Lisa Reinisch

The fall of RBS: nationalising debt, privatising profit

Liberal Democrat MP Vince Cable is incensed: “It is absolutely wrong that profits are being privatised and losses are being socialised,” he says about last week’s quasi-nationalisation of the Royal Bank of Scotland (RBS).

The Liberal Democrat is one of the harshest critics of the bail-out proposal, which he describes as a “disgrace” and “a total betrayal of the British taxpayer”.

Cable is often credited with being one of the first politicians to foresee the collapse of the financial sector. “It is to his credit that he continues to deny this,” says the BBC Today Programme’s Evan Davis. Cable remains modest about his early warnings: “The fact that I got a few things right can be likened to the old story that among the blind, the one-eyed king is king.”

Cable is highly critical of the government’s strategy and accuses it of shirking full nationalisation. As much as 95% of the RBS could end up in public ownership after the bank declared losses of £24bn - the biggest in UK corporate history – and had to ask for a bail-out on Thursday.

The government has so far stopped short of using the term ‘nationalisation’, a decision that has angered many.

RBS put assets worth £325bn into a government-sponsored asset protection scheme, which allows the troubled bank to pass potential losses to the taxpayer, who now effectively owns 80% of the bank.

“The concept of nationalisation must be faced. We now have almost-nationalisation, but with the government very reluctant to accept that step,” says Cable. He is adamant that the government must do more to ensure taxpayers are getting a fair deal on their unprecedented investment in the financial sector. In the worst case, the taxpayer stands to lose around £275bn. In the best case, profits could be made once the economy recovers.

“While the taxpayer does face risks as a result, the cost of doing nothing is far greater,” said Chancellor Alistair Darling in defence of the proposal.

Since the beginning of the global banking crisis, an unlikely cast of characters has stepped forward to speak out for nationalisation, leading to a revival of enthusiasm for Keynesian intervention policies. Recent converts include Alan Greenspan, the former chairman of the US Federal Reserve, and failed Republican presidential candidate Dick Cheney.

But critics argue that many of these ‘new interventionists’ have a questionable understanding of nationalisation, seeing it as a convenient way to access cash and trying to minimise commitments to the taxpayer.

“The British taxpayer is insuring the car after it has crashed, and the sad truth is that it is families up and down the country who are paying the price,” said shadow chancellor George Osborne.

Issues such as bonuses, risk management and tax-avoidance, which Cable describes as ‘poisonous’, should be at the centre of the government’s demands to the RBS: “Leading banks are engaged in massive tax avoidance, which should be dealt with across the board. We also have to separate high-street banking and investment banking.”

Generous executive pensions have also played a central role in the controversy. Critics fear that the consequences for individuals for what many see as a blanket failure of top-level bankers are inadequate. A case in point is the lavish £650,000 annual pension of former RBS chief executive Sir Fred Goodwin, which was revealed last week.

Nationalisation remains a thorny issue. “I do realise the dangers,” admits Cable. “It could become politicised; it could become bureaucratic. But the practical necessities point in that direction and that is the main controversy we will have to deal with.”