Banking update: RBS and Lloyds parts to be sold off to the cheapest bidder too?

Tonight the BBC are reporting that a major announcement will be made by the UK Government tomorrow, November 3, regarding the future of the Lloyds and RBS banks that it owns major stakes in following the bailouts of last year. It seems likely that tomorrow's proposal for Lloyds and RBS will be similar to the proposal for Northern Rock featured on this blog last week. At present speculation suggests that both banks will have to split off parts of their branch network to form new 'good banks' (without toxic assets) for sale within four years, while the taxpayer keeps all the bad bits. As with the Northern Rock, the good part of which seems likely to be sold off before the 2010 election, surely the worry must be that four years will not be sufficient for the taxpayer to gain a return on the banks as they return to profitability. However, the hope must be in the Lloyds case that this will undo last year's shotgun marriage between Lloyds TSB and HBOS, one of the largest mergers in UK corporate history, and which the Office of Fair Trading recommended against due to the combined market share of the two banks combined. Whatever happens is bound to be very interesting indeed - it will be interesting to see where this will leave the remains of Scotland's banking industry.

Northern Rock split a poor policy decision for the future

Today the EU approved the UK government plan to split nationalised bank Northern Rock into two. One half will become a so called 'good bank', to be flogged off to a private company while the other half will become a 'bad bank' and remain in the state sector. The bad bank will keep all of the Rock's 'toxic assets', such as the 100% plus mortgages which the bank was left holding after the US financial sector suddenly lost interest in 'repacking' them as AAA securities (which weren't) in 2007.

The government apparently intends to return the 'good bank' to the private sector by the 2010 General Election. Given that that will be in May or before, the privatisation will happen almost straight away in business terms - a very quick privatisation. Although no doubt there will be a competitive process to buy the good bank, bidders, who could include Tesco Bank, Virgin Money, or the National Australia Bank, will be buying a business which would almost need rebuilding from scratch as a credible savings and mortgage bank. Meanwhile taxpayers will be left holding the toxic assets in the bad bank, and could possibly be paying for them as generations. Surely it would be wiser to rebuild Northern Rock in the public sector, but with private sector style management for a ten or twenty year period to restore it to profit, before releasing it back on the market for a much larger sum? Its not as if there are not precedents. Even the privatisation hungry Conservative government of the 1980s knew this; British Steel was a basket case nationalised industry suffering serious losses when the Conservatives came to power in 1979. By 1988 it had been turned around by new management who closed unprofitable plans, improved the company's marketing strategy and made it a world productivity leader in the industry. In the car industry the basket case British Leyland, nationalised by Labour in 1975, was also returned to the market successfully by Mrs Thatcher's government in 1986, again with unprofitable parts of the company closed and the company's trade union problems resolved. If we must have government intervention in industry, why can't we turn it around and make it a good investment for the taxpayer?