Good Money After Bad

Britain is dumping another $50 billion or so into the Royal Bank of Scotland and Lloyd's Banking Group in order to keep them going.

The Treasury will inject 25.5 billion pounds of capital into RBS, for a total of 45.5 billion pounds, making it the costliest bailout of any bank worldwide. The government will fund about a quarter of Lloyds’s 21 billion-pound fundraising. Both banks said they won’t pay cash bonuses to workers earning more than 39,000 pounds this year.

The rescue will bring the government closer to full ownership over RBS, while Lloyds will escape government control. Lloyds CEO Eric Daniels will raise funds from money managers to avoid the Treasury’s asset insurance plan that would give the government a majority stake. He’s betting bad loans will decline after the Bank of England said the country’s recession was nearly over. In contrast, Stephen Hester, RBS’s CEO, will accept greater government oversight and insure 282 billion pounds of his banks’ riskiest assets with the Treasury.

“There is now a very fine line between RBS being nationalized,” said Danny Gabay, director of Fathom Consulting in London and a former Bank of England economist. “This contrasts with Lloyds willing to fight harder for its independence.”

RBS fell 8.3 percent to 35.45 pence as of 12:12 p.m. in London trading, for a market value of 20.1 billion pounds. Lloyds declined 2.1 percent to 83.25 pence.

RBS is all but nationalized, and Lloyd's is simply struggling in flypaper at this point. Over at Big Picture, Barry flags Joseph Stiglitz reminding us that we should have gone with Plan N in the first place.

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai Oct 31. “They would be lending and the economy would be stronger.”

Stiglitz has stuck with his view even after the U.S. economy returned to growth in the third quarter and as banks’ share prices climbed this year…

The U.S. government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system.”

Why are we planning on how to bail out banks in the future when we should be making sure that banks never get too big to need to be bailed out instead?

And people wonder why I think Helicopter Ben, Timmy and the rest of Obama's economic knuckleheads (save Paul Volcker) need to go.