RBS is a vulture bank driven by debt

From the disaster at the Co-op Bank, driven into the hands of hedge funds by incompetent management, to the Royal Bank of Scotland, which forced small firms out of business so it could buy up their assets on the cheap, the message is clear.

Five years after the great financial crash of 2008, the regulators still haven’t got a clue what is going on and bad debts are threatening to bring the whole system crashing down in an even more calamitous way.

What’s the government been doing? Apart from bailing out banks like the RBS, the answer is precious little. The banking bill going through parliament ignores or weakens many of the recommendations made by the Banking Commission set up by the ConDems.

The Commission proposed strict separation between the lending and trading arms of the global banks. But the government, fearful of the reaction of the financial sector, watered this down.

As to the notorious RBS, which after it was nationalised continued to pay vast bonuses to senior staff, including disgraced CEO Fred Goodwin, it has taken a self-commissioned report by Lawrence Tomlinson, a care home entrepreneur, to expose how the bank is wrecking small businesses. His report claims:

“The experiences of many businesses across the country suggests that, at least within RBS, there are circumstances in which the banks are unnecessarily engineering a default to move the business out of  local management and into their turnaround divisions, generating revenue through fees, increased margins and devalued assets.”

Viable companies told Tomlinson that RBS had put them into the hands of what they called the bank’s “hit squad”, which imposed vast fees and fostered a “climate of fear” among its struggling customers. When the firms went into default, another division of RBS bought them for a song as a way of reducing the bank’s nominal debts.

RBS is desperate because its debts are astronomical. Over and above the £36bn of toxic loans RBS has put into its “bad bank account”, The Herald reports that there are a “number of enormous landmines that continue to lurk just under the surface”, amounting to a staggering £1 trillion.  

Over to the Co-op Bank. Once it was part of a group that had its origins as a mutual created to help working people and the labour movement. Today it is a shambles, driven into the ground by people like former chairman the Reverend Paul Flowers, whose colourful private life has boosted tabloid circulation.

His is a story of sex, drugs and politics that helped bring down a bank. After owning up to a £1.5bn capital shortfall, it was recently acquired by vulture funds group LT2. Poor management and light-touch UK financial regulation lay behind its demise.

Flowers, who once underestimated his bank’s asset base by £44bn in public evidence, was appointed to the Co-op’s board in 2008 after using his network of labour movement contacts to his advantage. In the last months of New Labour in 2010, he was appointed chairman of Co-op Bank.

The Financial Times reports: “Crucially, he had been made a non-executive director of the bank the year before, passing a lengthy ‘significant influence function’ interview. So he got only a light grilling from the FSA on his suitability for promotion. Labour links counted in his favour, say people familiar with process.”

In 2009, the Labour government persuaded the Co-op to buy out the Britannia Building Society, which came with vast debts. This was a major factor in the Co-op’s eventual collapse. The ousting of Flowers in June this year was too little too late to save the bank.

Of course, the ConDems are milking the Co-op story for all its worth for their own political ends. But the Blair-Brown governments and their ministers also share political responsibility for the debacle at RBS and the Co-op, not that they will ever acknowledge it.

Paul Feldman

Communications editor

A corporatocracy in all but name

The scandal engulfing the Cameron government over ministers’ close links with the Murdoch media empire, as well as promises made about BSkyB before the 2010 election, is symptomatic of a wider political disease called corporatocracy.

How governments were “bought” by the corporations, especially the so-called investment banks, is the story of how the state became a direct mouthpiece, advocate and sponsor of big business.

It parallels the rise of a global economy dominated by transnational businesses that find national borders an irritation and are prepared to move capital to the region or country where it is most profitable without a second thought.

Murdoch was doing no more than what a shareholder-driven business has to do. News Corp lobbied to win support for its aim of buying up shares in BSkyB. It made use of its connections to culture secretary Jeremy Hunt and prime minister Cameron.

The fact that the plan coincided with the hacking scandal, leading to the Leveson inquiry, blew their strategy out of the water. With the BSkyB deal off for the indefinite future, the Murdochs have no further need to protect ministers.

Murdoch’s media empire is moving away from supporting the Tories and is backing the Scottish National Party north of the border. Now commentators like Peter Oborne are speculating that the government itself could fall over the scandal. The fact that Cameron is regarded as a traitor by traditional Tories for getting into bed with the Lib Dems and being too soft on Europe is only fuelling the flames lapping at the door of No.10

The Labour Party is making a great deal out of Cameron’s difficulties but let’s not forget that the previous Blair/Brown governments were politically responsible for perhaps the biggest scandal of them all – the creation of a deregulated banking industry.

Deregulation was not the prime cause of the financial meltdown of 2007 but played its part when the unravelling began. If Cameron had his Chipping Norton set with Murdoch employees Rebekah Brooks and Andy Coulson, then New Labour had its prawn cocktail circuit.

Blair and Brown assiduously courted the banks before and after the 1997 general election victory. They pledged “light-touch regulation” and Labour’s endorsement of the City and financiers in general.

Sir Fred Goodwin, who ran the Royal Bank of Scotland into the ground, by 1999 was actually in the government machine itself, chairing task forces on the work of credit unions (!) and the New Deal programme. In 2001, Goodwin attended a pre-election lunch for bankers at Chequers aimed at securing their support at an election. In 2004 Goodwin became one of eight bankers knighted under New Labour.

So when in 2007, RBS decided to take over the Dutch bank ABN Amro, no one in Whitehall or the Financial Services Agency demurred. ABN Amro was badly exposed to the US sub-prime market and RBS was severely weakened as a result. The rest, as they say, is history. Taxpayer bailouts followed by recession and spending cuts. Thank you Brown, Blair, Ed Balls (who in 2006 praised deregulation) and Yvette Cooper, chief secretary to the treasury.

The official report into the collapse of RBS identifies key moments between 2005 and 2007 when the Financial Services Authority created by New Labour backed off from challenging the bank’s low levels of capital and liquid assets.

Adair Turner, FSA chairman then and now, admitted recently: “Was there, however, a pervasive influence of assumptions about the City on the UK political dynamic? Yes, there was. There was a belief that light-touch regulation, or limited-touch, would make the City bigger, and that the City was a source of employment and tax revenue in particular. And therefore there was clear pressure on the FSA at times to say, go easy on the city. The FSA never used the phrase ‘light touch’, but politicians did, and they did it in speeches, which were directed at the FSA.”

Yes, the mainstream political parties are all in it together and have been for a long time. At our expense. The present state, the corporatocracy, is rotten to the core, undemocratic, beyond reform and ruling on behalf of the 1%.

Paul Feldman

Communications editor

They were all in it together, not just Goodwin

At last! Something we can agree with Labour’s former chancellor, Alistair Darling, on. Fred Goodwin (formerly Sir) should not be singled out by the establishment.

Goodwin certainly had a big hand in the virtual destruction of the three-century old Royal Bank of Scotland, but he was far from alone in his responsibility for the causal chain of events that brought the global financial system to the brink in 2008.

There’s an entire class of people whose positions should be on the line for allowing and encouraging the massive expansion of the system of credit and debt.

The Financial Services Authority, the toothless body created by the previous government, cheered from the sidelines as balance sheets more and more resembled a house of cards.

Darling’s New Labour government was at the forefront of ensuring London’s role as the base for the world’s banks and other gambling houses.

But can any of them be blamed for doing their jobs? Surely they were just doing what was necessary to keep the economy on the growth path? Yes indeed.

Having thrown in their lot with capitalism - the social and economic system that distributes profits extracted from the value-generating activities of those employed in the production of commodities to otherwise disinterested shareholders - they also became its playthings.

But it was their choice, and they are collectively responsible. And as the crisis intensifies it exposes more of those who constitute that collective web of responsibility.

Now the inner logic of the system has brought 25 of the 27 governments of the European Union together in a most terrible Faustian pact.

What they are calling a “fiscal union” is a drawing together of the otherwise helpless in an unprecedented assault on their populations. Their intention is to ensure that the entire population of Europe gets to experience the austerity conditions already wrecking the lives of the 50% of young people without jobs in Greece and Spain.

And all with the objective of a “return to growth” at some time in the distant future.

So what are the prospects?

Fresh from chairing the global economy session at the World Economic Forum in Davos, eminent Financial Times commentator Martin Wolf has this to say about the fiscal union:

“The IMF now forecasts a recession in the eurozone this year, with a decline of 0.5 per cent in overall gross domestic product. GDP is forecast to fall sharply in Italy and Spain, and stagnate in France and Germany. This is a terrible environment for countries seeking to cut fiscal deficits. Forecasts are far from satisfactory for other high-income countries. But the eurozone is the most dangerous part of the world economy: only there do we see important governments – Italy and Spain – menaced by a loss of creditworthiness.”

And in a chilling forecast, Wolf looks back to guess at the future:

“Just as it was not the dominant cause of the collapse, but rather sloppy lending and improvident private borrowing, so fiscal discipline is not the cure. This attempt to vindicate the catastrophic austerity of Heinrich Brüning, German chancellor in 1930-1932, is horrifying.”

A repeat of the ensuing events in Germany is indeed horrifying to contemplate. There can’t be such a repeat. The debt-fuelled growth that produced global corporations more powerful than any single country means that today’s crisis affects all countries simultaneously.

The capitalist system of production and its inseparable financial twin have been on life-support since 2008. It’s time to pull the plug.

Young, workers, the unemployed, students and older people must now draw together in a global network of People’s Assemblies. They can establish the power not only to settle accounts with those responsible for the crisis but build a society motivated by meeting human needs in place of the narrow interests of shareholders.

Gerry Gold
Economics editor

How to 'rescue' the banks from the owners

On the day the Royal Bank of Scotland reported the biggest annual loss in UK corporate history - a mind-boggling £24 billion - and news emerged of former chief executive Sir Fred Goodwin’s £700,000 a year pension, New Labour announced its third rescue package for the stricken bank.

This was timed to prevent a further decline in the bank’s share price which had fallen by 90% in the last year. The plan worked. Shares rose. How so?

The deal stops short of total state ownership, limiting the state’s interest in the bank to a potential 95%. But the government’s, and hence the taxpayers’ non-voting share-holding leaves control and any future profits to the current shareholders. The details of the deal are complex, involving a tax-funded insurance scheme under which the state guarantees to buy up the bank’s toxic assets.

Since October, the major capitalist countries have pledged not to allow systemically important banks to fail. What is being protected by this conspiracy of the world’s most important governments is of course the system of social relationships in which private capital owned by shareholders underpins billions of employment contracts. The contract guarantees that part of the value generated by the labour of people who work for a living ends up as profit in the shareholders’ bank accounts.

But the economy is in freefall, and the profit system is broken. Japan’s exports have fallen by 50% in a few months and its industrial output plunged 10% in January - the biggest monthly drop since records began more than half a century ago, the government said today. Key industries like car manufacturing which have been the engine of growth are, like the banks, bankrupt, too important to be allowed to fail, too big to save.

This contradiction is real. It can be resolved in one of two ways. The competitive logic of capital insists on the destruction of overcapacity and the loss to humanity of much that it has produced. The 90% drop in RBS’s share value provides a measure of the shrinkage the system needs before growth can restart.

Another way is possible. A different kind of government and political system would greatly simplify the rescue by taking the banks – all of them – into full social ownership. Has anyone trodden this path in history? Well, yes actually. Just a few weeks before the Russian Revolution of 1917, Lenin wrote how capitalism had made a new society possible by creating an “accounting apparatus in the shape of the banks”, which revolutionaries “take ready-made from capitalism; our task here is merely to lop off what capitalistically mutilates”.

He added: “ We can ‘lay hold of’ and ‘set in motion’ this ‘state apparatus’ ...because the actual work of book-keeping, control, registering, accounting and counting is performed by employees, the majority of whom themselves lead a proletarian or semi-proletarian existence.” [emphasis in original]. A few weeks later the transfer of Russia’s private banks into public ownership was achieved.

RBS has vast resources and assets worth a nominal £2.2 trillion. It has been at the heart of the world’s financial system since the earliest days of capitalist production. It grew to become one of the world's top 10 financial services groups which operate in every country around the world.

The services they provide over global networks enable people and organisations throughout the world to account for the products they produce and exchange.
In common with most of the big banks, RBS provides insurance services. It is the second largest general insurer in the UK, and the biggest provider of motor insurance. It develops and maintains the infrastructure and technology that support its branches and cash machines, internet and telephone banking services, mortgage processing and money transmission.

The work of the bank is carried out by the more than 140,000 people it employs worldwide. Under their control the bank can continue without the need for shareholders. From their own ranks they could elect a new system of democratically-accountable management. Who needs the owners or executives like Goodwin? No one! It's time to seize what belongs to us in any case.

Gerry Gold
Economics editor