Knowing and Making

Robert Peston says that RBS is auctioning off Williams and Glyn's - a bank which, I confess, I have never heard of, but which has 2% of the UK's retail banking market. Which, if it doesn't put them in the top ten banks, definitely must be in the top twenty. Although it's not mentioned on this Wikipedia page . Aha - this article explains it - the brand does not really exist any more, but RBS is thinking of reviving it and attaching it to the 300 branches it has to sell off. My view is that competition is the best way to get the banking sector to lend more, reduce the economic rent taken by a few individuals in the sector, and improve the efficiency of the economy. So this is a good first step. Let's hope it is not bought by Santander, though that's looking like a strong possibility, or NAB which owns the Clydesdale and Yorkshire banks. A new independent bank, even a small one, would stimulate competition much better than transferring assets from a big c...

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...

The BBC has reported that the chief executive of RBS, Stephen Hester, is about to be offered a new pay deal by the board . If one thing is predictable in life, it's the howls of outrage that will accompany the headline figure: £9.6 million. But the real figure is not £9.6 million - it's £1.2 million. Still a big salary, but on nothing like the same scale. The biggest chunk of the rest will be payable only if the share price of the bank hits 70p - double its current level and 40% up from the 50p at which the government originally invested - meaning that the taxpayer will have made an £8 billion profit on its RBS investment. So why is it being presented as a £9.6 million deal? Of course this might just be the BBC's spin. Perhaps they put together all the figures themselves and picked the highest figure, a natural thing for any reporter to do. But in fact it may be the bank who has decided to lead on this figure. If so, why would they do that? Surely they have an interest in k...

Robert Peston reveals a report by MPs on bankers' bonuses. Of course they are calling for reform. But what should that reform look like? Here are a couple of odd things about such bonuses: Behavioural economic theory indicates that it's not so much the absolute amount of money that acts as the reward, but the relative amount - if I get £5m to your £3m, it's just the same as me getting £500k and you £300k. The 'reward' seems to be the ego boost of being at the top of the tree. But unfortunately it's also not the amount of money that has led to the risk-taking behaviour. Even if banks had only paid their employees 1/10 of the bonuses, they would still have acted the same way. So how to change behaviour, if that's what we want to do? Certainly tying bonuses to long-term results instead of short-term is one option. But for motivational purposes, people should still receive performance bonuses relatively quickly, as this is how their mental association between a...

Is it true that people get more rational when they have more time to make decisions? Intuitively this would make sense. And if so, it partly explains Fred Goodwin's willingness to pay back the £2.7 million lump sum he's received from his pension pot, in return for bumping his annual pension income back up from £555,000 to £703,000. This is a rational decision on the face of it, because it equates to an annuity rate of about 5.5% - which, although it's a level which should be available in the marketplace, is better than the 4.4% he is getting on the whole pension. In which case, why did he take the cash in the first place? This is the phenomenon of hyperbolic discounting  - where people overweight the value of cash or other benefits now, compared with the future. Time discounts, of course, are perfectly rational in themselves - but people discount more sharply in the current year than if they are pre-committing themselves for future years. Possible explanations for this phe...

The Wall Street Journal today says that the UK government "...has already spent £600 billion on its financial bailout" This is simply misleading. The government has made a lot of liquidity available in exchange for other assets  through several Bank of England schemes. It has barely spent anything at all; even if you include the bank recapitalisations, which are also in exchange for equity, the figure is around 5% of the number quoted. While this kind of stuff is to be expected from the Daily Mail and other tabloids, I am pretty surprised at it in the Wall Street Journal . I'm glad that the FT  still maintains a standard of reporting that allows us to rely on its interpretations as well as its raw facts.