Sixteen years after the financial crisis. The TPP market commentary.

Ever wondered what happened to the cash from the bank bailouts?

The financial crises sparked what has become known as the Great Recession, which, at the time, was the most severe global recession since the Great Depression. It was also followed by the European debt crisis, which began with a deficit in Greece in late 2009, and the 2008–2011 Icelandic financial crisis, which involved the bank failure of all three of the major banks in Iceland and, relative to the size of its economy, was the largest economic collapse suffered by any country in history. It was among the five worst financial crises the world had experienced and led to a loss of more than $2 trillion from the global economy

It was a global economic disaster, yet not all governments’ interventions had the same financial results. In fact the US, who actually caused it, seem to have fared better than most.

The first public indication of the crisis was in February 2007, when HSBC issued its first-ever profit warning as a result of losses incurred by its US consumer finance arm. Later that year, in July 2007, two Bear Stearns hedge funds became insolvent.

There followed a series of global events that led to the seizure of interbank credit markets. The UK retail bank Northern Rock, which relied heavily on short-term funding, sought emergency assistance from the Bank of England. When this arrangement was publicised, the bank experienced the first run on a British bank in 150 years.

In news reported around the world, customers of the bank were shown queuing outside branches to withdraw their deposits. In an effort to stop the panic, on 17 September 2007, the then UK Chancellor of the Exchequer, Alistair Darling, announced the government would guarantee all Northern Rock deposits.

In the period September 2007 to December 2009 the UK government intervened financially making further interventions to support the banking sector, and specifically to Royal Bank of Scotland, Lloyds Banking Group, Bradford & Bingley as well as Northern Rock. Northern Rock and Bradford & Bingley were both taken into full public ownership; RBS was taken into majority public ownership; and the government took a minority stake in LBG.

At its peak, the cash cost of these interventions was £137 billion, paid to the banks in the form of loans and new capital. Most of this outlay has been recouped over the years.

Sixteen years after the financial crisis, taxpayers all over Europe are still counting the cost of bailing out their banks. Unlike in the US, where public funds were repaid years ago, European governments continue to nurse losses on stakes in some of their largest banks.

This month the German government sold a 4.5% stake in Commerzbank to Italy’s UniCredit AG, leaving it with a 12% holding. The position dates back to 2008 when Commerzbank became the first German bank to tap a bailout fund set up by the state, pulling down €18.2 billion in two tranches. Including the proceeds from last week’s sale, on which UniCredit paid a premium to the prevailing market price, Berlin has recouped €13.9 billion. Yet even with Commerzbank stock at a 10-year high, the government is still sitting on a €2.1 billion loss.

As at October 2021, the UK Office for Budget Responsibility reported the cost of the UK Banking interventions as £33 billion, which includes a loss of £35.5 billion on the RBS rescue.

This contrasts with the experience in the US. Under Treasury Secretary Henry Paulson, the federal government forced the biggest US banks to accept state funds as part of its Troubled Asset Relief Program (TARP) in October 2008.

Some banks went back for more but within two years the government had been largely repaid, in many cases even making a profit. When it sold its final shares in Citigroup in December 2010, the Treasury Department trumpeted a $12 billion realized gain, locking in “substantial profits for the taxpayer,” said Tim Massad, the acting assistant secretary for financial stability.

In Europe, the Dutch government comes closest to turning a profit on its stake in ABN AMRO Bank. The state took the bank over completely in December 2008 at a cost of €21.7 billion. Since reintroducing it to the stock market in 2015, the government has raised almost €11 billion, including €1.2 billion announced last week as part of a trading program that reduced state ownership to 40.5%.

Together with dividends of €6.1 billion, the government has clawed back around €17 billion, which adds to the current value of its stake to leave a small overall profit. Yet policymakers are hardly celebrating. Finance Minister Sigrid Kaag prepared a calculation for the Dutch parliament last year that includes a €6 billion financing charge on the initial outlay. Recovering that, too, would require ABN AMRO’s stock price to double.

Here in the UK, the ledger looks worse. In November 2008, the British government became a 58% majority shareholder of Royal Bank of Scotland, now NatWest, pumping in £45.9 billion. Its shareholding is now down to 18%, the government has taken out £29 billion via stake sales, dividends and fees. A directed share buyback in May allowed it to recoup £1.2 billion, and it continues to sell shares in the market at a rate of around £450 million a month (no wonder the share price has struggled).

Now at £5 billion, the value of its remaining stake is insufficient to cover its outlay. Although it made money on Lloyds Banking Group Plc and other holdings (before financing charges), the UK taxpayer’s largest exposure was with NatWest.

While US banks didn’t have to contend with the euro-zone financial crisis that followed the 2008 meltdown to the same extent as their European peers, the US experience shows the benefits of injecting more capital earlier and creating an environment that allows banks to fund themselves in private markets.

The only major financial institutions in which the Treasury still has a stake are housing giants Fannie Mae and Freddie Mac. Yet even here, the difference is stark. The Treasury is already sitting on $110 billion in gains in these two, having taken out $301 billion of dividends on capital injections of $191 billion. “As a practical matter, it’s what has helped us to reduce our overall deficit,” said former Treasury Secretary Jack Lew.

And the upside is greater. Based on the terms of their rescue, Fannie and Freddie still owe the government a further $334 billion, and if the Treasury chooses to forgive some of that, it would be to the benefit of common shareholders, where the Treasury has an 80% stake.

As they struggle to unwind holdings, European policymakers must be looking on in wonder. Bailouts may be less popular on the other side of the Atlantic, but they are a lot more profitable.

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Can you believe it was 16 years ago? How time flies.

Although the global economy seems on stronger footings at the moment, often scenarios like this unfold very quickly. We don't envisage anything like this happening in the near future, but that's why we would preach to always build a very diversified portfolio just in case. Some approaches work well for a few years, then other methodologies excel. Sometimes you're best buying and holding, other times buying after dips is the prudent strategy, and for some the occasional short sell works a treat. The key is to have some small exposure to every approach.

Whatever happens to the market over the coming years, here at TPP we will try our best to deliver for you.

Enjoy the rest of your week.

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