"State to save HBOS and RBS"

Britain is moving quickly to use the its new bank rescue facility, which was increased from £59 billion to £75 billion. Note the article suggests that stock market trading may be suspended in connection with the rescues. From the Times Online (hat tip reader Tim):

The government will tomorrow launch the biggest rescue of Britain’s high-street banks when the UK’s four biggest institutions ask for a £35 billion financial lifeline.

The unprecedented move will make the government the biggest shareholder in at least two banks. The Royal Bank of Scot-land (RBS), which has seen its market value fall to under £12 billion, is to ask the government to underwrite a £15 billion cash call. HBOS, which is Britain’s biggest provider of mortgages, is requesting up to £10 billion. Lloyds TSB, which is in the process of acquiring HBOS, and Barclays require £7 billion and £3 billion.

The scale of the fundraising could lead to trading at the London stock market being suspended. This would be to give time for the market to digest the scale of the information and its impact.

One consequence of the deal is that Lloyds could renegotiate the terms of the takeover, although both sides are still keen for it to happen….

The British bank rescue could leave the government owning 70% of HBOS and 50% of RBS. Crisis talks were taking place this weekend between the Treasury, the Financial Services Authority (FSA), the Bank of England and the heads of the four retail banks. As part of the fundraising it is likely that banks will also have to own up to future losses from their exposure to sub-prime mortgages and other financial instruments.

Mervyn King, the governor of the Bank of England, has told the banks to ask for more than they need.

This is to make sure that their capital position is strengthened sufficiently to absorb shocks and to withstand a long recession. Further capital is also available and the Treasury has increased the total amount to £75 billion.

It is thought all parties believe that a coordinated rescue is the best way forward…

The way in which the money will be raised has also been simplified. The most likely process is for the government to underwrite an issue of ordinary shares. This would give preemption rights to existing investors, and those shares not taken up will be owned by the government.

These shares could be placed in a newly created bank reconstruction fund that would hold the shares until market conditions improve.

King has insisted on the recapitalisation of the banks as a condition for other elements of last week’s bailout package, including a doubling of the special liquidity scheme from £100 billion to £200 billion and a new £250 billion guarantee of bank lending.

The Bank of England has also increased the stress test required for banks to prove that they are in a strong capital position. This is called its “core capital ratio” and it has been boosted from six to nine.

Banking sources say the combined loss of capital of the banks as a result of the credit crisis was £150 billion but some of that has already been made up by earlier capital-raising exercises and some will not be needed because the banks will be more constrained in their future lending.

The Bank has also been pushing for early action by the banks on raising capital….

In addition, Barclays is attempting to raise around £3 billion from a number of Middle Eastern sovereign-wealth funds, including the Qatar Investment Authority, as well as Asian investment houses, including Japan’s Sumitomo Mitsui Banking Corporation.

Update 6:30 PM: Apparently there is a range of reporting as to the state of play. From a reader via e-mail:

Le Figaro is now saying they will all announce a plan Monday.

This is somewhat different from the German accounts in Der Spiegel, which suggested that Germany was still being recalcitrant, although more consistent with the FT line that everybody was falling in line. Let’s see on Monday morning.

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  1. Anonymous

    So US, British and other EU banks get recapitalized courtesy of the taxpayers, whilst their managers walk away with their cash bonuses. How nice.

  2. MJ

    According to reports in most major german newspapers, Germany will more or less copy the british plan and announce it tomorrow but only after Weber pushed hard. I agree with the criticism of Paulson but at least he understands markets. The german government is so clueless, it is outright scary. Consider that Finance minister Steinbrück gave a speech in parliament only hours before he was told of the Hypo problems, where he laid all the blame on the US and declared that Germany had no problem. The first package blew up because they didn’t even check the books of Hypo. They guaranteed deposits without ever realizing that this would lead to a run on money market funds and still had no idea that all of this was not enough. And according to press reports the german banks are the leaders in loans to Iceland, especially the state-owned banks.

  3. Anonymous

    They/we need more funding….it’s never be enough. Enjoy the lulls in the storm.

    I’ve run out of popcorn and the next batch is aboard ship tied up at some dock waiting for a letter of credit before she can float.

  4. River

    Yves, there are continuing problems with LIBOR. Here is a link to an interesting post. Sorry for being off topic but I did not want to fill out a form to send you an email. Thanks

    ‘LIBOR has ceased to function as a reliable benchmark suitable for commercial and residential loans in terms of US dollars.

    It is in backwardation with an inverted yield curve, and has significantly diverged from the Effective Fed Funds rate.

    This is most likely because of the Eurodollar ‘short squeeze,’ as shown by the record TED spread, and the inappropriately small sample size of LIBOR reporting banks.

    This is all a symptom of the greater issue of the US dollar, which is no longer suitable as the reserve currency for global central banking.

    The Federal Reserve is no longer able manage the dollar to simulate the stability of an external standard, given their decision to ignore nominal money supply growth. Their current mandate instead focuses them on purely domestic economic metrics that may be inappropriate for the changing state and requirements of exogenous economic systems, unless those systems are willing to subordinate their fiscal and monetary discretion.’…snip…


  5. Will T


    This comment is off-topic, as there is not an open thread suitable for this story from Bloomberg:

    Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

    Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.


    The graft of this administration know no bounds.

  6. ruetheday

    River – The real problem is that LIBOR is NOT an actual market interest rate, it is an arbitrary number posted by the BBA based on a survey of a handful of its members. There is no reason for US financial institutions to continue linking mortgages or other instruments to LIBOR.

  7. Anonymous

    Does anyone have any clue as to why Condoleezza Rice is at The G7 negotiations? Seems very odd to me that she is involved in finance, as that is a Treasury thing? Seems political?

  8. Anonymous

    will t,

    I suspect what happened was that the revised law requires the Tsy to publish on their website the prices paid and the collateral.

    This public disclosure messed up Paulson’s original plan of overpaying for securities from prefered firms. If he publishes that he paid 80% for super senior tranche from GS that others had at 10%, Paulson would have been inundated with offers from others that he would not be in a position to refuse.

    So now, FNM/FRE overpay for the toxic waste and no one is wiser. The $40 billion monthly limit also lets him tell non-GS sellers, sorry we’ve used our quota for this month.

    He then uses the $700 billion to inject capital into MS and GS. Too late, though, to save his buddy Bobby Steel.

  9. Anonymous

    Funny I don’t recall markets needing to be shut for folks to relax with their thoughts when they were going up. “Markets” are being revealed as the stock promotion schemes that they’ve been all along. So much for a capitalist and his capital wringing a profit from the proud land. I can understand why Jeff Skilling felt so persecuted, he wasn’t doing anything that GE wasn’t doing, he just wasn’t as good at it.

  10. Anonymous

    What is emerging is a financial war beginning with Euroland and the US.

    The US is the originator of the majority of derivatives. Solving the dollar problems as the world reserve is incalculable and talk of a new world reserve currency is the product of a trouble dollar.

    Euroland will recover sooner and faster than the US and does not want to carry the debt load caused by the US. Don’t expect anything earth shattering from this weekend’s meetings.

  11. Anonymous

    Euroland needs to figure out who is going to bailout the hedge funds know as Deutsche Bank and UBS.

    You want your house? Come get it.

    They tried to liquidate out of the housing market, that can’t work, then they move on to commodities, and finally the stock market. They are selling everything they can.

    I’m sorry, this is our problem? Right.

  12. Anonymous

    “This public disclosure messed up Paulson’s original plan of overpaying for securities from prefered firms. If he publishes that he paid 80% for super senior tranche from GS that others had at 10%, Paulson would have been inundated with offers from others that he would not be in a position to refuse.”

    The B4 auditors will of any seller will know about the sale prices, and they may use this information to help financial firms book assets at inflated prices, even though Treasury’s purchases are limited.

    And to the guy who complained about the stock market as a promotion scheme, the good value investing goods I’ve read (there aren’t many) all recommend calculations of intrinsic value based on what a promoter could sell the company for.

  13. Anonymous

    Rice may be @ G7 to represent Middle East oil, because this is a coordinated devaluation of G7 currency relating to currency reserves, thus oil wants to be in on this shit and Condi has the cell phone hooked into OPEC

  14. locust

    I admit, I really don’t understand the subtleties of everything that’s going on.

    So, is it my imagination or are the countries in the G-7 saying:

    No one has any idea just how big or how bad the problem is. No one has a handle on the entire scope. All they know is yes it’s really bad.

    If that’s really the case, then if they don’t get a handle on the problem, they can’t work towards a solution. And to me, that means the global economy is about to splinter and shatter into a thousand million pieces of isolationist policies because absolutely no one trusts anyone else to tell the truth.

    I would absolutely love to hear that I’m wrong and that’s not what’s going on.

  15. Anonymous

    “No one has any idea just how big or how bad the problem is. No one has a handle on the entire scope. All they know is yes it’s really bad. If that’s really the case, then if they don’t get a handle on the problem, they can’t work towards a solution. … I would absolutely love to hear that I’m wrong and that’s not what’s going on.”

    The financial technocrats in the government know what they need to do: nationalize all the insolvent fiancial institutions, drop the bad assets into a big pot for winding up, and capitalize the banks worth saving with enough money to provide financing to the real economy.

    The stumbling blocks have been political because resolving the issues will force someone to absorb major losses and know one wants to do it. The shareholders don’t want to be diluted. The buyers of puts and short sellers want to make money by having the shareholders wiped out. The debtholders don’t want to be repaid less than par. The holders of credit default swaps want the bondholders wiped out, so they can collect under CDSs. And last, but certainly not least, all the players want cheap financing that hurts the little guy sitting in cash, and government subsidies that hurt the little taxpayer who doesn’t feed at the trough.

    Once the credit crunch hurts joe and jane 6 pack enough to force the politicians to decide how the losses will be divided up, that’ll calm the markets. Until then, a lot of social programs like social security, disability, welfare, school lunch programs, medicare, COBRA, etc, will act as a safety net to prevent things from getting too bad. So will loan extensions, loan purchases, or loan guarantees provided by fannie mae, freddie mac, the FDIC, the FHLA, the export-import bank, the overseas private investment corp, and other federal agencies.

    That isn’t to say things won’t be painful. The 73-74 and 80-82 recessions were painful, but people survived. It won’t all be bad. A lot of bright people were forced out of finance in the 70’s, the same will happen now, and we’ll benefit by having these people get jobs in the real economy.

  16. Anonymous

    anonymous 10:02

    the distinction of course is the GS has the cash while the others still have assets being carried at inflated prices

  17. David Habakkuk

    This may well be naivety, but there is one thing that is puzzling me about the way that the British package is evolving.

    It is said to be based upon upon the approach taken by the Swedes back in the early Nineties, which Yves and others have noted is the most successful treatment of a financial crisis.

    As I understood it, however, a crucial part of the Swedish approach was that at an early stage decisions were made on which banks one could realistically expect to save, and which were past praying for. And the latter were allowed to go to the wall.

    Is the assumption behind the approach being taken in Britain that none of the major banks are past praying for? If it is not, how do the British authorities propose to do the triage which appears to be universally regarded as indispensable to the successful handling of a financial crisis?

  18. kevin de bruxelles

    I hate reality TV but the current banking crisis really boils down to an episode of Survivor where all the banks are afraid to lend to each other because they have little idea who will be the next voted off the island. So what is missing from all these nationalization plans is the critical step of tirage, where the bad apples are closed down and the good apples are saved. Only a credible culling of the weak banks will convince the survivors that the ones still standing will make it. If the governments announce their intention to save all banks then the reaction may be that the governments are throwing substantial amounts of good money to save the bad apples, thus furthering the crisis.

    It will take a lot of political courage for governments to kick enough weak banks to the curb. And they need to do it this week at the latest.

    (I see David Habakkuk has already basically said this but I will post anyway)

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