The Independent reports that a rescue package will be announced tomorrow. After the massive amounts of liquidity thrown around in the last couple of weeks, a mere £50 billion seems a bit puny. However, this is a far more sensible than anything done in the US to date (save the AIG bailout, which was concluded on appropriately punitive terms). The government is making a direct investment, instead of the much more costly, indirect, and administratively complex route of buying dud assets at inflated prices, and taking preferred stock and possibly warrants.
From the Independent:
A £50 billion lifeline is set to be thrown to Britain’s beleaguered banks today. Ministers will announce that the Treasury is spending the money to buy huge stakes in the lenders, which suffered further dramatic collapses in their share prices yesterday.
The plan was hammered out last night in emergency talks chaired by Gordon Brown at No 10 as the crisis intensified. Mr Brown, together with the Chancellor, Alistair Darling, and the Bank of England Governor, Mervyn King, were expected to confirm the bailout before the markets opened this morning, with Treasury officials preparing to work through the night on the detail of the proposals. Under the “recapitalisation” deal – which Mr Brown described yesterday as “the stability and restructuring plan” – up to £50bn of taxpayers’ money would be pumped into troubled financial institutions in an effort to build up their capital and encourage them to lend again. In return, the state would be given preferential shares in the banks, which could be cashed in by the Treasury once their value recovers.
From Times Online:
Taxpayers will be committed today to providing more than £50 billion to bail out high street banks in an attempt to avert a cataclysmic failure of confidence.
Alistair Darling was due to tell the City in an early morning announcement today that the sum will be available for “investment” in banks that have demanded help from the Government. The drastic rescue move is designed to help to reassure savers and to kickstart the paralysed credit markets by encouraging banks to lend to each other again.
After meeting Mervyn King, the Governor of the Bank of England, Downing Street was forced to make the announcement earlier than it had intended because of fears that a second day of hammering for bank shares had made leading institutions vulnerable. HBOS shares slumped by 42 per cent yesterday, Royal Bank of Scotland was down 39 per cent and Lloyds TSB dived 13 per cent in another torrid day for the banks.
The taxpayer will take a stake in banks that seek assistance through the purchase of preference shares, which the Chancellor will say could mean ordinary people making a profit once the crisis is over. Holders of preference shares are the first in line for the payout of dividends but they do not carry voting rights. The bailout is expected to be structured so that the Government also receives rights to ordinary bank shares at low prices, holding out the prospect of profits if and when banks recover.
Update 1:40 AM. RBS top brass is being shown the door as part of the rescue. From”Royal Bank of Scotland chiefs to be forced out under bailout deal” in the Telegraph:
Royal Bank of Scotland will today clear out its boardroom as part of a shake-up, demanded by Government, for a state-assisted re-capitalisation of the bank.
Chief executive Sir Fred Goodwin and chairman Sir Tom McKillop are out. They are to be replaced by Steve Hester, formerly of the Abbey, and Sir Philip Hampton, currently chairman of Sainsbury’s.
As part of the deal with Government, there will be a future cap on executive pay and shareholder dividends.
The departure of RBS’s top management comes the day after shares in the UK’s second biggest bank fell 39pc over funding shortfall fears.
It coincides with a move by the government to throw a £50bn lifeline to Britain’s battered banks, to be announced before the market opens this morning and expected to take the form of a taxpayer-funded capital injection in exchange for preference shares.
The emergence of an urgent need for capital had placed Sir Fred’s and Sir Tom’s positions under renewed pressure after the bank raised £12bn in the biggest rights issue in European history earlier this year and indicated that it would not need to come back for more.
It’s not only more sensible, it’s honest. Unlike the US, where accounting and regulatory standards are being changed to obfuscate the problem, and where the Congress can’t even specify how Treasury will price the assets it purchases, or what criteria hold for obtaining help to begin with. The Brits will see more oversight through partial nationalization, but in the US we’ll have secret valuations and help extended on the basis of cronyism and the executive’s opinion of which firms deserve to live or die.
Why do you think Warren Buffet bought in to Goldman?
He is no mug and realises that Paulson will make sure GS come out winners in this fiasco.
British taxpayers will now own chunks of the three major banks – remember over here this is easily acceptable – we own the BBC!
Lets start a rumour….Nouriel Roubini seen sneaking into Her Majesty’s Treasury offices…..!!
Instead of the authorities shutting down the $60 trillion derivative mechanism that is causing global systemic collapse, they seem to all be looking at this fire with awe and wonder, dreaming with glazed eyes as to how they can profit from this, how they can get jobs there, after working in the SEC, Senate, Congress, etc. Look at the whore Greenspan working for a hedge fund!
IMHO, London needs to shut down its market and suspend trading in derivatives and then of course, if this was a just world with good people, someone in America would suspend trading of derivatives like CDS:
"Say you can swim; alas, 'tis but a while!
Tread on the sand; why, there you quickly sink:
Bestride the rock; the tide will wash you off,
Or else you famish; that's a threefold death."
>> FYI: CME Group's clearing member, Lehman Brothers Inc., is a subsidiary of
Lehman Brothers Holdings Inc., but is a separate company with its own
accounts, assets and customers.
>>> Shares of futures-exchange operators CME Group Inc. and IntercontinentalExchange Inc. are trading higher on reports the Federal Reserve is holding meetings this week to discuss creating a regulated market for credit default swaps, the derivative instruments at the heart of the financial crisis.
The New York Federal Reserve is hosting a meeting with financial institutions this week to discuss plans to develop a central counterparty for the roughly $60 trillion unregulated CDS market, according to press reports. CME and ICE are seen as the biggest potential beneficiaries and are reportedly in talks with the Fed to create a CDS exchange.
…and indicated that it would not need to come back for more.
More of the same: either total incompetence or total dishonesty. I understand the situation is dramatic and therefore the severe problems the banks are having now were perhaps earlier not entirely foreseeable, yet this sort of late stage recognition/acknowledgment has only undermined confidence further and made it all that much worse.
Actually reality has been almost as entertaining as your proposed rumour.
In Monday’s FT, the Tory leader David Cameron announced that he was that day discussing the crisis with ‘Carl Bildt, the Swedish prime minister who 15 years ago showed how a centre-right government can intervene decisively in a financial crisis while protecting the taxpayer.’ Free market dogma goes out of the window, even on the right, which will be of enormous help in making possible sensible responses to the crisis.
Cameron had seen Mervyn King on the Friday, who I suspect had put the fear of God — or a total run on the banks and meltdown of the system — into him.
King is a clever and sensible man, who is known to have been concerned about the undercapitalization of British banks for some time. I suspect it will have been as clear to him for some time as it has been to Yves Smith that the most successful approach to a financial crisis has been that of Sweden.
What I hope is that covert contingency planning for an approach based on Swedish lines has been going on in the BoE for some months — and that the authorities are not simply improvising off the cuff, but have clear contingency plans for developing this initial bail-out in more radical directions. If such planning had been going on, we would of course not know about it, as it has to be conducted in deepest secrecy for fear of precipitating the mass exodus of those shareholders whose equity is (rightly) liable to be wiped out.
Be that as it may we shall soon see how much further and how rapidly the British authorities proceed along the Swedish route — and whether other European states follow. I suspect many European central bankers may have been coming over the past weeks to Willem Buiter’s conclusion that the North Atlantic banking system is effectively insolvent — as I do not think Bernanke has.
Re: “The plan was hammered out last night in emergency talks “
We have heard this same crap all year, from way too many buffoons, i.e, last second plans, emergency talks and emergency plans. What a bunch of bloody poppycock — they make this clown crap up on the fly and they have no clue as what they are doing. These career politicians are actors on a stage which plays to a bunch of idiots that are increasingly dazzled by this mult-act soap opera, which has only one theme — this is a $60 Trillion problem caused by financial derivatives that are unregulated and they are causing a global plague that could result in Biblical-like chaos!
Be that as it may be, Global GDP is about $54 Trillion, so, isn’t it just a little weird that we have at least a $6 Trillion deviation between total global gross domestic product and these casino related derivative bets? I’d start swearing right now, but one has to be civil and not act as if the world is coming to an end!
On its face, this is much the most sensible intervention seen so far in any country. In particular, public recapping comes tied to a mandate for ‘partiticipating’ firms to, goddamiit, lend into the commercial paper markets forthwith. This is a far better idea than any Guvmint buying CP paper: take over the banks and put them on notice to fund the real economy.
It has been said elsewhere that the UK banks are so deeply enmeshed in the global economy that it is questionable as to whether the UK government can, on their own, truly backstop their _entire_ banking sector in the absence of a global solution. But having a go at it is the right thing to do, so.
And speaking of ‘responsible global citizens,’ it would be a good thing, as mentioned by others here in comments, for the UK to pull in the grossly irresponsible CDS activity which has been so profitable for the City but so profitless for the global economy. So yeah, let’s just see who wants to be a ‘responsible global citizen’ when it’s _their_ winnings which have to be cashed out to buy the title.
Oh and by the bye, this action by King in the UK is an unequivocal though tacit admission that global banking is in a _solvency_ crisis. If even the Brits see this, how dense do Hank and Bennie have to be to keep on pumping faux liquidity?
. . . This is really about _ideology_, folks, and beliefs die hard, sometimes only when the airwalking body splatters the pavement. Our public financial leadership in the US see themselves as the handmaidens of capital, and just cannot accept that their universal masters have gone cannibal with hemorraghic feaver. Face to face with the ‘Dorian Gray reality’ of their own inner contradictions, these servants of capital can only babble the same tired and increasingly nonsensical lines. This isn’t about rates, liquidity, and confidence: It’s about the bill coming due that we’ve stiffed for thirty years.
In the 30s in the US, the masters of capital mostly never _did_ come to grips with what they had wraught. It was a new kind of politician who took them by the scruff and dragged them into conditions of profitability, mostly by just not letting the raft sink until the weather improved, really. It’ll be tougher this time if the Mad Professor kills our currency first. “Stop that man before he prints again!”
Britain’s tax revenue is around 200 bill pounds/year with about 45 bill borrowed on top for around 250 bill/year budget.
So the 50 bill equity stake is one quarter of the tax base. What kind of bank earnings do they think will pay for this stake? Foreign exchange trading expertise, interest rate swaps, arbitraging US treasuries and mortgage debt? Swaps and flops and plops. (RBS has 2 trillion+ in liabilities, Barclays more than 1 trillion.)
Seems the issue here is the same. It is very difficult to de-leverage while relying to maintain as large a piece of the derivatives pie as possible. If what they call earnings are more or less exclusively tied to derivatives and the fees earned from them it is almost impossible.
So the Telegraph story on Pakistan is kind of relevant pointer for a whole class of middle tier countries with too much debt and too little economy, like the UK.
And while a lot of worry is going into finding the right brand of Drano for the money markets, this one will clear the clog without destroying the pipes, there is a wave of sovereign nation bankruptcies beginning to crest above the surface.
It will be interesting to see this list come together over the next couple of weeks, as we find out whether Brown’s “partial Swedish model” is as good a deal as he thinks, and how adequate the credit lines he’s proposed really are.
I agree that the UK bank recapitalization plan is a more direct solution to the problem of banking capital than buying up troubled assets and surreptitiously overpaying them. I do have concerns about the implementation of the plan – it seems like the 8 banks have agreed in principle to take on 25 billion pounds of capital, but (a) that feels puny – some of these are really big banks – and (b) the terms haven’t been worked out, so I could see banks backing out. But this is more likely to have an impact on the crisis itself than the interest rate cut: http://baselinescenario.com/2008/10/08/global-rate-cuts-attacking-the-symptom/.
Anyone have any idea how this might affect RBS’s American subsidiaries; i.e., Citizen’s Bank?