. Holiday. Amen.

  21. cap vandal


    (ie, fair value accounting in a downturn is more conservative treatment than hold to maturity

    Totally correct on the asset side. However, more general application of M2M or as I prefer to refer to it, derivative accounting, also marks the liabilities to market.

    I was just looking at a floating rate preferred issue of BAC, a former Merrill issue, that has a par value of $25 but sold yesterday for $6.

    If BAC had marked their debt to market value, they would have announced a nice profit yesterday.

    As irrational as that might sound, if both BAC and C had preferred shares of the other on the asset side of their balance sheet, they cold have just traded them with each other for a net zero impact.

    A lot of people are interested in more widely applying derivative inspired accounting to more areas of the balance sheet under the misguided belief that it is inherently more conservative.

    In fact, it is just inherently less stable and more volatile.

  22. Anonymous

    @doc holiday,

    Dito for me, this is as much a social issue as a financial one.

    Is the Constitution or Federal Law to be suspended just out of convenience for a few in society that in their minds made a honest mistake.

    These people knew the risk they took with other peoples LIVES, they were entrusted with their labors fruits to secure a better future for them and their family’s. Their actions bespeak of criminal intent, where is their fiduciary duty, then they take their cut and some of yours to live and party like Caligula’s guests while the Country is diminished.

    The bail out, amounts to nothing more than double dipping and if any registered accountant or CPA handled a clients monies this way would be charged and tried in Court, it is nothing more than a Nigerian scam, we need more of your monies to release your total amount, then sorry we lost it, bad luck and such is life, they always get their monies don’t they now.

    I posted before “Consumer Confidence” is the oxymoron of the day. How can you have Confidence with out the Rule of Law, that is why its there, to give Citizens the confidence that the unlawful acts of others will be resolved with out a lynch mob or a storming of the fortress gates. It is an agreement between the State and its Citizens for the protection of both. The Citizens will find confidence again when the Rule of Law is applied, until then their moral compass will spin, no direction can be deduced in which to travel.

    BTW good bye G.W.B. you do throw one hell of a party, not to worry we will clean up the mess, you just go and relax as you must be tired for efforts, pesky reporters and their questions, having to prove WMDs or any thing you had a gut feeling for, it should be enough for the King just to proclaim the truth. I look froward to your book and speaking tour, should be interesting.


  23. Anarchus

    Cap Vandal:

    I think we agree.

    M2M makes no economic sense when applied to the liability side of the balance sheet, since: (a) if you’re going to stay in business, you have to pay off your liabilities dollar-good at book, unless (b) you can buy up 100% of the liability in the market at the discounted value, except that (c) practically speaking you almost never can buy up the liability in the market at a hugely discounted value since the liabilities really only go to huge discounts when the responsible company is under massive financial distress.

  24. doc holiday

    Right on Skippy,

    This is a social problem and it makes me wonder how a problem of this magnitude would be dealt with, if we were dealing with a global health problem, where every hospital had been involved in fraud and mis-management and negligent, like these crooks at the banks and insurance holding companies, who are currently un-accountable for their actions.

    As a society are we are forced to turn a blind eye to fraud, just because there is an elite group of upper crust pirates that are above the law? Nonetheless, there is a wide range of government connected politicians that have been supportive of this fraud — and how easy it is to forget this chain of corrupt people involved in this conspiracy, who should be in prison today, slipping on bars of soap, falling into the arms of their loved ones:

    n June 2008 Conde Nast Portfolio reported that numerous Washington, DC politicians over recent years had received mortgage financing at noncompetitive rates because the corporation considered the officeholders “FOA’s”–“Friends of Angelo”. The politicians extended such favorable financing included the chairman of the Senate Banking Committee, Democrat Christopher Dodd, and the chairman of the Senate Budget Committee, Democrat Kent Conrad. The article also noted Countrywide’s political action committee had made large donations to Dodd’s campaign. Democrat Senator Dodd proposed that the federal government buy up to $400 Billion in defaulted mortgages. Citizens for Responsibility and Ethics in Washington (CREW) has called for House and Senate to investigate Senators Conrad and Dodd.

    Why is Dodd free?

  25. Small l

    gaius marius

    Yes cash flow matters but the article is about technical insolvency, or another scare campaign depending on your point of view.

    M2m is a problem on the up and down side. A large percentage of the market now has little to with investment return and a lot to do with trading. When the small number of buyers exceed the small number of sellers we have asset inflation and rosy books; and away we go; the system is awash with credit backed by assets that have a book value based on the small percentage traded (to get things really humming add margin loans and stir).

    When things turn we have this mess.

    I don’t know what the solution is, but pretending that the solution is found using willing sellers and buyers bidding for a small percentage of the asset is stupidity.

    Perhaps it is the worse solution possible; but better than everything else tried ( to pinch Churchill words); but it doesn’t make it right.

  26. Anonymous

    well Barclays aren’t paying their suppliers on the due date so I guess they are actually in the full missionary position (tits up)

  27. Bankruptcy for LLoyds TSB

    What is so disgusting and ridiculous about this country and the big fat cat wankers that work in the city is my story… READ THIS!

    I formed a company in 2004 which sold equipment and materials, i'm was in my mid twenties with aspirations and drive and self motivation to do my best for myself and so that i could employ others. Year 1 i turned over just short of 60K, tripled turnover Year 1 to Year 2 and then doubled turnover year 2 to year 3… Until the banking situation in year 4 my bank withdrew my overdraft facility, becuase they needed to "recover profitable assets", six months later with the inability to be able to purchase goods, coupled with the lack of sales from everyone tightening the purse strings i unfortunately had to close my business – That was the end of last year.

    Over 8 months on i have just received a petition for my personal bankruptcy because of the overdraft i couldn't pay back.

    So in under 2 weeks i have to go to court and potentially become bankrupt becuase Lloyds TSB withdrew my overdraft and caused my company to close.

    It is disgusting to think that they have the audacity to do this when the financial crisis is due to their negligence and ineffeciency to be able to keep an eye on their accounts and exposure, let alone the disgusting decision to withdraw my overdraft and cause me to close a profitable business.

    I am now in the process of looking at petitioning their bankruptcy after all my taxpayers money has been ripped out of my pocket to be put into an insolvent company such as LLoyds TSB. If their are any Lawyers out there up for the challenge please get in touch with me i would LOVE to speak with you, or anyone that is interested in stopping these bankers stealing our taxpayers money in order to pay for their "performance bonuses".. This country is going to pieces for so many reasons and it's about time we all lose the stiff upper lip and have our say, look at the Spanish or French, although i am not an advocate of everything they do, they speak their minds and governments and councils listen to what they have to say.

    Get in touch at

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