Knowing and Making

Robert Peston has been working hard reporting on results from RBS and Lloyds the last couple of days. A couple of points. He claims that taxpayer's money has gone down the drain at RBS, because: we as taxpayers put in £25.5bn of new equity into this bank last autumn...but...the equity of this bank has increased by less than £16bn to £80bn. So almost £10bn of the £25.5bn we've only just put into RBS has already been wiped out by losses. Well, that's half true. £10 billion has indeed been wiped out by losses. But it's not £10 billion of our  money, it's £10 billion of the former shareholders'  money. Our £45.5 billion has bought 84% of that £80 billion in equity, a £67.2 billion asset. The reason we're not in profit yet is because the market is still applying a discount due to uncertainty over future losses. We don't know if those losses will happen yet - it depends mainly on economic recovery - but on the book value of the bank, we got a good a...

Is Lloyds, as Robert Peston suggests , really acting on the instructions of its shareholders in trying to withdraw from GAPS (the Government Asset Protection Scheme)? Or is it, as seems more likely, trying to give its management more power? The EU and Treasury intervention that he refers to will restrict the freedom of Lloyds executives to hang onto the empire they've built; and incidentally, to set their own pay and credit policies. Selling off the Halifax branches might well be in the interest of Lloyds shareholders if not in the interests of the board. What's more: if the government does wish to make more credit available to UK businesses and consumers, one way to do it is to make sure banks have lots of capital available to support lending. If Lloyds really can raise £20 billion of new capital, wouldn't it be better if that can support £100 billion of new lending, rather than just replacing the GAPS scheme without increasing loan capacity at all? With the economy in th...

A fascinating question today on Robert Peston's blog which mixes rationality and game theory. Do shareholders of the merged Lloyds-HBOS want to retain the management (inherited from Lloyds) which got them to where they are today? The strictly rational answer is to look only at the future, and the expected value of retaining versus terminating the managers. Rational agents do not consider the past, as you cannot incentivise for past actions - they have already happened and there is no possibility to change them. In which case, shareholders should make a prediction about these executives' likely future performance. Of course, they do  need to use past actions and performance as data points in estimating future performance. Thus, absorbing HBOS which was probably an error of judgment, should be set against the other (generally smart) actions that they took while managing Lloyds. However, in reality people do consider the past while making these kinds of decisions, as if their cur...