Lloyd's Dampens Investor Confidence

Britain's Lloyds Banking Group (LYG -28.7% to $3.80) dampened investor confidence, putting a lid on the bank stocks as it reportedly will lose US$14.3 billion in total.

Given the seemingly endless stream of bad news and loan losses from banking institutions, is it any wonder people have lost faith in the financial system?

Lloyd's, once considered a relatively safe play, acquired the aggressive mortgage lender HBOS in the midst of the Sept-Oct financial system meltdown, without any real understanding of the liabilities they were taking on. LYG was trading at about $21 on the NYSE at the time, already down in a year from about $43. After the losses in HBOS became obvious, LYG then plunged to a low of $2.35 in mid-January, bouncing to $6.80 a couple weeks later on the belief that the Bank of England would backstop the losses, and now crashing to $3.80 following the announced -$14.4 billion pre-tax annual loss at HBOS. The bank reportedly stated that its own pre-tax profits would come in at around 2.4 billion pounds ($3.5 billion), but it warned that the deteriorating market environment and additional write-downs on HBOS' corporate loan book forced it to take the overall loss. However, even the Bank of England or the British Treasury or the patience of the British taxpayer have limits.

Sadly, Lloyds CEO, Eric Daniels, admitted in testimony on Wednesday that the urgency of events surrounding the Lehman Bros collapse, and the impending failure of HBOS, meant that time spent on due diligence on the deal was "three-to-five" times shorter than usual. In other words, this banker was no different than Bank of America CEO Ken Lewis's ill-advised acquisition of Merrill Lynch and Countrywide Financial earlier, and Wachovia CEO Ken Thompson's acquisition in 2006 of Golden West, and the subsequent mistake by Wells Fargo Bank (WFC) to acquire Wachovia, and a host of similar deal-makers: they all rolled the dice, figuring they owned the casino, so what could go wrong. The common thread was that these bankers had no clue as to the liabilities they were taking on, but ought to have understood that when their industry was soon to enter the credit squeeze phase of the financial cycle those losses were going to be massive. After all, as bankers, they are the experts. The result today is that they have gone hat in hand to the taxpayer and to their customers, begging forgiveness and money. Traders, however, are not stupid, nor forgiving.

So, amidst this pall over markets on Friday, traders in NY decided to pack it in early for the President's Day holiday long weekend. Although the prices fell into the close, the volume was exceedingly light. The DJIA (-82.85 -1.04% to 7850.41), S&P 500 (-8.35 -1.00% to 826.84) and NASDAQ Composite (-7.35 -0.48% to 1534.36) closed the session on a weak note. The Toronto Composite (-100.68 -1.15% to 8678.10) was also soft, but the Venture Board lifted (+9.77 +1.07% to 925.65).

The net effect on the equity market of the Lloyd's Bank report was that more capital shifted out of Financials (XLF -3.8%), as Banks ($BKX -5.3%) and REITs ($DJR -6.0%) saw no bids at all. Energy (XLE +0.2%) picked up a bit, and among the industry groups, the Semi-conductors ($SOX +1.2%) saw some inflows, but overall there were no remarkable moves other than in the Financials, which went south.

In the Cara 100, the winners were led by Russian stocks Mobile TeleSystems (MBT +7.5%) and Vimpel Communications (VIP +6.7%), and then down to MICC (another emerging market telecom services provider) (MICC +2.6%) and China Telecom (CHA +2.2%).

The Cara 100 losers were Dow Chemical (DOW -5.1%), as well as Canada's leading diversified financial, Manulife (MFC -4.5%) and leading tech, Research In Motion (RIMM -3.9%).

The US Treasury bond market had major increases in yields across the board, dropping the long 30-year T-Bond ($USB -2.32% to 126.28) to an extremely weak close. The House of Representatives voted in the afternoon to approve the $787 billion economic stimulus plan in a 246-183 vote, with no Republican support. However, the White House also warned against "unreasonable expectations."

In forex markets, the trade-weighted US Dollar ($USD) had a modest loss of -0.20% to close the week at 86.02, while the Euro had a similar small gain (+0.16% to 128.80). It was the Yen (-1.20% to 108.73) taking a hit against the Pound (+0.97% to 144.02) and Cdn Loonie (+0.82% to 81.00) that was the market focus for the day.

Crude Oil ($WTIC) futures contracts moved to April for West Texas Intermediate, dropping slightly -$0.20/bbl to close at 41.97. April Brent (European crude market) closed at $44.81. Normally there is a slight premium for the West Texas Intermediate price over the Brent price.

$GOLD futures closed about -$5.00 lower at 942.20/oz.

Spot prices at the close of the week (compared to at 7:43am ET Friday morning and to two mornings ago) for gold, palladium, platinum and silver are 936.50 (938.69) (922.22); 214 (212) (207); 1059 (1063.5) (1040); and 13.63 (13.41) (13.32), respectively. The silver price continues to look stronger.

Earlier on Friday, the Asia-Pacific equity markets were all very strong at the close: Australia (+1.10% to 3496.7); Japan (+0.96% to 7779.4); China (+3.23% to 2320.8); Hong Kong (+2.47% to 13554.7); and India (+1.78% to 9634.7). In equity trading on European bourses at the close: the French CAC (+1.13% to 2997.86); German DAX (+0.13% to 4413.39); and, UK FTSE -0.30% to 4189.59) were notably weaker as the day went on.

The DJIA futures for March closed the week at 7779, and the March S&P 500's were at 820.1. Traders have been put off by the uncertain political conditions in Washington for the last three days, following Tuesday's Geithner Swoon.

Comments

[morph366:]

On the subject of Lloyds and HBOS one of the interesting sidebars on the amalgamation of the two banks was the embarrassment caused to Gordon Brown last week by the magnitude of the loss and a stupendous example of cronyism at work between top bankers and politicians.
The man who ran up the lousy mortgage book at HBOS - a certain Sir (mustn't forget that bit) James Crosby - had to step down from his position as the deputy chief financial regulator at the FSA after it became apparent that he (Crosby) had failed to properly heed a warning from the very same regulators back in 2005 about the risks that HBOS was taking with its aggressive mortgage lending strategy.
No wonder these people can't find a solution to the crisis.

Feb 15 11:36 AM

[Old Trader:]

Bill,

I was under the impression that LYG was not so gently "persuaded" to take over HBOS, in an effort to assuage fear in the markets of HBOS's collapse. Am I mistaken?

Feb 15 11:38 AM

[Old Trader:]

Somewhat like JPM was "persuaded" to take over WM...

Feb 15 11:40 AM

[ozcutty2:]

Good+Bad=Bad, the government hoped it would equal good!

They should have let the bad fail, but its too late for that. LYG will probably be nationalised now, what a shame. I was tempted to invest at $8, glad i didn't. Don't trust the UK governement to look after shareholders, their track record is not good.

Feb 15 08:33 PM

[donzelion:]

"...time spent on due diligence on the deal was "three-to-five" times shorter than usual..."

All of the banks knew that the liabilities in the targets they were acquiring were unknowable. If the private sector could create these unknowable liabilities over the course of a decade or more, how could they - or anyone else - unravel that kind of complexity in a matter of weeks?

By buying up both healthy assets and plague victims, the banks wanted to position themselves to seek a political remedy to a problem far beyond their power. So far, it's working out well for them: the government can't work through the complexities underlying all the liabilities on the books, but it can print money - the "gordian knot" solution to a long-standing problem in the private sector.

Feb 16 06:30 AM