The U.K. Plan Looks Smart

Here is a quick update on the latest developments with the British Government's plans to bailout its banking system. From the FT:

Britain was on Sunday preparing to pump about £39bn into three of the country’s largest banks in a broad-based recapitalisation that could see the UK government end up with controlling stakes in Royal Bank of Scotland and HBOS.

Top executives from RBS, HBOS, Lloyds TSB and Barclays were last night locked in talks with government officials in a frantic attempt to hammer out details of the capital increase before the markets reopen on Monday.

Under the plans being discussed, RBS is likely to raise as much as £20bn in fresh capital. Of this, £15bn would come in the form of a placing of ordinary shares with the government, with the remainder in the form of preferred shares. Existing RBS shareholders will given an opportunity to buy the shares, but if they do not the government is expected to be left with a controlling stake in the bank.

Sir Fred Goodwin, RBS’s embattled chief executive, is expected to step down, to be replaced by Stephen Hester, the former banker who is currently chief executive of British Land. Sir Fred will become by far British banking’s biggest casualty of the credit crisis.

HBOS is expected to raise around £12bn, of which £9bn would be in the form of ordinary shares while Lloyds TSB - with which it is due to merge - is expected to raise a total of around £7bn. The capital increase and the prospect of a large government shareholding may also prompt Lloyds to rethink the terms of its planned takeover of HBOS, announced last month.

Barclays executives were also last night locked in negotiations with the government over its capital needs. The bank is maintaining it will raise around £7bn in new capital but is asking for the time to find the money without calling on the government...

The fundraising talks come just a few days after the government unveiled a £400bn bailout package designed to recapitalise the banks and unfreeze the inter-bank lending markets in an effort to avert a severe recession. However, the recapitalisation envisaged in the earlier scheme would only have given the government preferred shares with no voting rights.

The government is expected to inject equity in the banks by creating a Bank Reconstruction Fund, which could provide at least £50bn of capital.

It's going to be interesting to see how all of this is going to play out, as the overall cost of receiving funds from the Government (monetary, loss of control, various mandates on pay, behavior, etc) will undoubtedly motivate the banks to pull out all the stops to raise capital. On the other hand, receiving an infusion of capital from the government may very well assist with those capital raising efforts, as it could give potential investors more confidence.

Either way, I like the fact that the banks aren't especially excited about participating in the plan and will only participate in they have no other options, because not only will it motivate the banks to save themselves but it will also motivate them to raise the cash necessary to back any loans, buy back the preferred shares, etc.

Like I said before, if you're going to bailout companies because it's necessary for the health of the economy, structure it in a way that is painful for the companies receiving help, so it motivates them to either find a way save themselves without government assistance and/or to repay their debt to the taxpayer as soon as possible. 

You can read more here.

Source: 

The Financial Times: "U.K. to inject £39bn into banks" -- Peter Thai Larsen, Jane Croft, Jean Eaglesham and Kate Burgess, October 13, 2008.

Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Comments

[ashizashiz:]

I sit here at my desk at work---for now---and gawk wide-eyed in utter amazement at the depths to which human beings will go in order to satiate their lust for power and their Midasian greed. Paulson, Bush, Bernanke: soucndrels, one and all. Scumbags of the highest order. Liars who would sell their souls to the devil, who would swear on the lives of their families, that they are telling the truth. But no amount of dissembling or obfuscation can change the laws of nature: reality, in the end, always wins out.

Toxic “assets” in the tens of TRILLIONS of dollars fill the casks and vaults and safes and basements of the world’s major financial institutions. Worthless pieces of paper that, when exposed to the light of day, will bring the global economy as we know it to its knees. There is no escaping this reality. None. The laws of nature will eventually pull the curtain back on the Oz-like charade that is being played out in Washington and Paris and London and Berlin, and the global economy will shatter.

And so in the intervening days/weeks/months, Paulson and Bush and all of their minions pump trillions of dollars of “money” into these so-called “healthy” institutions in order to loosen the credit market so that, at least for the time being, things regain the appearance of a recovery. And an election takes place next month, and the DOW “rebounds” to about 10,400 give or take, and a few of the largest banks begin easing credit restrictions and reluctance to take on risk, and all seems to be moving in the direction of eventual better times. And yes, recession exists, and the economy is tight, and jobs are lost, but the new President goes on TV and tells the people that, while times are tough, we are a strong people, and we will recover. (Meanwhile Bush and Paulson and their minions have moved to a small island off of the coats of Costa Rica and hired Blackwater to protect them from the rest of the world.)

But soon thereafter, at some unknown moment in time, all of the fake money, the supposed assets and capital that the Bushies have pumped into the system---all of the trillions of dollars in guarantees promised by the countries of the EU to their financial institutions---all of these monies become exposed for what they really are---MORE DEBT. More lies, falsehoods, specters. Trillions of dollars THAT DO NOT IN FACT EXIST, loaned to banks and insurance companies and auto makers in “hopes” that they, somehow, will be able to make some money and build capital that, at this point, is simply a wraith in the night. But of course this plan fails. It must fail. It is just another layer of the grand ponzy scheme of the millennium, perpetrated on the people of the Earth by a handful of greed-mongering bastards and sons-of-bitches.

By way of metaphor, this situation is akin to building a tower on unsteady ground, and instead of deconstructing the tower and starting again, you simply make the tower taller and claim to the people that this truly is the most wonderous tower in the world, a monument to the strength and resolve of the people. But it must fall. The laws of physics demand it. And the same is true of our current economic joke.

And so I sit here and watch economist after economist, legislator after legislator, president after prime minister after finance minister, claim that the plan “will” work. And they are all lying.

2008 Oct 14 10:07 AM

[WAKEUP:]

Today, at 10:07am, a comment was posted by "ashizashiz." I have been expecting a comment, a realization, if you will, of exactly this sort, for about a year, now. His/her comment was full of the despair and desperation that comes to a person who suddenly realizes, to use street slang, that they have been "had." Now, too late, of course, this person sees with clarity a sight that scares the hell out of them. And while the choice of words was a bit on the melodramatic side, the thrust of realization was correct. I can only marvel at the level of self-delusion and comfortable circumstances that would have allowed a person of even moderate means to take this long to wake up. This person obviously suspects that they will soon lose their present job. They now realize what a life-changing event that will be. The house may well be lost, even a car or two, also. And that's just the start. It gets much worse. I know. I went through the entire spectrum, quite a few years ago. It takes years to recover, and that's if you hustle. We still see mundane, overly-optimistic articles every day, articles which try to make us believe that this is just an unusually large bump in the road. I have been pointing out the real risk of just this type of situation since I began commenting on this site. This is not just a big bump in the road; rather, what has happened is that the only bridge back to safety has fallen into the water. It will take ten years or more to fix it. The solution, for "ashizashiz," and others in that position? Get into something entrepreneural, as fast as you can. The easy ride, the soft ride of a button-pushing job and coasting on one's investments is over, for all but the most affluent. Now we'll all have to do some actual work, for a change. It's been coming, for a long time. Now, it's here.

2008 Oct 14 06:58 PM