British Banking Bailout: An Update

by: Markham Lee

Another quick update on the British Banking bailout, namely the British Government injecting of £37 Billion into Royal Bank of Scotland (NYSE:RBS), Lloyds (NYSE:LYG) and HBOS (NASDAQ:HBOS) today: 

(From BBC News): Shares in Royal Bank of Scotland, Lloyds TSB and HBOS have fallen sharply despite the UK government's £37bn rescue package for the three banks.

The plan is meant to secure the banks' futures, but it also means profits will have to be shared with the government. HBOS closed down 27.5%, Lloyds TSB was 14.5% lower and RBS down 8.4%.

In return for the injection of taxpayers' money, the government will also get a say in how the banks are run, including executive bonuses. BBC business editor Robert Peston said the banks faced "absolute humiliation". It would "count as perhaps the most extraordinary day in British banking history", he added.


Extraordinary times

RBS will receive £20bn of taxpayers' money with a further £17bn to be put into HBOS and Lloyds TSB. Barclays (NYSE:BCS) intends to raise £6.5bn without government help….

..As a condition of the deal, the government has insisted that senior directors should get no cash bonuses this year, with future bonuses to be paid in the form of shares - a move aimed at encouraging management to take a more long-term approach.

HBOS will raise £11.5bn from taxpayers, made up of £8.5bn in ordinary shares and £3bn in preference shares, while Lloyds TSB is to get £5.5bn.

The money is conditional on the merger of the banks going through...

...Barclays has said it is to raise £6.5bn of new capital. The bank is to raise the money from private investors, rather than going to the government. 

Barclays also said it would scrap its final dividend payout for 2008, saving it £2bn.

Our business editor said it was not wrong to describe the part-ownership of RBS, Lloyds TSB and HBOS as nationalisation, but the situation was very different from Northern Rock and Bradford and Bingley, which had seen private investors lose their holding. "Shareholders will continue to own a big chunk of the banks," he said."

Now that is how you conduct a bailout: the banks suffer severe humiliation, bonuses are forbidden, you have banks like Barclay's that are trying to avoid participating, and there is a very strong motive for the banks to get healthy and rid themselves of government support as soon as possible.

One would hope that our own government shows similar courage and respect for the taxpayer as it negotiates a stabilization plan with the CEOs of America's top banks today. However, let's not forget that our government is negotiating a plan WITH the CEOs and is trying to encourage them to participate in the plan, as opposed to the Britons whose government first created a plan and then negotiated the terms under which the banks could receive help if they weren't able to raise cash elsewhere.

The difference in approach is likely to define how our plan differs from the British one, both in terms of implementation and the terms under which the banks receive assistance.

Turning our focus back to the British banks, it's worth nothing that not all of their major banks received assistance [most notably HSBC (HBC)], which suggests that the banks that didn't receive a cash injection and/or were able to raise cash themselves will be able to establish further dominance in that market/be the cream of the British banking crop. After all, who is going to be more attractive to customers, investors and potential employees, the bank that had to be nationalized or the one that managed to survive the crisis on its own?

You can read more on the situation in the U.K. here.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.