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Why bank shares are falling
- 8 Oct 08, 10:23 AM
The government announces massive, unprecedented financial support for our banks, and their share prices fall - well all of them but that of HBOS.
Shome mishtake shurely.
Well no, that's completely predictable on the basis of a decision by the Treasury and the Financial Services Authority - as part of the rescue package - to pressurise eight banks into agreeing to raise at least £25bn in new capital.
This capital can come from commercial sources. But even if, for example, Barclays was able to raise new capital from regular private sector investors, that capital would be expensive - which is why its share price has fallen (by 15%, as I write).
And since the Treasury is actually making available at least £50bn of new capital to recapitalise the banks, it's pretty clear that the FSA - the City watchdog - thinks they'll need that much.
So it may be good news that the Treasury is prepared to shore up their balance sheets, but it's pretty bad news that there's such a big hole to fill.
Also the £50bn from government comes with expensive strings attached - such as reductions in dividends payable to other shareholders, and commitments to start lending again to small business and home buyers.
In other words, shareholders in the banks are being punished for the sins of executives who will need to go cap in hand to taxpayers.
Why has HBOS's share price risen?
Well, the big danger for HBOS was that it wouldn't be able to refinance its medium-term borrowings from the money markets as they fall due in the coming couple of years.
It faced possible insolvency due to the drying-up of these wholesale sources of finance.
HBOS has in effect been taken back from the brink by the Treasury's decision to provide a guarantee for new short-term and medium-term issues of debt securities by banks.
This may sound like gobbledegook. But what it means is that when banks raise money from other financial institutions, those loans will be guaranteed by the state.
Which means that when a bank or money manager lends to HBOS from now on, it is in effect lending to the Treasury or to all of us as taxpayers - and we're a pretty good credit.
So HBOS - and other banks that take advantage of the guarantee - should be able to start raising funds again from commercial sources.
Now here's the resonant conclusion.
If HBOS is no longer in imminent danger of going bust, there's no longer quite the same imperative for it to be rescued and taken over by Lloyds TSB.
That deal now looks like a fantastic one for Lloyds TSB, because it's a once-in-a-lifetime opportunity to create a retail super-bank.
But HBOS shareholders might wonder whether they're selling out too cheaply.
And the competition authorities may bristle too. They may nag the government about whether ministers were right to rule that the deal should go through, irrespective of whether consumers could be hurt by the birth of this monster bank.
A very big rescue
- 8 Oct 08, 07:30 AM
The Treasury's rescue package for the banks is substantial, as big an economic initiative as it has probably ever taken.
But then the problem it's trying to fix is huge.
First, the government will make available at least £50bn of taxpayers' money to invest in banks.
The cash will be there if banks need it, if they are being damaged by a perception that their balance sheets are too weak.
If any bank didn't need the additional capital - which will be classified as Tier One under the rules that determine the strength of banks, and will probably be in the form of preference shares - it would not have to take our money.
But if a bank does want it, there will be strings attached - such as restrictions on executive pay and limitations on what it pays out in dividends to other shareholders.
Taking taxpayers' money will not be a licence to trade as normal.
Second, the government will try to fill the almost lethal funding gap created by the collapse of wholesale money markets.
For a fee, it will guarantee the money they borrow from other banks and financial institutions for periods of up to three years.
This is crucial. Because one of the great fears at the moment is that they will be unable to refinance their asset-backed bonds and other wholesale borrowings as they mature over the coming two or three years.
This will be seen as particularly helpful to HBOS - and should facilitate its takeover by Lloyds TSB - since there has been uncertainty about how it was going to pay back holders of its mortgage-backed bonds,
Third, there will be a doubling from £100bn to £200bn in the Bank of England's Special Liquidity Scheme - which allows banks to swap their mortgages for Treasury bills, which are the equivalent of cash. It's a way of providing them with greater certainty about their funding for the next two and a bit years.
Pulling this together, what the government is doing, on behalf of taxpayers is providing hundreds of billions of loans and risk capital to fix banks and a banking system that's perilously close to the brink.
At a time when financial markets across the world have seized up, only taxpayers have the resources to fix this problem.
But three questions follow.
Will it be enough?
Well, unless the economy spirals into total freefall, it should be sufficient to keep our banks functioning in these challenging times.
Can it prevent the economy sliding into recession?
Most economists think we're already there. But the package should help to prevent the downturn becoming vicious.
Will taxpayers be poorer for the rescue?
There are a number of ways of looking at this.
Plainly it would be better for most of us if a deep recession - which would create misery for perhaps millions thrown out of work - can be avoided.
But there is no guarantee that we'll make a profit on the £50bn that's being invested on our behalf (although we might).
And given the sheer scale of how much we're lending to banks, many many hundreds of billions of pounds, there has to be a question mark over whether we'll get every single penny back.
This represents the semi-nationalisation of the banking system.
And what can't be predicted with any scientific precision is how many years it will take for the system to be privatised again, for there to be a reversion to almost business-as-normal for our banks.
Tuesday's Picks
Rescue plan due in hours
- 7 Oct 08, 06:47 PM
The Government is poised to announce details of a comprehensive rescue package for the banking system.
It will include a proposal to inject capital into banks and to provide a standby facility to ensure our big banks have enough cash to fund their day-to-day operations.
In a UK context, this is a very big moment.
It is the government's attempt to stabilise our banking system.
I'll file more as and when I have more detail.
UPDATE: 20:03
As I said this morning, the amount of capital to be invested in our banks by the Government on behalf of taxpayers will be up to £50bn - which is what most analysts estimate is needed by the British banking system.
And there will also be a promise that if any bank has difficulty raising funds from wholesale markets - which remain chronically seized up - the authorities will fill the gap.
I presume that will require the Treasury to provide additional financial help to the Bank of England (that's more taxpayers' wonga), since the Bank of England's balance sheet is probably not big enough to fill our banks' wholesale funding gap on its own.
These are big sums of our money being put at risk to stabilise the financial system. It matters to all of us that the ambitious works - not least because the reluctance of our banks to lend to companies and households is sending the economy into recession.
For what it's worth, one banker - who runs one of our biggest banks - tells me that he is optimistic that it will bring a bit of calm to the extroardinarily turbulent banking market.
It's also a big moment for the Prime Minister, Gordon Brown. This is the first genuine, full-scale economic crisis he has had to face since he entered government, as chancellor of the exchequer, in 1997.
His place in history will depend on whether taxpayers' cash is being used to slow or stem the downward spiral in the economy or whether this is good money disappearing down a deep black hole.
Banks' most pressing problem
- 7 Oct 08, 10:02 AM
A shortage of capital is a big issue for banks, as I've been blathering on about for days (and see my note of this morning on our banks' meeting with the chancellor and request for a capital injection from taxpayers).
But the really urgent issue is the breakdown of wholesale markets, and the increasing difficulty that almost all banks are having in funding themselves on a day-to-day basis.
The basic problem is that the collapses of Lehman and Washington Mutual have made all financial institutions wary of lending to any bank where there is even a scintilla of risk.
It turns out, therefore, that Hank Paulson and the US Treasury were probably wrong in allowing them to fail.
But that's spilt milk.
The more important point is that, across the globe, there are very few banks that are finding it easy to raise money from wholesale sources.
In other words, all this fuss about insuring retail deposits is beside the point.
We all know that governments won't allow retail depositors to lose money - so that's not something to worry about.
A far bigger concern is that most banks are suffering a progressive erosion of the money they receive from other financial institutions.
To date, that's been replaced by colossal loans from the authorities.
In the case of the UK, the Bank of England and the Treasury have collectively provided well over £200bn of incremental lending to our banks over the past year.
It's what I've described as nationalisation by stealth.
But all governments will probably need to do more.
What the Irish government did, in guaranteeing both retail and wholesale deposits in their banks, may turn out to be something of a model for Europe-wide action.
What we may need is a cast-iron pledge from all European governments that they will fill whatever funding gaps emerge at their respective banks from the seizing up of money markets.
It's probably the best outcome that can emerge from today's meeting of European finance ministers.
Bankers all across Europe are watching this meeting, and keeping their fingers and toes crossed, that the finance ministers understand how fragile they are - and that the finance ministers will pledge to keep them afloat, whatever the apparent strain on public-sector balance sheets.
Banks ask chancellor for capital
- 7 Oct 08, 07:00 AM
When Treasury officials started working overtime last week on an emergency plan to inject new capital provided by taxpayers into our banks, the chancellor wasn't sure how our banks would react.
Would they proudly tell him to hop off?
Or would they put out the begging bowl?
Well last night a trio of the UK's biggest banks - Royal Bank of Scotland, Barclays, and Lloyds TSB - signalled to Alistair Darling that they'd like to see the colour of taxpayers' money rather quicker than he might have expected.
According to bankers, these three were disappointed that at a private meeting last night with Darling, held at his request, he didn't present to them a fully elaborated banking rescue plan.
One banker told me that what he called the Gang of Three of Barclays, RBS and Lloyds TSB told Darling to pull his finger out and finalise whatever it is he's eventually prepared to offer on taxpayers' behalf.
On paper, Lloyds TSB, RBS and Barclays don't have a pressing need for additional capital.
But they have become concerned that they are being weakened significantly by investors' perception that they are short of capital and their balance sheets need to be strengthened.
Also at the meeting were Mervyn King, Governor of the Bank of England, and Adair Turner, chairman of the Financial Services Authority.
And although the other big banks were represented, it was the chief executives of Lloyds TSB, Royal Bank of Scotland and Barclays - respectively Eric Daniels, Sir Fred Goodwin and John Varley - who formed a tightly-knit caucus and gave urgent focus to the discussion.
The three banks estimate that they may need around £15bn of new capital each, with £7.5bn paid up front and a further £7.5bn guaranteed by the Treasury that would be delivered if it became necessary.
Current rough estimates are that the capital injection could be as much as £50bn in total for all British banks.
As yet however, there has not been any detailed negotiation with the Treasury on the amount of taxpayers' money that may be invested in them.
There is no precedent in the UK for taxpayers to take such significant stakes in banks.
The Treasury has been working on a rescue plan along those lines, as I disclosed in my note on Saturday.
The three chief executives will talk again today, so that they can establish a common position, in advance of any further negotiations with the Treasury on a rescue package.
The Treasury's current thinking is that it would acquire preferred stock in the banks, that wouldn't carry voting rights. But it would also take warrants over the ordinary shares, which is a device for ensuring that taxpayers would benefit if the banks' share prices were to rise.
However, the chief executives also told Darling that a capital injection of this sort would not be enough to stabilise the banking system.
The steady withdrawal of funds by other financial institutions, the collapse of the wholesale funding market, remains a serious problem - which probably can't be solved by the Bank of England continuing to provide ever greater loans against an ever wider range of collateral.
In the next couple of years, many tens of billions of pounds of asset-backed securities have to be paid off or redeemed by British banks. So the banks want a commitment from the government that it will lend to them, whether or not they have collateral of the sort demanded by the Bank of England, to allow them to redeem these bonds.
The banks are not looking for a formal guarantee from the Treasury that it will protect wholesale depositors, which is what the Irish government gave to Irish banks, but they would like a formal pledge that it will fill any funding gap created by the steady ebbing away of wholesale funding
If such a commitment were not forthcoming, confidence in one or more British banks may continue to ebb away, to a potentially lethal extent - or so the banks fear.
Monday's Picks
How close to capitulation?
- 6 Oct 08, 03:47 PM
Blimey it must be serious.
Every European Union leader has signed up to the following statement:
"All the leaders of the European Union make clear that each of them will take whatever measures are necessary to maintain the stability of the financial system - whether through liquidity support through central banks, action to deal with individual banks or enhanced depositor protection schemes.
"While no depositors in our countries' banks have lost any money, we will continue to take the necessary measures to protect both the system and individual depositors. In taking these measures, European leaders acknowledge the need for close coordination and cooperation."
So the mayhem of uncoordinated statements and actions over the past few days by the governments of Germany, Denmark, Sweden, Ireland and Greece was simply an accident.
They're all back on the same hymn-sheet today.
Investors seem underwhelmed: the FTSE 100 index is tumbling and shares are currently almost 8% lower.
If sustained this would make it the third worst fall in the history of the FTSE 100 index.
Does this mean we're close to that fabled moment in stock markets - the point of capitulation - when investors lose all hope and dump their stock at any price?
According to the theory, there can be no sustained recovery until the markets are in the clutches of utter despair.
Not everyone subscribes to the pseudo-economic psycho-babble.
But it certainly looks hairy out there.
UPDATE 17:35PM:
Today was when no one could be under any illusion that the global banking crisis is primarily a North American phenomenon.
There's a mess in Europe too, because European banks were also seduced over the preceding few years into lending too much to cheaply to consumers and businesses.
In the past 24 hours, we've seen bank rescues in Belgium, Luxembourg and Germany, and an attempted rescue of an entire economy, that of Iceland.
We've also had the worrying spectacle of apparent disunity among the governments of Europe, with Germany, Denmark, Sweden and Spain all taking unilateral steps to reassure their savers - which risked destabilising banks in other countries.
And when EU government heads then issued an emergency joint statement promising to collaborate more closely, curiously that served to spook investors even more - presumably because it underlined the fragility of the banking system.
What's also prompted high anxiety among investors and bankers is the mounting evidence that the crisis in financial markets is causing a severe economic slowdown.
And when there's a collision of a financial and economic downturn, well the consequence can be painful - because rising unemployment leads to more loans going bad which further weakens our banks.
So the chancellor's plan to strengthen our banks by injecting taxpayers money in the form of new capital is also an economic recovery plan.
What the Germans did
- 6 Oct 08, 10:27 AM
It gets weirder.
My official sources tell me that the German government is not legislating to formally increase protection for savers.
What Angela Merkel did, they say, was give a "political" commitment that no German savers would lose a penny - which is more-or-less identical to the commitment given by our Chancellor of the Exchequer, Alistair Darling
But the horse has already bolted - in that this morning the Danes have given an unlimited guarantee to their savers and the Swedes have massively increased the level of protection they offer.
Whether the German or British governments like it, there does appear to be a clear trend towards almost total protection for European retail depositors.
Monday morning feeling
- 6 Oct 08, 07:20 AM
Welcome to another anxious Monday morning.
Money markets are deeply stressed again, with the Asian rates for lending between banks for three months remaining at their highest level since last December.
Asian stock markets are falling, with Japan down 5%.
And it's the troubles of Europe's banks, and the messy response of the authorities, that's to blame.
First, let's accentuate the positive.
Fortis's Belgian and Luxembourg operations have been bought - and effectively rescued - by the mighty BNP Paribas of France for just under £12bn in shares and cash.
The troubled German property lender, Hypo Real Estate, has been rescued for the second time in a week, with a package of loans provided by the government in partnership with a consortium of banks and insurers.
And the UK seems to have moved a step closer to announcing the details of a contingency plan being worked on in the Treasury (which I described in my note on Saturday) to inject billions of precious new capital into British banks.
So far, so reassuring.
But.
We still don't know how and what the Icelandic government will do to restore confidence in its banking system.
There's talk of a great national effort, or the use of its citizens' £8bn of pension savings to provide financial support to banks that may need it.
But as of now, it's unclear what Iceland will attempt to do to stem the flight out of its currency and shore up banks that have borrowed £80bn in foreign currencies (and see my other Saturday note, "Markets call time on Iceland").
Finally, there's the residual uncertainty about the extent of Germany's guarantee to holders of private accounts.
It certainly looks as though it's providing 100% insurance to £450bn of deposits. Which seems fairly ambitious, and will put pressure on the UK government to do something similar.
But here's the thing: retail deposits in the UK are much greater than that, some £950bn, according to an analysis by the City watchdog, the Financial Services Authority.
In other words, we in the UK appear to hold more of our savings in authorised banks than seems to be the case in Germany.
So for the UK to offer 100% protection would put a proportionately great strain on the public sector's balance sheet.
Sunday's Picks
German guarantee lost in translation
- 5 Oct 08, 08:35 PM
I don't now expect an immediate decision by the Chancellor of the Exchequer to follow the example of the Germans and offer a full 100% guarantee to protect the savings of ordinary retail savers.
Why not?
Well Alistair Darling and the Treasury can't get any sense out of the German government about what it is precisely that they are doing.
So there's no point in responding to something that's still a touch ephemeral.
There are two possibilities.
The German Chancellor, Angela Merkel, may be saying that the full financial might of the German state is guaranteeing or underwiting the retail liabilities of German banks - and thus bringing hundreds of billions of additional debt on to the public sector balance sheet.
That's certainly what's implied in briefings by the German finance ministry. And if that's what's happening, it will reverberate all over Europe.
It is the kind of commitment that would at a stroke strengten German banks in the eyes of their creditors.
And if there weren't to be an ebbing away of deposits from British banks, our chancellor and prime minister would have to respond in kind - at the cost of a massive increment to our national debt.
But it is theoretically possible that Angela Merkel thinks she is simply saying what Alistair Darling said at the height of the Northern Rock crisis a year ago, and repeated last week - which is that she's prepared to do whatever it takes to protect the savings of German retail depositors.
That's a rather softer promise, which wouldn't lead to a swelling of the German national debt.
One thing, and one thing alone is crystal clear: European governments are as dazed and confused by the mayhem in the global banking system as most of the rest of us.
So they shouldn't be surprised if money markets open tomorrow even more stressed than they have been of late.
After all it's been another weekend of attempted rescues of banks from Iceland, to Germany, Luxembourg, Belgium and Italy.
Fingers crossed all the relevant battered banks - or in the case of Iceland, a battered economy - have had the salve and plasters attached by dawn.
Full deposit protection is nigh
- 5 Oct 08, 05:04 PM
The decision by the German federal government to guarantee all private savings in German banks is momentous.
In a globalised banking market, in which money can leak across borders like a sieve, it will be almost impossible for the UK not to follow Germany's lead.
I would be immensely surprised if Alistair Darling, the Chancellor of the Exchequer, didn't announce a similar commitment within the next 24 hours.
The formalisation of full protection for depositors throughout the European Union became almost inevitable after similar decisions were taken over the past few days by the Irish and Greek governments.
But Germany is the biggest economy in Europe, a global powerhouse, with a banking sector that for years prided itself on its conservativism.
That Germany is the first of the major European economies to provide 100 per cent insurance to private savers shows just how fragile its banks have become.
The trigger for the announcement seems to have been the desperate straits of Hypo Real Estate, the commercial property lender whose rescue in jeopardy.
But that's only the trigger.
The underlying cause is a near-total collapse of confidence by creditors to banks and by bankers themselves.
Update 19:16
What an unfortunate mess. Just hours after leaders of the UK, Germany, France and Italy promised to co-ordinate their responses to the global banking crisis, Germany seems to have struck out on its own - by offering 100 per cent state-backed insurance to the country's private savers.
The German initiative - which is long on resonance and worryingly short on detail - caught the British Government off guard. The UK Treasury wasn't expecting any such drastic attempt to shore up confidence in Germany's banks.
And although official statements from the German government are unambiguous that savers money will be fully protected by the state, there's a disturbing lack of detail about precisely how this guarantee would work.
For example, it's not clear whether this is a formal, unambiguous commitment to take the retail liabilities of the German banks on to the public sector's balance sheet - a commitment would add many hundreds of billions of euros to Germany's national debt.
Also, to add an almost comic element to Germany's evasive action, almost simultaneously there's been a statement by the EU Competition Commissioner Neelie Kroes that blanket guarantees on bank deposits by individual members states are "discriminatory".
Kroes added that she was hopeful that Ireland's controversial 100 per cent guarantee - launched last week - would be modifiedn in "a form for which we can together state that it is line with the treaty".
At a time when there's profound unease across Europe about the safety and security of our banks, the spectacle of governments seemingly at odds with each other and with the Commission is unsettling, to put it mildly.
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