RBS reported a statutory loss of £40bn which falls to £24bn if technical issues relating to the acquisition of Dutch bank ABN Amro are ignored! The losses came from £16.8bn in write-downs on loans and assets – primarily complex products based on sub-prime mortgages – and £7.8bn on trading which was mainly derivatives trading and credit default swaps (CDS) where losses are marked daily.

RBS is going to insure £325bn of so called “toxic” assets with us (UK government). For “toxic” assets read failed investment decisions and loans. These decaying toxic assets include:

•   loans to individuals , small businesses, corporations and private equity schemes;
•   credit card loans;
•   mortgages;
•   mortgage backed securities including collateralised debt obligations (CDOs).

These CDOs are complex packaged securities based on sub-prime mortgages. These were incorrectly priced because of wrong assumptions on default rates and the relationship between sub-prime borrowers. These assets are falling rapidly as the US housing bubble continues to deflate. The US housing market is down 27% from its peak. Also, the US economy continues to weaken as the revised numbers on fourth quarter show the economy (GDP down by an annualised 6.2% for the quarter against an original 3.4% down) to be much weaker than was thought when the original number came out.

It is not clear if CDS’s are to be included in the “toxic” assets. These CDS leak money every day as the value of insuring against bankruptcy increases as the recession deepens and lengthens. But when a company goes bankrupt they (CDSs) are like a switch and a massive payout is made from the bank who has sold them to the investor who has bought the insurance. We expect to see more and more of these CDS’s switched on as we go further into the recession. CDS will really kick in during the last three quarters of this year.

How is RBS gong to pay us for this insurance? Wait for it… they are going to issue £13bn of non-voting shares which they will sell to us at 50p a share – RBS is trading at 29p a share – the premium is for us getting first go at any dividend as if there is likely to be one in the near future! RBS has the option to sell a further £6bn worth of shares. Finally RBS paying £6.5 bn for participating in the scheme by issuing new shares to us!

RBS are simply printing shares, selling them to us and giving us the money back to us so that any further losses on £325bn on “toxic” assets are born by us!

The scale of their losses and the exposure they have to the US housing market, corporate bankruptcies and the global recession means they desperately need capital (our cash) to cover past and potential future losses.

The UK government have exposed us through RBS to the global recession in a highly leveraged way. It’s highly irresponsible and pushes the UK closer to bankruptcy.

In the US the government has had to take a further bailout on Citicorp as they announced a further £10bn of losses for 2008, taking its stake to 37% of the company.

With the German government passing a law to allow nationalisation of the banking industry we are edging towards a global banking system bailed out by ordinary people but with ordinary people bearing all the risks of the banks greedy irrational investment decisions.

The hedge funds are an unregulated industry which “manages” several trillion dollars worldwide. These types of frauds have been allowed to go undetected because of the complete lack of hedge fund regulation and to a lesser extent the financial naivety of the investors in such schemes. These investors are largely very rich individuals who have benefited from the massive redistribution of wealth that has gone on over the last 25 years from the workers and poor of the world to a new breed of super rich individuals.

The con has been easy to run in rising financial markets with money flowing into these schemes at a faster rate than it flowed out. Madoff had never ever made a financial transaction in over 13 years and Stanford had issued false investment certificates and put investors’ money in property and private equity schemes instead of as he claimed in financial markets.

But once markets began to fall and investors made withdrawals the cons were eventually exposed. This is not just bad news for the hedge fund industry but investment firms and capitalism as a whole. Clients of hedge funds have stepped up their withdrawals from these funds and a large part of the meltdown in markets this week was down to hedge fund withdrawals. But investors and individuals are loosing their trust in all investment management schemes. This will put additional downward pressure on the financial markets. It also means in the long term capitalism will find it yet more difficult to raise money to bail it’s self out using financial markets. It will have to increasingly turn to governments, that is ordinary people to fund its bail outs and investment projects.

We may laugh at the madness of investment capitalism and the naivety of its rich investors but it is the workers and poor of the world which will eventually have to pay for these crooks scams.

It was quite incredible that such a fund should be the home for investments for banks such as the RBS and HSBC. These are funds for wealthy individuals who can afford to lose all their investments. Not High Street banks who are largely funded by ordinary peoples’ savings, wages and loans.

Ironically most of these funds are registered and have their assets in jurisdictions which come under British rule. The loose financial, criminal and civil legislation which govern these offshore tax havens has to be signed off by no other than the privy council in the UK. Another example of Britain undemocratic crown powers. So while Brown may bleat about the speculators he is using crown powers to give these hedge funds the framework to make speculative, or in this case false, money.

Hedge funds have had their worst year since their inceptions with hundreds of billions of dollars being withdrawn.  These withdrawals have contributed to the turmoil on the financial markets this year. We can expect to see these withdrawals accelerate as investors scramble to avoid becoming a victim of another scam.

This is bad news for the derivatives’ market where hedge funds use the leverage accorded by such instruments to speculate on assets. Theses markets will leave other investors locked into illiquid instruments with it increasingly difficult to get out of them. Banks will be hit two as hedge funds will force banks to realise losses as they withdraw funds to meet redemptions by investors.

We can expect to see further declines in all markets with more losses and bailouts for the banks. Things have just become markedly worse for global capitalism and its markets.