In the three years of Coalition government, the taxpayer has been losing money hand over fist as the state sells public assets for less than they are worth, and buys private assets at more than they are worth. In just the last week we have seen the the undervaluing of Royal Mail shares and the state guaranteeing EDF Energy twice the market rate for energy produced by their new nuclear power stations. Is the UK government stupid, corrupt, or both?
According to the National Audit Office, The UK National Debt rose by £850bn as a result of the 2007/8 Bank Bailout. This is almost twice the nation’s total annual budget. For this amount, the UK could have funded the entire NHS (£106.7bn a year) for eight years , our whole education system for twenty years (£42bn a year) or provided two hundred years of Job Seekers Allowance (£4.9bn a year). The taxpayer was not consulted in this matter. The public were told two things:
- The economy would collapse if the banks were not bailed out
- They were buying assets which would later return value to the public purse. It was an investment in our future.
Firstly, as Iceland has demonstrated – allowing bad banks to collapse and their criminal executives to face the consequences, does not have to crash your economy.
Secondly, a closer look at what has actually happened to our ‘investment’ in those failing banks reveals that we were mis-sold the bailout, as we were mis-sold PPI and Interest Rate Swaps. The Bailout was nothing more than the government colluding with Banks to privatise profits and socialise losses.
The Sale of Northern Rock
Northern Rock saw enormous growth through the early 2000’s, in a similar way to RBS. They were achieving this purported balance sheet miracle, by indulging in the same high risk ventures as other mortgage lenders. In short, they borrowed huge sums, lent out to subprime (skint) customers, then bundled loads of these debts together (to make collateral debt obligations), selling them on to investment banks like Goldman Sachs.
This practise created a paper based profit. In reality the bank was just generating debt; vast and unsustainable debt.
The bubble burst in 2007, and there was the first run on a UK bank in 150 years. The UK government took over the beleaguered bank, pumping in £1.4bn of public money. The Bank’s assets were managed at arm’s length by UKFI.
While the Northern Rock board, responsible for such catastrophe, walked away with their bonuses and pensions intact, thousands of ordinary staff lost their jobs. They also lost their savings which were manifested in company share save schemes, the shares now worthless. The same went for their wider shareholders. In January 2009, it was decided that shareholders were not eligible for compensation for their losses. This decision was upheld through subsequent stages of appeal.
By 2011, the bank had been split into two vehicles, one squeaky clean retail bank ready to go back to business; the other, a worthless toxic shell containing the debts which dragged the bank to ruin. George Osborne (UK Chancellor) sold the Good Bank to Richard Branson’s Virgin Money for a mere £747m, half what we paid for it. Furthermore, the Bad Bank, with its £21bn of toxic debt, remains ours.
Despite this colossal loss, Chancellor Osborne announced in July that he was appointing the Rothschild bank to prepare identical plans for the sale of RBS.
Now, would anyone in their right mind make this deal with their own money? Even if one was fooled into it once, surely never again? Yet this is all of our money, it comes from our wages and the money we hand over in taxes on goods, services and national insurance.
The government recently managed the unfulfilled aim of every government since Margaret Thatcher – they sold the Royal Mail. The UK public were told the Mail had to be sold as it was a burden on the public purse, and it needed to be freed from government control to become a properly competitive service.
This is utter bunkum. Royal Mail has been producing profits year on year, and this May more than doubled profits for the previous year, bringing an addition £403m in for the taxpayer.
Nevertheless, the government decided to hand a profit making public asset over to the private sector. On October 15th, Royal Mail shares were floated on the stock exchange, with just 10% going to employees.
The government set the price for shares at just 330p each, valuing the 60% of the business it was selling at £3.3bn. Ordinarily, you would expect to see the share price rise by 5-7% on the first day of trading – this suggests that the price is set about right, and that investors believe it is worth investing in and buy. In the first day of trading, Royal Mail shares rose 38%. This would imply that they were seriously underpriced. Indeed, two of the Banks advising the government had valued the shares at £5 each, or £5bn in total.
As it happens the share price continued to soar, hitting a high of 538p a share – meaning a £2.08 profit on each share bought for some investors. Those who invested £750 in shares on the Friday could expect to make a £328 selling the shares on the following Tuesday morning…but at the expense of us all.
What will be the cost to the UK public, as workers, taxpayers and consumers? Well, in some ways they are simply a continuation of a trend as the Mail ethos moved from public service, to profit making business.
- 50,000 jobs have been axed by the Royal Mail over the last decade as it was treated like a business rather than a public service – and they have stated that there will be further job losses as a result of privatisation.
- Above the financial loss of the undersold asset, the £12bn black hole in the Royal Mail workers’ pension fund has also been left in the hands of the taxpayer.
- The price of a first class stamp is now 60p – a rise of 19p or 46.3% in just the last three years. Prices are set to rise as a result of the privatisation.
- This comes on top of planned closure of 76 of the Crown’s 372 Post Offices, largely in small towns and rural areas.
In short, while a small number of people make a large profit – many more will face a loss, as either employees, taxpayers or consumers.
It was announced this week that the government as agreed a strike price for energy produced by EDF Energy’s planned new nuclear power plants. The strike price is the price the government guarantees EDF will receive per MegaWatt/Hour of energy produced. The current market rate is £47.50. The government has promised EDF £92.80. Yes, you read that correctly – the UK government has guaranteed EDF Energy twice the market rate.
As with Fracking, the government is using recent energy price hikes by the Big 6 energy firms as a case in favour of New Nuclear – implying or explicitly stating that prices will come down. However, in agreeing this strike price the government has guaranteed that they will not. They have fixed the price for energy produced by New Nuclear at twice the market rate.
Another bad deal for the taxpayer and the consumer, brokered by a government that consistently delivers for big business.
Stupid, Corrupt, or Both
This is corruption. It is not the brown envelopes kind of stuff we are taught to think of as corruption. No, it is something far more insidious. It is a corrupted politics: a ring of privilege and mutually beneficial decision making that has become politics in the UK.
You see, there is an election in 2015. The Tories and Liberal Democrats are in the process of selling off as much of the family silver as possible to flatter the public finances in the short term. This will enable them to say ‘See, Austerity is working’, despite all evidence to the contrary. This is political corruption at a strategic level.
Next, there is political corruption at the tactical level: the personal vested interests of ministers making the decisions. They seek friends in the investment banks and private firms involved in the sales in hopes of lucrative directorship and consultancy positions when they leave politics. After his wave of privatisations in the 1990’s, former PM John Major went on to become European Chairman private asset management giant the Carlysle Group. After opening up much of the nation’s law, policing and justice services to private security companies such as G4S while Home Secretary – former Labour MP John Reid became a Group Consultant for…G4S. After leading the war in Iraq, creating billions in business for JP Morgan bank – Tony Blair became a Senior Advisor for JP Morgan. This is the revolving door between politics and big business, which can sway the decision making of MPs with an eye on their personal long term interests.
There is also good old fashioned nepotism. The best man at George Osborne’s wedding, was Peter Davies. The same Peter Davies whose Hedge Fund bought £50m in Royal Mail shares (valued low by Osborne and co.) and has already made an £18m profit on the investment.
Finally, there is ideology. This is where the current government is both stupid, and corrupt. They are ideologically opposed to the idea of the welfare state and public services. This is no secret. The stupidity behind this ideology is this: it is the welfare state which keeps the long exploited content enough not to fight back. They are sowing the seeds of ultimate rebellion.
It’s Not Just Them
However, the adage holds true: We get the government we deserve. Since the baby boomers, the UK electorate has also been stupid and corrupt. It has been stupid enough to believe government after government which said one thing and did another – and willing to vote them in to do the same all over again. And we have been corrupt enough to put our own short term financial interest above our collective long term interests. We have let them sell off our council houses, water, gas, electricity, planes, trains, key manufacturing industries. We didn’t stand together. We allowed ourselves to be divided. We prioritised making a fast buck over the serious long term consequences. In each of these sell offs the government tempted us with a welcome to business class. “Become a shareholder!” they said. But we were already were. And now most are not.
So, we don’t just need to do something about this government. We need to replace this whole politics, and we need to start with ourselves and our communities. We need to create community again, and stand for it. It starts and ends with you and me.
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