RBS creates Bad Bank squared

Government measures are like bridging-loans to solve the financial and economic crises. They are seen by most observers as a bridge being built into the fog, the fog of economic warfare, a bridge to nowhere according to some, a bridge to recovery and sunshine according to others. I'm in the latter camp.
How US and UK authorities will move next is very much a matter of what is mutually agreed between them. What one does is a greenlight to the other. This is a 2-way process of policy exchange and that is a very healthy way to be, coordinating between the world's two biggest financial centres and between two economies that are intimately tied to each other and have been moving in tandem for 150 years.
If you read my Obamanomics blogspot (also here via clicking on profile) you'll read that US Treasury Secretary Geithner was getting flak for not being clear whether TALF would be combined with a "bad bank" approach to use up the remainder of TARP (owned by Congress) and whether hedge funds would get loans ($1 trillion) to buy toxic assets? Now we have a clue in UK policy. The idea is that the Bank of England and HM Treasury will construct a bad bank, alongside UKFI Ltd and BoE Liquidity Window, but that banks should each create one of their own and also put up non-core businesses for sale (all reminiscient of Lloyds of London Equitas fund that took 15 years to work its way out of the asbestos claims etc.) The contrast between RBS's statement expected next Thursday at that of Lloyds Banking Group last Monday that I likened in the last blog to Banking in Wonderland could not be greater. It will be a defining difference between the new generation in charge of our banks and the old guard, most of whom are still in place, but most of whom will have to go! Fashions change and that includes the way to lead our banks. At the Treasury Committee Hearings (same week as similar Congressional Hearings when top bankers were interrogated) Stephen Hester the new CEO of RBS shone out as the most impressive (also for the fact that he is personally not guilty) and someone who will undoubtedly speak out more and more on behalf of all of UK banking.
The first sign of this is that RBS is about to unveil major restructuring whereby business assets worth several hundred billion pounds (that might include some of its US banking assets?) will be put up for sale as well as creating a non-core subsidiary into which about £300 billions of unwanted assets will be placed. The aim is to quarantine the troubled assets (the TARP and bad bank concept first pioneered by lloyds of London to deal with its asbestos claims) of the business into a "bad bank" and allow the stock market to place a value on the remaining core operations (i.e. expcting the share price to bounce up dramatically - should already start to happen as soon as Monday's market opens!)
It is part of the crisis handling that critically valuable decisions should be announced at weekends e.g. saving, nationalising or failure of a bank, so that the information does not hit during a trading day and will be factored into prices at market opening on Monday. It will be the start of a period of good news like getting letters from the insurers saying "yes, we accept your claim for the house-flooding" and "yes, we'll pay the hotel bill, but only half of it and we expect you to pay for new superior flood defences!"
Market-timing is essential but cannot be tightly controlled. It will be most interesting to see how the ideas generated here reverberate in Monday's Asian makets and then Europe in the morning and the USA in the afternoon? Recent days have seen a revival of discussion in the media about Japan in the 990s, the lost decade etc. and why this was lost because Government did not act fast enough to remove non-performing loans into quarantine. Recovery was so long term and slow to arrive because underlying household spending could not recover from the burden of paying off housing loans over years when house-prices failed to recover and low inflation generally was more of a hindrance than a help. Good news "The Spring has sprung" days and weeks of March and April will soon be here, when I fully expect to see share values recover considerably. The recovery plan will be detailed or outlined on Thursday (by which time positive expectations will have had 4 days to push up bank stock and the FTSE100), when RBS announces Britain's biggest corporate loss of c.£28 billions and cost cuts worth around £1 billion a year. CEO, Mr Hester is not expected to place a figure on the number of job losses, but reports this weekend said as many as 20,000 jobs could go, around 10% of the global workforce, additional to thousands of posts already axed. The Sunday Telegraph reports that the assets and businesses will be placed in a non-core division and will include Asian and Australian units acquired as part of RBS's ABN Amro acquisition in 2007. RBS's aircraft leasing unit and portfolios of mortgage and lending assets by its US business Charter One will also be set aside. And RBS will withdraw from about half of the 60 countries in which it operates, including Malaysia and some parts of eastern Europe. So maybe that means it will keep it main US banking assets - good! The overhaul will leave RBS with businesses such as NatWest and Direct Line, plus parts of US retail banking subsidiary Citizens and key investment banking operations in places such as Hong Kong.
This week's full-year results are likely to confirm a loss of between £7 billion and £8 billion, as well as a write-down of up to £20 billion on the balance sheet value of previous acquisitions, including ABN Amro. RBS is 68% owned by the taxpayer, is also likely to place at least £200 billion of toxic assets into the Government's asset-protection scheme, which aims to protect banks against further losses. I would additionally expect it to swap another £50 billion at the Bank of England's "son of SLS" liquidity window in the coming 6 months.
Talks involving Treasury officials and RBS and Lloyds Banking Group, which is also expected to participate in the Government's Asset-protection Scheme (GAS - can that be right?) are said to be taking place this weekend.
Sunday nights at HM Treasury (and similarly at US Treasury and Federal Reserve) has been the happening place in London, where it's all happening for months now and where the highpoint will be April's London G20 Conference. The crisis management is also coming to a head in the EU and Eurozone (for latest see my Monetary&Fiscal blogspot) and EU leaders will therefore be poring over all the details of the UK new initiatives and how these will be echoed in Washington. I should make more effort to attend and less tending the animals on my Borders farm. They've had to be fed during the snow, but the weather's got a lot milder now and in a few more weeks the grass will be regrowing, by which time my wife should be back from Cuba with my cigars! Will I be wading back into the share market to go long, for 3 months at least maybe, and then using my liquid savings to go back into property in the Autumn? But, of course, I earn banker's fees from other people's liquidity! So, best advice is don't ask me?