Oct. 13th, 2008

peterbirks: (Default)
As it gets to this time of year, even in a normal year, I tend to get weary. The year just slowly wears me down. But this isn't a normal year and these aren't normal times. It's like the crack cocaine version of financial economy. One hit every 15 minutes. As time goes on, hits that would have had a big impact a few weeks ago, you hardly even notice. You need at least a financial tsunami to wake you out of your torpor.

I mean, I've woken up this morning to be told (well, I knew last night, but you get my point), that three of the UK's Big Five banks (Lloyds TSB, Halifax Bank of Scotland and Royal Bank of Scotland/NatWest) are to come into effective public ownership -- Barclays thinks it can muddle through without becoming part of UK plc, and HSBC is strongly capitalized. Back in 1983 the Labour Party manifesto proposed closer control of the banks and scrutiny of lending standards. Michael Foot led the party to its worst defeat since the second world war. At the same election the Socialist Workers Party, led by the late Paul Foot, advocated the nationalization of the banks. Of course, no-one took any notice of such fringe lunacy. I rather wish Paul were still alive; he would have brought some liveliness to the debate.

One institutional investor was still muttering the "growth" mantra about UK banks this morning, presumably not having noticed that it was partially this pressure from institutional investors that got the banks into the shit in the first place (look how Lloyds TSB was criticized for not playing the game).

Royal Bank of Scotland is to raise £20bn, £15bn of it at 65.5p a share. At first glance, this is a good deal for the British taxpayer, who actually gets to vote now as well. RBS may have tons of toxic shit, it may emerge as a much smaller operation, but you (the taxpayer) are getting shares at 90% off what was seen as a 'fair' valuation only 12 months ago.

Now, let's discount the growth assumed at the time. That might knock 30% off the price, down to 420p. Then assume that RBS will be half the size that it was. That reduces the price to 210p. 65.5p still looks like a big discount. It provides for a further 2/3 of the bank's capital disappearing in toxic sludge.

Once again you may recall the Birks estimate of $300bn to $400bn in "real" value being lost over the past few years. Is anyone really suggesting that RBS is on the hook for more than 10% of this? I don't think so.

In addition, we're putting in £5bn for Preference shares at 12%. I'd certainly back that rather than the moves of several Councils (and charities) to put money into Landsbanki.


Barclays appears to be taking a different tack. From what I read of this morning's statement, it's raising £6.5bn, but not from the government. It's also getting £2bn by not paying a dividend — a gutsy play that will send some investors into paroxysms (the kind that never look at the share price or the earnings but always want the dividend to be maintained no matter what is happening in the real world). This needs further analysis, but it looks like the right move to me.


Somewhat unexpectedly, the Lloyds/HBOS deal is not dead. However, given that it isn't dead, it's unsurprising that the terms have been changed. It's now 1 HBOS share for each 0.605 Lloyds TSB share. HBOS is going to raise £17bn from the taxpayer and Lloyds TSB is going to raise £5.5bn from the same source. The split of equity/preference shares is roughly as for RBS. The Lloyds equity is at 173p per share -- not such a big discount at all as it was for RBS, which indicates that the Lloyds TSB book and model is funadamentally more sound. That seems to price the HBOS shares at about a quid -- the only area where I think UK plc might be overpaying.

By the end of it all, the taxpayer will own 43.5% of Lloyds/HBOS.


Which leads to the final question; will it solve the problem? Well, it's one hell of a good model -- about as good as you could put together if you have both financial and social concerns at heart. On the downside, we have yet to see the extento to which effective public ownership will screw up the system. It could be counter-argued that they could hardly screw it up any more than private ownership has over the past five years.

Banking always sat uneasily in the private sector, right from that moment that the government passed a law stating that an employee no longer had the right to demand to be paid in cash. This single rule interlinked the banking system with the entire social fabric.


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