Monday, 12 August 2013

Banks, Bail-Ins and Your Pension

According to a report by RBS carried in the FT at the weekend, European banks need to shed €3.2 trillion of assets in the next few years. Bank assets are essentially loans and mortgages. As I've pointed out recently, these loans and mortgages on the banks balance sheets across Europe, including Britain, are largely a fiction. The collateral behind them, the value of the property they have been loaned against is still valued at the bubble prices of a few years ago, not even at today's values, still less anything approaching the kind of reasonable valuation of that property that would be necessary to prevent them suffering huge losses when those bubbles burst. Instead, those banks are hiding the real extent of their exposure by again investing in huge amounts of derivatives. 

Deutsche Bank, who are picked out by the RBS report as one of the most in need of additional capital, has exposure to derivatives equal to the entire global GDP! If all these banks increased their capital to cover their exposure, they would probably need to add around €30 trillion of new capital. That is not going to happen, so assuming the whole global financial system does not blow up in the meantime, it will be resolved on the basis of a combination of additional capital and asset sales. But, as I've pointed out previously, this is just one area in which vast amounts of new capital demand is arising, at a time when the supply of new capital is growing more slowly. The consequence must be the kinds of increase in interest rates we have already been seeing.

But, that has other implications. Not only will it explode the remaining property bubbles, including the new one now developing in the US, but it will mean that everyone burdened with debt will face the same kind of difficulties that Greece has faced over the last few years, and continues to experience. That is that the cost of servicing that debt rises sharply, as interest rates rise. At a certain point servicing the debt becomes impossible. That is a problem both for the British Government, and even more so for all those people who are already struggling to pay their mortgage, or for all those zombie businesses, barley able to cover their loan interest. Pay Day Loans are not going to fill this gap.

But, other recent events demonstrate a further problem. In the US, Detroit has just declared bankruptcy. The decision is being challenged in the courts by municipal workers unions, because it threatens the pensions of their members. How its decided will be important. If the court decides that the workers pensions are fair game, and the council can renege on payment to its workers, the same as to any other creditor, then current bankruptcy law in the US will be upheld, but the US government will the be under intense pressure to bail-out the pension scheme to ensure that the workers, and millions of potential Democrat voters, do not lose out. But, if the government does bail-out the pension fund, it will be under pressure to bail-out other creditors, if not the city itself, as well as setting a precedent for other cities, like Chicago, who are also likely to declare bankruptcy in the near future. But, if the court decides that the pension fund is not fair game, that leaves a question of how the city pays pension entitlements it cannot afford to meet. It also means other creditors will get less of their money back.

That is important to British workers for several reasons. Firstly, British banks are exposed to Detroit for £1 billion, and to other US cities for an even larger amount. Some of that money will also be money invested by UK Pension Funds in US Municipal Bonds. But, the second reason is that a similar decision was taken recently by a UK Court.

Lehman Brothers and Nortel Networks who went bankrupt were faced with a similar situation as Detroit, in relation to their workers' pension funds. The administrators of these companies keen to ensure that as much money went to their friends employed in the financial sector decided to try to raid the pension funds, making the workers right to the pension they had paid for no more secure than any other creditor. The High Court rejected that attempt. However, the administrators took it to the Court of Appeal, which also ruled against them. But, now they have taken it to the Supreme Court, and the Supreme Court has backed them.

In the past, I've pointed out that the reason pensions are so appallingly bad in Britain is for several reasons none of which are to do with workers living longer. The worker owned and controlled pension scheme of the Mondragon Co-ops in Spain, for example, pays out an average of £13,000 a year, which makes the average £3,000 a year, supposedly gold plated pension of a UK local government worker look really sick. Yet, the Mondragon Pension Scheme has income double what it needs to pay out for these pensions!

In the UK pensions are so bad because on the one hand, the prices of shares and bonds have been blown up into a huge bubble over the last 30 years, so the workers contributions into them, continually buy fewer shares and bonds. As the income into the fund needed to pay out the pensions comes from the yield on those shares and bonds, it has therefore become progressively smaller as the number of shares and bonds that can be bought has diminished.

But, the most scandalous way in which UK pensioners are ripped off is in the way their pensions are managed. The immediate management is in the hands of pension fund managers, but they farm out the actual investment to banks and other financial institutions. As Panorama reported a couple of years ago, the basis on which they do that has nothing to do with maximising the pensioners returns, but everything to do with maximising their own returns. They hand over the investment and management to whoever will give them the biggest commissions and other kick backs.

According to Panorama, around two-thirds of workers contributions into their pension funds goes not to buying shares, bonds and other investments, but to cover the commissions, fees and other payments to the fund managers, banks etc! 

So, we now have a situation where the banks reduce workers pensions by blowing up asset bubbles in shares, bonds etc. which reduces the amounts of these that are bought. They further rip-off the workers in all of these commissions etc., and then they load up businesses also with a load of debt, so that when the business goes bust, those banks and finance houses will be first in line to get their money back, whilst pensioners will be told now that the pot is empty!

This is exactly the same kind of bail-in of workers that the EU has now proposed as far as their bank accounts are concerned, when a bank goes bust. They have essentially formalised in law what happened to workers savings in Cyprus. The very rich will be able to get their money out before the shit hits the fan, if they did not already have it elsewhere, but when the bank goes bust, it is ordinary workers savings that will get hit to reduce the burden on other creditors. The same is true about the other bubbles that the banks have helped blow up with loads of credit in property etc., and which people like Osborne are continuing to encourage.

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