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.