THE government will launch the biggest rescue of Britain’s high-street banks
tomorrow 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.
Royal Bank of Scotland (RBS), which has seen its market value fall to below
£12 billion, is to ask ministers to underwrite a £15 billion cash call.
Halifax Bank of Scotland (HBOS), Britain’s biggest provider of mortgages, is
seeking up to £10 billion.
Lloyds TSB, which is in the process of acquiring HBOS in a rescue merger,
wants £7 billion, while Barclays needs £3 billion.
The scale of the fundraising could lead to trading at the London stock market
being suspended. This would give time for the market to digest the impact of
the moves.
One consequence of the deal might be that Lloyds could renegotiate the terms
of the HBOS takeover, although both sides are still keen for the merger to
take place.
An economist who declined to be named said: “This is the biggest risk of the
UK’s balance sheet ever undertaken. No-one knows the extent of the toxic
assets these banks are exposed to.”
Separately, the future of Morgan Stanley, the American investment bank, is
also in doubt today following a sharp sell-off of shares and warnings of a
possible credit downgrade from Moody’s the ratings agency.
Mitsubishi UFJ Financial Group is reviewing the terms of a $9 billion (£5.3
billion) capital injection into the bank and may launch a takeover. HSBC,
Citigroup, JP Morgan and Deutsche Bank are also assessing the situation.
Morgan Stanley’s market value has slumped to $13 billion.
The British bank rescue could leave the government owning 70% of HBOS and 50%
of RBS. As a result it could take board seats at both companies and exercise
control over future dividend payments.
Crisis talks were taking place this weekend between the Treasury, the
Financial Services Authority, the Bank of England and 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 a co-ordinated rescue is the way forward.
Final details will be thrashed out tonight.
The way in which the money will be raised has also been simplified. The
government may have to underwrite an issue of ordinary shares. This would
give pre-emption rights to existing investors, and those shares not taken up
will be owned by the government. These could be placed in a new bank
reconstruction fund that would hold them until conditions improve.
King had 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. “They say there’s no excuse for delay,” said one banking source.
“We need to get on with it.” Banks concede that executives will lose their
jobs. Among them, Goodwin and his chairman, Sir Tom McKillop.
In addition, Barclays is trying to raise about £3 billion from Middle Eastern
sovereign-wealth funds, including the Qatar Investment Authority, as well as
Asian investment houses, including Japan’s Sumitomo Mitsui Banking
Corporation.
US Treasury secretary Hank Paulson gave a clear indication late on Friday that
he would stand behind Morgan Stanley and Goldman Sachs to prevent another
collapse on the scale of Lehman Brothers.Both banks were hard hit by last
week’s historic stock-market sell-off. Morgan Stanley’s stock dropped almost
60% last week, while Goldman’s fell 29%.
Paulson’s assurances followed the G7’s plans to tackle the economic crisis.
“We did not speak to any specific firm today. We spoke about firms that were
important and firms that were important systemically,” he said. Questions
over continuing liabilities stemming from the collapse of Lehman Brothers,
Washington Mutual and the Icelandic banks continue to rumble through the
markets.
An auction process on Friday night determined that the collapse of Lehman
Brothers will cost providers of credit default swaps an estimated $233
billion payout — which has to be paid in the next two weeks..
While much of the exposure is expected to sit with AIG, the insurance giant
that has been partially nationalised, a number of banks are thought to have
issued insurance against bank collapses that will now be called upon.
Pressure is mounting on the International Accounting Standards Board to
abandon its “mark-to-market” accounting principles, which many believe has
been one of the key factors in causing the credit crisis.
The rules insist that assets be held on a bank’s book at the most recently
traded market price. As the markets took fright from exotic credit
derivatives, the prices fell well below what is considered to be their true
economic value — leading to bigger than expected paper losses being taken by
the banks. As the markets have crashed, the problem has become ever more
acute.
On Friday night, America’s chief accounting body, the Financial Accounting
Standards Board, revealed that it would suspend the mark-to-market rules to
take account of extreme market conditions. Institutions will be able to use
their own estimates of an asset’s worth instead. The move follows pressure
from the US Securities and Exchange Commission.
In a “position” statement, the board said: “In determining fair value for a
financial asset, the use of a reporting entity’s own assumptions about
future cash flows and appropriately risk-adjusted discount rates is
acceptable when relevant observable inputs are not available.”
Questions also persist about the collapse of the Icelandic institutions, and
the knock-on effects of their demise. It has emerged that the FSA told the
London-based capital-markets business of Kaupthing to move some of its £20m
cash pile out of a bank account held with its Icelandic parent company
“several months” before the bank collapsed last week.
A senior source at Kaupthing Singer & Friedlander Capital Markets, run by
former KBC Peel Hunt boss Tim Cockcroft, said the cash had been moved into
four or five UK bank accounts following concerns raised by the regulator.
The news suggests the regulator may have been flagging concerns about Iceland
to business customers while local councils and consumers continued to
deposit cash with the banks.
A handful of Treasury officials have grown concerned about the potential for
conflicts of interest emerging between the advisers working on the bailout
deal and the financial implications.
For example, Goldman Sachs, which is advising Royal Bank of Scotland, also has
large financial exposures to the bank.
There have been calls within the Treasury for an independent advisory boutique
like Blackstone or Greenhill to be appointed to monitor conflicts of
interest, but it is understood that these calls have gone unnoticed so far.
I think simplisticall game iny this is the biggest create a problem then solve it game giving the banks and financial markets greater control over money and moving swiflty to One Wortld Bank...and all that it entails.
It is not their finanical crises at stake it is ours. What can we do?
Ioho, Sydney, Australia
in view of the government investing/ (giving ) such sums to Hbos- Lloyds and both parties saying they want the merger to go ahead , when will the merger actually take place ? the opportunity to have government spokesmen on the board ,must surely allow parties to review the merger terms
michael, sydenham, england
These bankers should be immediately dismissed and the SFO brought in to thoroughly review their accounts. There must be a penalty in the UK for this type of disgraceful behaviour and it should be severe to discourage it happening in the future.
R McAuley, Antrim, UK
Where did all that "lost" money go? Maybe its gone into space with the likes of Garriot - tycoon in what...probably repackaged sub-prime loans. If that's so then our monwy has really gone into space.
James, Leicester,
If there were no shareholders, there would be no banks and your money would be kept under the mattress, until its robbed. Equally, if the shareholders are not allowed dividends, then depositors should equally receive zero interest. Some people have not figured out that everyone loses here.
lang, london,
Govt should take pref. shares in RBs and HBOS and not ordinary stock .The rate of return of the pref stock should be just enough so that it can cover its cost of capital. If govt moves that way, then the interests of the taxpayer and others will be well protected .Tomorrow the market would love it
Roy Chowdhury, London, UK
Why is Goldman Sachs involved? It's the American giant waste of space that made plenty of money on what are now sub prime bonds. The only people in the UK with a proven qualified track record in large scale recovery are the big accounting firms like KPMG, Deloitte, Ernst and Young or PWC.
Rahul, London,
Surely HBOS don't need Lloyds TSB now they have goverment money? Why would Lloyds TSB want a pig in poke? Listen to me HBOS - back off from Lloyds they are bad news. Stay strong and go it alone.
Geoff Filmore, Farnborough,
Brett, As a shareholder, this is probably good news for you. The investment by the government should calm the recent storm over RBS stock. My guess is that the price would go up, but we'll see tomorrow.
James, London, UK
Will hmg now use the remaining cash in its bail out fund to turn the banks we the taxpayer now own into world beaters. A single national bank with reasonably paid staff and no need to advertise could offer us all cheap loans (subject to strict conditions) or good interest on our savings.
Clive Stringer, Eggesford, England
HBOS and RBS saved but NR and BB destroyed - could it have something to do with the strength of the SNP and the reaction of the scottish to a scottish bank being run down by Labour?
Labour would be out of power for decades if it ran down RBS or HBOS in the same way as NR.
David, London,
Brett: I fear the answer is likely to be "Yes".
In the alternative, and as one of your proposed "new" shareholders, I would be delighted, you and you fellow shareholders could stump up the money yourselves.
Any takers?
Alan Hargreaves, Holywell, UK
please ecxuse my ignorance in this matter but things are moving at such pace and it has become rather confusing for the man in the street.my question is as a small shareholder in rbs are my shares going to become even more worthless should the government purchase say 50% of the shareholding.
brett, swindon, england
Looks like the start of the final phase of the collapse of the Icelandic banks; skyrocketing spreads of credit default swaps, a partial takeover by the government in an “unprecedented move”, and elaborate statements of assurances from the banks.
I hope your bailout plan will be more successful than ours was. However, just in case, make sure ALL your deposits are securely insured. Good luck to you.
Jon, Reykjavik,
Hang on Haydn? A government rescue package for the guilty is theft? Please stop discrediting capitalism by talking such nonsense. Are you trying to incite the lefties?
Eric Skelton, Cardiff, Wales
A dramatic change, from acquisition of portions of banks’ mortgage portfolios to purchasing shares in the banks. The government’s taking board seats and exercising control clearly foretells a creeping transition from socialism to communism.
Dennis Eagan, Colorado Springs, US
The sub prime toxic debt is insignificant in relation to the toxic debt of some of the derivative,futures,credit default swops that bankers have thought up to massively increase apparent profit to the balance sheet and hence their bonus's. Wait till they need to be settled. But someone sold them!
rob, ashbourne, uk
I see in todays Appointments Section (real touchy feelie newspaper) an ad for the vacancy of "The Bank of Englands Deputy Governor for Financial Stability" - time to brush off the old CV methinks - my A level in Economics should just about swing it in my favour.
david devonport, Great Yarmouth, UK
aren't we lucky that we have an experienced leader at the helm
and a party that can intervene when capitalism does'nt work.if the tories were in power under the now deafeningly silent david cameron-they would have stuck to their thatcherite dogma garbage-and you could wave goodbye to your savings!
john reilly, glasgow,
As an RBS shareholder the value of my shares have been eroded by the constant leaking of information from the treasury "spin depatment". While I agree that bank chiefs should go Sir Fred is not the only "dead man walking" Brown will follow soon!
Rob Wells, Chesterfield, UK
The megalomaniac bankers; 'masters of the Universe' have shown themselves to be no cleverer than the punters at William Hill.
Unlike the punters, though, they have done really well when their bets came home; and done really well when they did not.
Kevin, London, UK
It is theft that the government get a 50% stake in RBS at current share price when it has caused share price falls via constant leaks to the BBC. Ultimately RBS has settled ALL payments so far and has retail deposits in NatWest alone, that are far greater than any market cap/any government stake
Haydn, London, UK
The Union helping Scottish banks? Good move of Mr Brown against Scottish independence.
Michael, Sheffield,
credit default swaps are at the heat of the problem, however as the insurance companies go bust, and the governments take over, what do you think is going to happen to inflation, as real money goes in place of the fake leverage?
james, Portadown, n ireland
wot - no accountants?
Pete, Hull, UK
it seems to me the more money they have to find for this crisis the deeper it seems to get ,the dam is leaking but the leaks are appearing everywhere ,why would it not be better for goverments to kickstart their economies by starting major public works
john, stirling,
We are about to see the fiat money that the banks magicked out of thin air evaporate in a debt deflation. This means the UK could be on the hook for hundreds of billions of derivatives that require our real cash to settle.
john p-t, Reigate,
"people forget that 98% of uk population is not affected"
- eric savage, southampton,
In 6 months time, "eric", when the UK is in the full grip of a depression, your comment would be 100% correct if you removed the word "not".
Jon Leigh, Southern, France
Hi. What happened to all the comments from Andy Hornby the CEO of HBos stating they were a well capitalised bank. It just goes to show you can't trust a word CEO's say, as it is clear that his comments were complete lies.
Andy, Huddersfield,
I think FASB and IASB are only issuing clarifications to make the accounting for complex financial instruments a little more flexible. Unless transparency is maintained there will be no new private investors. Politicians may want numbers in accounts changed but that doesn't alter the reality.
Gillian , Bishop's Stortford,
Can some one please tell me why it is that it is two scottish banks which are having toi be rescued by the Uk government ?Might it be that its beacause they borrowed too much in reverse take overs of larger English Banks. Scotland will of cousre now benefit at the expense of Englsh taxpayers.
Chris, Epsom, England
lila vadgama, london, UK, it is not the responsibility of auditors to "comment on the balance sheet". Read the auditor's statement in any annual report. It explains exactly what auditors are there to do, which in actual fact isn't that much.
Andrew, London, UK
What started as a bad debt problems has a become a huge confidence and liquidity crisis. The only solution is to throw cash at banks and guarantee inter banks loans. When banks shares return to their normal valuation, it might turn out it a good deal for the government
Roberto, Paris, France
The general public seem to be watching with amazement at the ongoing financial crisis. Few of us are actually angry but the mood is changing. The average taxpayer is going to get dumped to pay for the mistakes others.
The calm before the storm; it is time to get angry.
John Smith, London,
The general public seem to be watching with amazement at the ongoing financial crisis. Few of us are actually angry but the mood is changing. The average taxpayer is going to get dumped to pay for the mistakes others.
The calm before the storm; it is time to get angry.
John Smith, London,
HOLDINGS OVER £50,000 in a Group of Diferent companies:
It depends on who holds the Banking licence. HBOS: BoS, Haliifax, Birmingham Midshires etc are one licence, so a max £50,000 across all is covered. LloydsTSB is a separate licence, likely to remain so after any deal, so up to £50K with them.
Ian, Petersfield, UK
English taxpayers bailing out Scottish banks and subsidising Scottish taxpayers to boot. The irony of it all, Alex Salmond wanting to leave the union and join together with Iceland and Ireland LOL and our government led by McDitherer & McDarling determined to save their Scottish bank pals.
Richard , Nottingham,
No one should get under any misapprihension, that the Govt.
is or may be helping the wage earners, NO, they are working
for the capitalist system, and why not ?
We all are capitalist, aren't we ? Pouring billions of £+$
we all are tax payers, are'nt we?
Cllr Ken Tiwari (Independent), Oxford , United Kingdom
I wonder if foreign countries will act on this news and invade what is left of these British banks like Brown did with the banks of Iceland. Follow my example he says to Europe. Is he saying: use terrorist law agains foreign banks and companies in your countries?
Kjartan, Reykjavik, Iceland
They can suspend Mark to Market in the US but not here because it's maddated in EU directives - see http://eureferendum.blogspot.com.
John Page, Brookmans Park, UK
Losing his job is not nearly enough punishment for Goodwin. Time that this charlatan and his complicit colleagues are investigated and if necessary held to account in a court of law.
I suppose his pal Gordon will see him alright with a job in a quango when the fuss dies down.
Rafael Gazpacho, Northampton, United Kingdom
Are the government behind the bank share crash? Having made a profit of £4billion from nationalising British Energy, could this be another opportunity for the treasury to earn money in the future. Could it have been a government source shorting bank stock and feeding the media with scare stories.
jane, uk,
A banks assets include credit card debt. Personnel debt stands at £3.6 trillion how can £35 Billion be enough
steve tea, manchester, cheshire
what is the position of depositors holding over 50000 in hbos , birmingham midhires, lloyds etc. Is the excesss auitomatically lost on the merger? Halifax branches in Fleet street, Catford, victoria say "yes ". Lewisham says no , Birmingham midshires also gave similar conradictory advice
john, lewisham, england
It'll be interesting for a tax-payer to apply for a bank-loan so that he can ask to borrow his own money.
E J Murray, Kerry, Ireland.
We shouldnt lose sight of the fact that most non state employed taxpayers are already shareholders through their pension funds. Despite the immediacy of the current crisis we still need to consider the impact of any action on the longer term. Our children will certainly not be thanking us.
Richard G, Bedford, uk
Banks should terminate the contract of as many morgages as it takes to bring enough money back to the bank. Let the people have the problem with homeless families
Martin Lloyd, macclesfield,
Does this mean we can have a giant screen in London that tells us, the tax payer, exactly how much pure pre tax profit we are making out of our share in the banks?
Also, while we are at it, why not make all companies expose their balance sheets for all to see?
Well, I can dream can't I?
Tom , Caernarfon, Wales
if depositors have over 50000 in either lloyds or a hbos organisation ,is the excess automatically wiped out on merger ? Does a merger or buy out count as Hbos 2 going Bust " I have been given conradictory advice from different Halifax branches
john, Lewisham, england
Regulators bear a major responsibility for the credit crunch, but so far no one has requested that they are also made to repay their salaries....all the unitelligible legalese that is published by the FSA ....and nothing to show for it apart from cushy jobs for a cast of thousands
Heinz Geyer, London,
Blackstone is not a boutique. IT's part of a private equity firm that has major lending relationships with the UK banks.
David Boycott, London, United Kingdom
Existing share holdings may be diluted as a result, i.e. are they creating new shares for the cash injection, hence a 50% stake in RBS will halve the share price and a 70% drop in HBOS. This is worrying, 5 of the top 9 banks are in trouble and 2 nationalised. I wonder is it time to buy bonds?
Gareth, Pwllheli, Wales
There is one and only one overall solution to this mess: make the minimum gap between purchase and sale of shares one year, Only then will the institutional shareholders start to take a considered interest in the stabilitiy of their investments.
Sejanus, London, UK
We must not loss sight of RBS's presence in the wider world, like lucrative markets in Asia. Looking it as a whole the business model is a sound one. None of these has been reflected in its stock value.
Alan Lam, Eastbourne, UK
about time too, though they should do 100% of RBS, and every small building society and stang behind lloyds, hsbc and barclays. too little too late though, market to market cjahnges are disastrous for the future though, but who cares nowadays. people forget that 98% of uk population is not affected
eric savage, southampton,
While Mr. Gordon Brown has waken to the laxity and "age of irresponsibility", there seems to be no mention about the audtors who audit banks whose obligation is to comment on the balance sheets.. Did they have no responsibility in all this "age of irreponsibility i??
lila vadgama, london, UK
Tim: Barclays actually has one of the strongest tier 1 ratios (9.2%) of all of the banks. Unfortunately this doesn't make good headlines. The 60:1 ratio is total assets to equity (excl. minority interest) which is a meaningless ratio when looking at a bank.,but does make a good headline.
David, London,
In return for this nationalisation the directors and senior managers of these banks should pay to the taxpayer the bonuses they 'earned' whilst accumulating all this debt.
Paul, Coventry,
good move if the goverment takes 50% of RBS and takes a seat on the board. It need to get ordianry shares and drive up the dividends then in the future it would be able to sell the shares wiht profit to the taxpayer in the future. if it takes up pref shares it will devalue ordinary shares on exit
amit hindocha, birmingham, uk
Recaps, Remarking, Transparency and Time is the solution. This will just be the first round of recaps. Without mark-to-market you have uncertainty and private capital will stay away. Real estate will continue to fall globally as recession bites, so bank assets are impossible to value as of today.
GH, New York, USA
Yet another strangely breifed story, which figures RBS
Will be interesting if RBS actually do request a cash injection, especailly as they have been stating that hey didnt. What will this paper print, if it doesnt happen?
With asset value of well over a trillion, dont think RBS are sweating
Edward, Newbury, UK
Barclays got a huge deal on the Lehman assets - at the expense of Lehman share- and bondholders. The building and computer equipment alone was worth a billion.
Indigo, New York, USA
Barclays mini cash infusion at £3bn seems odd when they have relatively low Tier 1 capital and the highest balance sheet leverage (60:1) of any of the top 10 European banks. What am I missing?
Tim Coldwell, Le Touquet, France
Presumably Fred Goodwin will be gone by the end of the week?
Scamp, Aberdeenshire,
Are dividends still to be paid to the shareholders in these failed banks? Are the managers who led these banks to failure still to be in post, and still receiving bonuses? It will cause widespread disgust and outrage among taxpayers if they are.
Disgusted, Hampshire, UK
Didn't Barclays blow a billion on Lehman's assets just a few weeks ago?
Mark, Oldham, UK