Lloyds are looking to avoid the embrace of government by going to existing shareholders to raise capital and sidestep the draconian break-up solution foisted upon RBS by Neelie Kroes. According to Bloomberg, this is the largest rights issue ever for a British company and equates to $34 billion.

All of this must be excruciating for Lloyds shareholders, as Lloyds was not a reckless lender during the bubble years. It was HBOS which nearly went to the wall and was subsequently foisted onto Lloyds.  At the time (late September 2008), I certainly thought the deal was in the best interest of all concerned given how little Lloyds was paying for HBOS:

The fact that government were so involved in the negotiations makes clear how important it was that this deal get done. It appears to have been the best outcome for all parties concerned: HBOS, Lloyds and Labour. The British Government has been pilloried for having squandered the good times and leading the UK into a major downturn with no room for fiscal stimulus. Both Gordon Brown and Alistair Darling should be worried about getting the sack. The last thing either they or the Labour Party needed was a failure of an institution like HBOS. HBOS was too big to fail.

The HBOS crisis was a perfect example of how liquidity concerns become intertwined with solvency issues in a time of panic. With the HBOS crisis now at an end, one wonders whether RBS will come under attack next, or whether we can breathe a sigh of relief until the next round of writedowns or share price losses. We will have to wait and see.

RBS did come under the government umbrella and both RBS and HBOS have proven major sinkholes for the UK taxpayer, with more money still coming.

What Lloyds are looking to dodge is the government’s Asset Protection Scheme, which Bloomberg estimates will cost the bank 15.6 billion pounds in fees and easily raise the government’s stake to a majority at 62 percent.

Below are the defining paragraphs of the scheme:

1.1 Under the Scheme, in return for a fee, the Treasury will provide to each participating institution protection against future credit losses on one or more portfolios of defined assets to the extent that credit losses exceed a “first loss” amount to be borne by the institution.  It is intended that the Scheme will target those asset classes most affected by current economic conditions.

1.2 The Treasury protection will cover the major part but not all of the credit losses which exceed this “first loss” amount.  Each participating institution will be required to retain a further residual exposure, which is expected to be in the region of 10 per cent. of the credit losses which exceed the “first loss” amount.  This residual exposure will provide an appropriate incentive for participating institutions to endeavour to keep losses to a minimum.

1.3 The Treasury currently expects that the fee will usually be satisfied by the issue of capital instruments of the participating institution.  These instruments are not expected to include ordinary shares, but will include a range of alternative capital instruments.  The Treasury will be open to consider other forms of fee, including cash.

Nevertheless, Lloyds are being forced to flog off assets , effectively deleverage, in order to escape the APS. Insight Investment management was sold to Bank of New York Mellon for 235 million pounds on Monday. The Intelligent Finance business, Cheltenham & Gloucester accounts and mortgages, and a number of Lloyds TSB branches in England & Wales will be gone within four years. The TSB brand is also history. No mention of plans concerning the Halifax or Bank of Scotland brand has been made.

It is unclear what kind of reception such a large rights issue will receive. Lloyds is down almost 2% in heavy trading so far today.

Sources

Lloyds to Raise $34 Billion to Avoid Control by U.K. – Bloomberg

Sale announcement of Insight by Lloyds – Lloyds TSB website

Related posts:

• RBS reports a record loss of 24 billion pounds
• Lloyds gets HBOS for a song
• Nils Pratley: A tale of two banks at RBS and Lloyds
• HBOS to raise new capital
• $467 billion in writedowns and counting

If our response focuses only on the symptoms rather than the underlying causes of the crisis, then we shall bequeath to future generations a serious risk of another crisis even worse than the one we have experienced.

-Mervyn King, Governor of the Bank of England

The Bank of England head has come out unequivocally against continuing with the status quo.  He sees grave risks at large global institutions like HBOS and RBS, which lent recklessly and leveraged up to a point where they threatened collapsing the entire UK financial system. As a result, he is now calling for them to be broken up or we risk a more severe crisis down the road.

However, Gordon Brown has rejected this notion and is looking to move forward with a tweaked version of the status quo.

The Telegraph reports:

Mr Brown told MPs that "the difference between having a retail and investment bank is not the cause of the problem."

The Prime Minister added that "the cause of the problem is that banks have been insufficiently regulated at a global level."

Mr Brown was responding to Mr King’s fiercest attack yet on big banking in a speech he gave in Edinburgh last night. Mr King indicated the country’s high street banks should be separated from their risky investment banking arms.

"“It’s clear King’s not happy with where we are now,” Colin Ellis, an economist at Daiwa Securities told Bloomberg. “He said the regulatory structure was inadequate, and coming from the governor of the Bank of England that’s as damming as it could be."

Lest we forget, Mr. Brown is the architect of the present regulatory structure in the UK. It was under his guidance as Chancellor that the regulatory structure was divvied up into the tripartite authorities of the FSA, the Bank of England and the Treasury. As with any incumbent, Gordon Brown has a legacy to protect and this puts his interests at odds with ours. So, it should be a given that Brown is not going to break up the banks, especially since he was the architect of the Lloyds-HBOS merger to begin with.

But, it is disingenuous for Brown to claim that right-sizing these institutions means abandoning the Universal Banking model.  There are 100 different ways to downsize a bank as the forced downsizing at Citigroup demonstrates.

Below is a video of Governor King speaking on the subject, making his call for greater regulation and an end of too big to fail.

In related news, Goldman Sachs’ Vice Chairman Lord Griffiths has defended Goldman and their outsized bonuses with the unfortunate phrasing that Britons must:

tolerate the inequality as a way to achieve greater prosperity for all.

To make matters worse, he threatened Britain with a loss of tax revenue by explaining bankers will just move to Switzerland if the UK tries to take their money away.

Are we looking at “the biggest moral hazard in history?” That’s how the Mervyn King video ends.

To be continued.

Related posts:

• UK: Darling confirms government to break up too big to fail banks
• FSA: Gordon Brown complicit in credit bust
• Lloyds gets HBOS for a song
• The Last King of Scotland
• Quote of the day: Gordon Brown, get your bazooka

This comes via the Telegraph:

UK Financial Investments (UKFI) said in its annual report that its loss on the two stakes – 70pc of RBS and 43pc of Lloyds Banking Group – had reached £10.9bn at the end of June.

The losses, which are not yet realised, have been wracked up since Gordon Brown was forced to inject billions into the troubled lenders in October.

The investment, which amounts to more than £3,000 that each UK household, will not be quickly disposed of. The recession is continuing to hit both banks hard.

“Given the size of our holdings and assuming that there might not be a strategic buyer for our stakes in these banks, we might expect to undertake several transactions in each bank’s shares, and that these will take place over a sustained period,” UKFI said.

The Treasury is hoping that the disposals of its stakes will eventually generate a profit for the taxpayer, after bailing out the banks when the system almost collapsed at the end of 2008 in the wake of the failure of Lehman Brothers.

Analysts at UBS have speculated that Lloyds could be forced to write off as much as £13bn on mortgage and commercial property lending, and lending to businesses, when it posts its results for the first half of the year on August 5.

You can forget about generating profits.  It’s not going to happen.  After all, we’re looking at another £13 billion in losses.  The UKFI should focus on mitigating losses.  That is a believable story.

Related posts:

• RBS reports a record loss of 24 billion pounds
• Lloyds gets HBOS for a song
• Lloyds has a decent first half
• British commercial property prices down 27% in 2008
• Deutsche Bank and HBOS hit by writedowns

I watched the proceedings of the UK Treasury Committee with HBOS and RBS this morning on Bloomberg UK TV and it was a dismal sight. It had the feel of the Nuremburg trials, honestly. The clip below doesn’t do justice to how tense the atmosphere was.

I will say this: these men from HBOS and RBS ran very aggressive organizations, piling in to all manner of risk at the top of the market. While they dissemble and prevaricate, it is plainly obvious that they did not see the risks in their actions, nor did they want to.

If I find better footage, I will post it.

Related articles
HBOS Inquired Into Risk Allegations, Ex-Chairman Says – Bloomberg.com
U.K. Bank Executives Apologize for Credit Crisis – Bloomberg.com
RBS Board Could Have Stopped ABN Takeover, Ex-Chairman Says – Bloomberg.com

Related posts:

• HBOS to raise new capital
• Where’s HBOS?
• Lehman fallout: HBOS and RBS are getting slaughtered
• HBOS versus Freddie and Fannie
• More on HBOS

As the financial industry further unraveled yesterday, Mathieu Robbins of the Irish Independent asked a worthwhile question: Was RBS the idiot company of all-time in buying ABN Amro at the top of the market?  Robbins says no and offers up nine other equally monstrous deals that all went seriously pear-shaped to prove it.

1. AOL – Time Warner, January 2000
2. Invensys – Baan, 2000
3. Taylor Woodrow – Wimpey, July 2007
4. HSBC – Household International, 2003
5. Quaker Oats – Snapple, 1993
6. BMW – Rover, 1994
7. Royal Bank of Scotland – ABN Amro, 2007
8. France Telecom – Orange, 2000
9. Daimler – Chrysler, 1998
10. British Commonwealth – Atlantic Computers, 1988

All of these deals are real stinkers.   The Irish Independent offers a bit of editorializing to enliven the matter, so see the link below.  This should remind us that M&A is a very tricky business.  Therefore, as we look on the stinking carcass that is RBS, the world’s largest bank by assets, the sort of enterprise that the government of the United Kingdom, should be very careful about supporting, let us remember these other miserable deals as well.

In fact, I have my own list of crap deals to add to these.  Here they are (I will dispense with editorializing, but imagine me doing a David Letterman-like #10, #9…etc):

1. Citicorp – Travelers, 1998 (In Largest Deal Ever, Citicorp Plans Merger with Travelers Group)
2. First Union – Wachovia, 2001 (First Union Pursues Wachovia, Making Offer of 13.1 Billion)
3. Bank of Scotland – Halifax, 2001 ( BoS and Halifax agree merger)
4. Wachovia – Golden West, 2006 (Wachovia acquires Golden West Financial)
5. Bank of America – Countrywide Financial, 2008 (Bank of America buys Countrywide)
6. Morgan Stanley – Dean Witter, 1997 (Wall Street firms to merge)
7. WorldCom – MCI, 1997 ( WorldCom wins MCI)
8. KKR – RJR Nabisco, 1987 (RJR Nabisco Explains Its Choice)
9. Texaco – Pennzoil, 1987 (Pennzoil-Texaco Fight Raised Key Questions)
10. Cerberus Capital – GMAC, 2007 (GM to sell 51 percent of GMAC)

Did I miss anything? I am sure I did; Rio Tinto -Alcan from 2007 comes to mind (Rio Tinto offers $38.1B for Alcan). Check out the Private Equity Deals from hell below for more of the same. Feel free to add your two cents in the comments.

Sources
Was ABN the worst takeover deal ever? – Irish Independent
The Year in 2008 PE-Backed Bankruptcies – WSJ

Related posts:

• Irish banks have unreported bad debt
• Citigroup grabs Wachovia on the cheap
• Irish property dam about to burst
• RBS reports a record loss of 24 billion pounds
• Where are the perp walks?

In Scotland, one of the UK’s most venerated names, the Royal Bank of Scotland, a bank that prints its own bank notes as legal tender, has been eviscerated by the over-leveraging and risk-taking of its CEO Sir Fred Goodwin.

Sir Fred, an accountant by training, started his career at Touche Ross, a precursor to the accountants Deloitte and Touche, rising to the level of partner. Somehow, he soon found himself in banking as COO at the notorious BCCI (Bank of Credit and Commerce International aka the Bank of Crooks and Criminals International), when Deloitte was hired to liquidate the corrupt financial institution after that infamous decade of financial buccaneering and scandal in the City of London¹.

Thereupon, Sir Fred had the good fortune to be whisked away to head up Clydesdale Bank (now a subsidiary of National Australia Bank) in 1995. Clydesdale was one of the three large Scottish banks along with RBS and Bank of Scotland (now part of beleaguered HBOS). This was a very plum job for a native Scot. Sir Fred earned the nickname “Fred the Shred” in the City of London for his ruthless cost-cutting (making him the British equivalent of John Mack “the Knife,” CEO of Morgan Stanley).

However, Sir Fred moved on to bigger and better things in 1998 as deputy CEO of RBS, a company with roots back to 1727, later becoming CEO when George Mathewson retired.

That’s when things started to happen for Fred Goodwin. The British banking scene was consolidating in the 1990s and early this decade. Lloyds Bank merged with TSB in 1995 to form Lloyds TSB. Midland Bank (where I banked in the 1990s) was acquired by HSBC in 1992 and rebranded HSBC in 1999. This set the stage for the biggest merger to date in 2000 — the acquisition of National Westminster Bank, one of England’s big four, by the smaller RBS in a bloody takeover battle with the Bank of Scotland. (Subsequently, Bank of Scotland would form an ill-fated merger with the demutualised Building Society, the Halifax, that has ended in this company teetering on the verge of bankruptcy).

But, Sir Fred, having snatched NatWest away from his cross-town rival, went on a binge of grotesque proportions. Wikipedia says this more flatteringly:

Following the NatWest takeover, RBS made a string of further acquisitions around the world, including the purchase of Irish mortgage provider First Active and UK car insurer Churchill. It also bulked up its US Citizens Financial, Inc arm with a string of further deals. Then in May 2004, RBS said it would purchase Charter One Financial Inc. of Cleveland, Ohio for $10.5 billion. The deal, criticised by analysts for being at too high a price, spread the RBS’s banking web across the Midwest for the first time, and made its U.S. banking operations No. 7 in the United States.

Since Goodwin took over as chief executive, RBS’s assets have quadrupled, its cost-to-income ratio has improved markedly, and profits have soared. In 2006 pre-tax profits climbed 16% to £9.2 billion with most of the growth coming from its investment banking business. RBS now numbers among the top ten banks in the world.

Banking experts have claimed that Goodwin’s success in acquisitions, notably that of NatWest, lies in his disciplined approach. Before deciding to do a deal, he does an unusual amount of due diligence. In the Charter One deal, RBS claims to have spent 500 man-days (the equivalent of 100 people working for five days) examining the bank’s books. Charter boosted the amount of pre-tax profit RBS gets from the U.S. and put RBS in a position to expand further.

However, following investor unrest in the build-up to RBS’s acquisition of a minority stake in Bank of China in 2005 Goodwin was criticised by some RBS shareholders for putting global expansion ahead of short-term financial returns. This caused its share price to plateau at around £18 per share. Goodwin was accused of megalomania by some shareholders, as reported by Dresdner Kleinwort analyst James Eden (who said he thought the label was ‘unwarranted’). After the Bank of China deal, he was forced to promise RBS shareholders he would not indulge in any further big acquisitions and focus instead on growing the group organically.

However, as things started to unravel in global finance this year, RBS came to be seen as one of the weaker players and came under heavy selling pressure. It was over-leveraged and under-capitalised after a 8-year binge. Ultimately, with Lloyds TSB having agreed to takeover HBOS at the behest of the FSA and Gordon Brown and Bradford & Bingley having been nationalised, RBS was the last large British bank in big trouble. As the markets went into freefall, RBS became more and more stricken. They are an enormous company — much too big to fail. In the end, it was too much for Labour to bear and Gordon Brown and Alistair Darling stepped in last week with their sweeping recapitalisation and rescue plan — one that has since been copied by much of Europe and may be copied by the Americans.

Royal Bank of Scotland has now been effectively nationalised. With that comes new management. So, of course, despite his 10 years of service at RBS, Fred the Shred was unceremoniously forced out as the government pumped massive amounts of money into RBS.

After a glorious 18 year career in British banking, Sir Fred can now go home and count his millions.

All hail the last king of Scotland.

Related posts
Recapitalising Britain
Lehman fallout: HBOS and RBS are getting slaughtered
RBS, Fortis Ratings Cut by Moody’s
RBS couldn’t raise the money
RBS takes an enormous hit

Sources
RBS to pay price of intervention by cutting jobs – Times Online
RBS hands keys to U.K.
government – Financial Post
RBS Cedes to U.K., Seeks $34 Billion as CEO Quits – Bloomberg

¹Scandals in the go-go decade of British finance leading up to a severe recession in the UK in the early 1990s included the 1982 murder/suicide of Banco Ambrosiano’s Roberto Calvi, “God’s banker,” found hanging from Blackfriar’s Bridge in London, the notorious 1986 Guinness Affair, the 1991 liquidation of BCCI, banker to international terrorist Abu Nidal amongst others, and the embezzlement and 1991 suicide of Robert Maxwell.

In the movie, “The Last King of Scotland,” adapted from the book of the same name by Giles Foden, Forest Whitaker plays the role of the maniacal Idi Amin during his rise to power and fall from grace in 1970s Uganda. The movie is largely seen through the eyes of a fictional young Scottish doctor Nicholas Garrigan who serves as Amin’s personal family doctor. Amin was a larger than life figure and truly ruthless person (who my father used to curse in 30-minute tirades at the dinner table back in the 70s) who sucked the life out of his country leaving it bankrupt. It is a must-see film — Whitaker won an Oscar for best actor for playing the over-the-top paranoid dictator Amin, the Last King of Scotland.

Related posts:

• RBS reports a record loss of 24 billion pounds
• S&P cuts HBOS counterparty credit ratings
• Lloyds gets HBOS for a song
• Rumour: NAB wants to buy HBOS Australia
• HBOS in trouble

Prime Minister Gordon Brown has finally pulled the trigger. In the most momentous move yet in the credit crisis, the UK government is effectively partially nationalising the UK banking system. For months, I have maintained that the financial system needed to be recapitalised in the UK and elsewhere. If any country is to work its way out of these difficulties, it will need to address the lack of capital that financial institutions now have.

Yes, this will cost UK taxpayers tens of billions and yes this is a very bold move. But, it is wholly necessary if Britain is to have a chance to escape this credit crisis without succumbing to a deflationary spiral.

I commend Brown on having the courage to do this. As I examine the details, I will keep you abreast of how effective this measure is likely to be. On the face of it, Brown seems to have done the right thing. Other countries, especially the US, should take note. This is far more powerful and effective use of taxpayers’ money than simply buying up bad assets at inflated prices.

Gordon Brown, the UK prime minister, on Tuesday night ordered a massive taxpayer-backed cash injection to rebuild the balance sheets of Britain’s high street banks, effectively part-nationalising the sector at a cost of tens of billions of pounds.

The momentous decision came after a day of turmoil on the London stock exchange, where shares in RBS, the banking group, fell by 39 per cent to add to a 20 per cent tumble the day before. Rival HBOS more than halved over two days.

Faced with an intensifying banking crisis, Mr Brown sanctioned moves for the taxpayer to recapitalise leading banks, in a bid to restore confidence in the system and to encourage them to start lending again.

The total cost of the scheme was estimated at between £35-£50bn, which is expected to be executed through the government acquiring preferred shares. Mr Brown is expected to insist the taxpayer receive generous dividends and profits on the deal if share prices recover.

Full details may not be given until Wednesday morning, although Mr Brown’s team said a statement would be given before the London markets open.

The plan may also include provisions to ensure government representation on the boards of the banks and possible caps on future remuneration for banks’ chiefs, and a fund to ensure they can continue to fund day-to-day operations.

Mr Brown had wanted more time to develop a fully-formed bank rescue package, but was pressured into acting immediately by the markets, after reports circulated that banks were demanding an urgent injection of public money.

At £50bn, the recapitalisation of UK banks would more than double planned public borrowing this year, pushing public sector net borrowing close to £100bn and over 6 per cent of national income, worse than any year since 1994-95.

The additional borrowing, coming on top of increasingly dire independent forecasts for the public finances, will reinforce pressure on Alistair Darling, chancellor of the Exchequer, to explain how the government will reconcile its new desire to borrow at whim with its existing budgetary rules, which prohibit such action.

Mr Darling will seek to explain the actions as necessary emergency measures in an economic downturn in a lecture on Wednesday evening, when he will also set out a new framework seeking to bring borrowing under control in the medium term and restore credibility to the government’s economic framework.

Spain on Tuesday became the latest European nation to take unilateral measures to deal with the world’s deepening financial crisis, announcing a €30-€50bn emergency fund to provide liquidity to the financial system by buying Spanish banks’ assets.

José Luis Rodríguez Zapatero, the prime minister, told a hastily convened news conference that the temporary fund was designed to provide credit for borrowers starved of funds by the seizing up of interbank lending.

European Union governments on Tuesday sought to put aside their differences on how to stop the financial whirlwind sweeping through Europe and announced agreement on a set of principles for rescuing troubled banks.

EU finance ministers said each of the country’s 27 member states would be free to adopt measures ranging from recapitalisation, the purchase of bank assets and state-backed guarantees of bank liabilities.

But the ministers failed to establish clear guidelines for protecting the bank savings of individual depositors, saying all countries would guarantee savings of €50,000 for one year but some countries might raise the figure to €100,000.

Source
Massive rescue plan for banks – FT

Related posts:

• The EU agrees to guarantee bank borrowing
• Australia guarantees bank deposits for three years
• Five banks seized in FDIC Friday night special
• The FDIC acknowledges it is to run out of money
• Lessons from Swedish bank resolution policy

The Europeans have no idea what is about to hit them. Their banking system is collapsing and European politicians are fighting amongst themselves. At French President Nicolas Sarkozy’s crisis summit, the politicians were unable to craft a comprehensive or wide-reaching response to deal with the banking crisis. Meanwhile, the carnage in European banking is increasing.

Within the last week alone, four banks (Dexia, Fortis, Glitnir and Bradford & Bingley) were nationalised and the Irish and Greek governments were forced to offer blanket guarantees to depositors. Now Hypo Real Estate is on the verge of collapse and the Bundesbank is warning that the result, due to its interconnectedness in German Finance, would be financial Armageddon. Moreover, European banks are even less well-capitalised than U.S. banks.

Do the politicians not see the urgency? The Europeans had better solve this problem or they are going to be in a world of hurt.

European leaders pledged to bail out their own nations’ banks while stopping short of a regional rescue effort to deal with the global credit crisis.

At a summit in Paris yesterday, leaders of France, Germany, Britain, Italy, Luxembourg, the European Central Bank and the European Commission agreed to ease accounting rules, seek tougher financial regulations and weaken enforcement of competition and budget laws.

“Each government will act according to its own methods and its own means but in a coordinated manner with the other European states,” French President Nicolas Sarkozy, who called the meeting, told reporters.

The gathering came a day after U.S. lawmakers approved a $700 billion bank-rescue package and as Europe’s own initial bailout efforts began to unravel. Germany’s Hypo Real Estate Holding AG said a government-backed 35 billion-euro ($49 billion) deal collapsed yesterday when banks withdrew their support. Belgian authorities worked to shore up Fortis after the lender received an 11.2 billion-euro lifeline on Sept. 28.

Europe “is still a dwarf compared to the U.S.” in terms of willingness to spend, said Laurence Boone, an economist at Barclays Capital in Paris. The statement on supporting banks “is not a progress. It’s the same as before the summit.”

The failure to forge a consensus approach to shore up banks roiled by soaring borrowing costs reflects the divisions in the 27-nation bloc. Germany criticized a plan floated by French Finance Minister Christine Lagarde to set up a rescue fund. A chorus of opposition greeted Ireland’s decision to guarantee its banks’ deposits and debts.

`Collective Action’

Hours before the summit, Dominique Strauss-Kahn, managing director of the International Monetary Fund, met Sarkozy to press the need for agreement. “Collective action is even more necessary in Europe than in the U.S. because Europe is more complex than the U.S.,” he told reporters. “Action must be taken quickly and in a concerted manner.”

German Chancellor Angela Merkel’s opposition underscored the hurdles to forging a unified front. “Each country must take its responsibilities at a national level,” she told a joint press conference after the summit.

The government leaders did agree on policy recommendations for the European Commission and for a global summit they’re seeking to deal with the credit crisis.

They said they would seek to harmonize guarantees of deposit levels in the wake of the Irish move. The U.K. bank regulator increased its insurance ceiling to 50,000 pounds ($88,500) per account from 35,000 pounds to stem a flow of funds to Ireland.

`Global Summit’

Their joint statement called for a global summit “as soon as possible” to implement “a real and complete reform of the international financial system.”

Sarkozy said that “all actors” must be supervised, including rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.

“We want a new world to come out of this,” Sarkozy said. “We want to set up the basis for a capitalism of entrepreneurs, not speculators.”

Anticipating increased spending, declining tax revenue, and government bank takeovers, they called for “greater flexibility” in the application of European Union competition and budget rules.

European finance ministers last month pledged to keep their budget deficits below 3 percent of gross domestic product even as the economic slowdown dented tax receipts and boosted welfare payments.

Accounting Rules

The leaders said they want to allow banks to keep some assets valued as if they’d be held until maturity, instead of having to review their value each quarter.

“That’s to stop the down-spiral of assets’ value,” Barclays’ Boone said. “That’s the closest thing the commission can do to what the Americans do.”

They also said they want to change accounting rules that require banks to review their holdings each quarter and report losses when the values decline, the so-called mark-to-market standard. Banks worldwide have written down $587.7 billion since last year, according to data compiled by Bloomberg.

With their economies headed into recession, European leaders said the European Investment Bank will lend 30 billion euros to support small and medium-size companies that may struggle to find cash.

Related posts
Crisis in Europe: an article I wrote in today’s Guardian
Europe is next
European banking collapse including nationalisation of three banks
Bradford & Bingley may suffer Northern Rock’s fate
Germany: banking system collapse possible due to Hypo Real Estate
Ireland guarantees bank deposits at six banks
Switzerland: politicians need to act now

Source
European Union Leaders Stop Short of Regional Plan on Bailouts – Bloomberg

Related posts:

• Crisis in Europe: an article I wrote in today’s Guardian
• The EU agrees to guarantee bank borrowing
• EU planning 200 billion euro package for Eastern Europe
• German deposit guarantee sets up a German-British row
• UBS does not see the need for panic over Eastern Europe

Lloyds TSB has announced that it will buy rival HBOS for 232 pence a share. Back in May 2007, just over a year ago, HBOS shares were trading for almost £17 each. However, HBOS closed trading today at £1.47, sustaining a loss of over 90% in 16 months time.

While HBOS is often touted as the largest mortgage lender in the UK, its shareholders should feel lucky to have escaped a Northern Rock or Lehman-style failure in the wake of the company shares’ abrupt selloff.

British bank Lloyds TSB has agreed to buy rival HBOS Plc to create a 28 billion pound ($50 billion) mortgage company, a person familiar with the matter said on Wednesday, making it the latest troubled bank to be forced into the arms of a better-funded rival.

HBOS, Britain’s biggest home loan lender, will be bought for 232 pence per share in an all-share deal, valuing it at over 12 billion pounds, the source said.

The deal is expected to be formally unveiled on Thursday.

HBOS had said earlier on Wednesday it was in “advanced talks” with Lloyds after its shares were battered for a sixth consecutive day on mounting fears about its funding position. Its shares still fell 19 percent on Wednesday to 147.1 pence,

A takeover will mark another chapter in a dramatic shake-up of the global financial landscape as firms with weaker balance sheets or funding strains are swallowed by stronger rivals, with deals encouraged by authorities worried about a wider meltdown.

Prime Minister Gordon Brown was involved in negotiating Lloyds’ deal for HBOS, the BBC said.

Alistair Darling, UK finance minister, said before the deal was sealed that the government was “keeping very closely in touch” and he expected commercial negotiations between the two banks to go on into the night.

-Reuters

The fact that government were so involved in the negotiations makes clear how important it was that this deal get done. It appears to have been the best outcome for all parties concerned: HBOS, Lloyds and Labour. The British Government has been pilloried for having squandered the good times and leading the UK into a major downturn with no room for fiscal stimulus. Both Gordon Brown and Alistair Darling should be worried about getting the sack. The last thing either they or the Labour Party needed was a failure of an institution like HBOS. HBOS was too big to fail.

The HBOS crisis was a perfect example of how liquidity concerns become intertwined with solvency issues in a time of panic. With the HBOS crisis now at an end, one wonders whether RBS will come under attack next, or whether we can breathe a sigh of relief until the next round of writedowns or share price losses. We will have to wait and see.

Related posts
S&P cuts HBOS counterparty credit ratings
Lehman fallout: HBOS and RBS are getting slaughtered
HBOS versus Freddie and Fannie
B&B gets its money, HBOS and Barclays don’t
HBOS in trouble
Where’s HBOS?

Related posts:

• Lloyds to raise 21 billion pounds in biggest rights issue ever
• Lloyds has a decent first half
• Consolidation through merger over bankruptcy
• HBOS to raise new capital
• HBOS in trouble

In yet another move by ratings agencies likely to roil markets, HBOS has been cut by S&P. Given the fact that HBOS is the biggest loser to date in the European banking sector in the wake of Lehman’s collapse. This cannot be seen as good news.

Standard & Poor’s said Tuesday it is lowering its long-term counterparty credit ratings on British bank holding company HBOS PLC to reflect the increased risk posed by the weak operating environment and slumping British housing market.

S&P said it is cutting ratings on HBOS and its main operating subsidiary Bank of Scotland to ‘A+’ from ‘AA-’, the fourth-highest investment grade. The outlook remains stable, said S&P.

“The rating action reflects Standard & Poor’s opinion that HBOS’ financial profile is less well positioned to manage the deteriorating operating environment than ‘AA’ rated global peers,” analyst Nigel Greenwood said in a statement.

The main differentiating factor is credit risk, said Greenwood.

“The U.K. housing and mortgage markets are in a period of “severe strain” and are unlikely to recover in the near term, said the analyst.

HBOS is more exposed than its peers because its British mortgage book accounts for more than half its total loan book, he said.

Earnings may also be hurt by lower revenue from the company’s corporate investments, which weakened “considerably” in the first half.

Recent initiatives to raise capital, including a 4 billion pound rights issue, were welcome moves from a credit rating perspective, said Greenwood. However, the rights issue was achieved without strong support from existing shareholders, suggesting financial flexibility is weak, he said.

The cost of protecting HBOS debt with credit default swaps surged Tuesday. HBOS’ five-year CDS widened by 150 basis points, according to IFR Markets, a service of Thomson Reuters.
-Reuters

I said the following just yesterday:

The question remains what the response by the Bank of England will be. The BoE and the European Central Bank seem less likely to bail out failing institutions than the Fed, although Northern Rock was eventually bailed out by the BoE and is now a British taxpayer liability. It must be worrying for the likes of HBOS to know that even the Fed let Lehman Brothers fail.

All eyes have been on the Fed, the U.S. Treasury and the SEC. We may be about to find out how the BoE, the Chancellor and the FSA handle crisis.

See also: Credit Crisis Timeline for a full list of writedowns by institution and a timeline of the credit crunch.

Related posts
Lehman fallout: HBOS and RBS are getting slaughtered
HBOS versus Freddie and Fannie
B&B gets its money, HBOS and Barclays don’t
HBOS in trouble
Where’s HBOS?

Related posts:

• Lloyds gets HBOS for a song
• S&P cuts ratings of big U.S. banks
• HBOS to raise new capital
• Hungary cut to a notch above junk by S&P
• Lehman fallout: HBOS and RBS are getting slaughtered

Don’t think that it is just the U.S. that has to worry about systemic risk. The Europeans have their own problems and the weaker financial institutions are getting absolutely killed in European trading right now. RBS is down nearly 13%. But HBOS is the top loser in the UK, down almost 25%.

Are we about to see bankruptcies over in Europe as well?

Given the inter-connectedness of the global financial system, it is not difficult to understand that selling pressures are hitting the European markets as they hit Asia in overnight trading. However, it is in the UK where things are the diciest. The UK has seen a double-digit decline in home prices and its property market is potentially more inflated than the U.S. market, and therefore has further to fall.

This means that the companies most exposed to falling property prices are in the firing line right now. Number one on that list is HBOS. The company, which is the result of a merger between Bank of Scotland and the Halifax, formerly the UK’s largest mortgage lender, is heavily exposed to property prices and is now experiencing increased selling pressure as a result.

HBOS is more reliant than any other major UK bank on borrowing in the wholesale markets for its funding, and could face higher financing costs as a result of Lehman’s collapse, which is likely to increase problems with interbank lending, analysts said.
-Reuters

Just in April, I was openly wondering why HBOS had not been pressured by the markets.

Looking through old e-mails, I read an article from the FT in 2006 that surfaced claiming that HBOS (Halifax Bank of Scotland)were poised and ready to go offer loans for 125% of value. That’s right, HBOS thought it a good idea to cover 95% of the house price and loan another 30% over appraised value unsecured as a personal loan.

Now that the UK has joined the housing bust, one must ask where are the massive write-offs that have to be sitting on HBOS’ books? Why aren’t they looking to do another rights issue like RBS? I fully expect some pretty horrific things coming from HBOS as the housing crisis heats up in Britain.

Now the case is exactly reversed: I wonder if market pressure will be the HBOS’s downfall.

RBS is the second big bank to come under pressure as they too have taken riskier assets onto their balance sheet and have had a difficult time raising capital to shore that balance sheet up. With the equity and capital raising markets closed, RBS’s options are effectively limited.

The question remains what the response by the Bank of England will be. The BoE and the European Central Bank seem less likely to bail out failing institutions than the Fed, although Northern Rock was eventually bailed out by the BoE and is now a British taxpayer liability. It must be worrying for the likes of HBOS to know that even the Fed let Lehman Brothers fail.

In the end, the question for HBOS and RBS will be liquidity and not solvency over the near term. Last Tuesday I said the following:

When it comes to solvency it is usually an issue of cash flow and not profitability. An institution can be perfectly profitable and become insolvent, just as an unprofitable institution like General Motors (with over $50 billion negative equity – see their Q2 2008 balance sheet) can continue as a going concern.

One problem with financial crises is that perfectly healthy companies, perfectly healthy financial institutions can go bankrupt just because they temporarily lack the funds to pay their creditors. This is what the lack of liquidity in our financial system can do. The real problem of crisis is that healthy institutions are often dragged down with unhealthy ones, leading to a dead weight loss and a negative feedback loop in the real economy.
-Solvency

This will be the issue for mortgage lenders in the UK going forward. Northern Rock collapsed because of its heavy dependence on the wholesale market. As HBOS and RBS fight for their survival, the same issues are at hand. Whether HBOS and RBS remain going concerns depends heavily on the measures they and the UK monetary and regulatory authorities take to bolster a jittery market.

Let’s see how this process unfolds.

See also: Credit Crisis Timeline for a full list of writedowns by institution and a timeline of the credit crunch.

Related posts:

• Solvency
• HBOS in trouble
• S&P cuts HBOS counterparty credit ratings
• Where’s HBOS?
• HBOS to raise new capital

Not every financial services sector company is a basket case destined for bankruptcy. There are many well-run lower risk organizations in the bunch. Moreover, let’s not blame the banking model for individual companies’ woes. The Economist had a good article this weekend highlighting the fact that it is not the universal banking model which is to blame f0r large writedowns at the likes of UBS and Citigroup.

Yet, tempting as it is to believe that changing business models would solve UBS’s problems, or those of the wider industry, the evidence of the credit crisis suggests otherwise. No single model has emerged from the turmoil either wholly vindicated or entirely discredited. Credit Suisse shares a city square in Zurich and a business strategy with UBS, but has come through the past 12 months in much better shape and continues to attract money into its wealth-management division. Citigroup’s version of the universal-banking model is one where it walks into every punch going; Britain’s HSBC has been more successful in blunting the impact of its American misadventures through decent earnings in emerging markets. Of the Wall Street investment banks, Goldman Sachs has survived with its reputation enhanced. Bear Stearns did not survive at all. Pure retail banks can blow up too: Northern Rock, which was nationalised by the British government after a humiliating run on it, had a simple enough product line.-No size fits all, Economist, 14 Aug 2008

While it is not a sure bet that Credit Suisse, Goldman and HSBC will continue to outperform their peers, it should be obvious that there are extreme differences in the risk profiles of different financial institutions n the same line of business.

Enormous losses were not a given for financial services companies. Those organizations with the greatest losses are the ones who took the largest risk. Their risk play has not paid off and they are reaping the consequences. Losses in the financial services sector are a direct result of individual institutions succumbing to the pressure for sustained profits in a low-return environment and making large bets on riskier assets just when the housing bubble burst. Other companies in the same sectors avoided these risks.

This got me to thinking about relative value plays in the financials. In that vein, let me suggest some financial institution relative value plays:

1. Large U.S. Banks: Wells Fargo over Citigroup
2. Large U.S. Banks: U.S. Bancorp over JP Morgan Chase
3. Large U.S. Banks: Bank of New York Mellon over Bank of America
4. Large U.S. Regional Banks: SunTrust over Wachovia
5. Large U.S. Regional Banks: M&T Bank over Washington Mutual
6. Britain: Lloyds over HBOS
7. Switzerland: Credit Suisse over UBS
8. Canada: Scotiabank over CIBC
9. Germany: Commerzbank over Deutsche Bank
10. Investment Banking: Goldman Sachs over Merrill Lynch
11. Property and Casualty Insurance: Berkshire Hathaway over AIG

Why would you own the list of second names when you can own the first? Bottom-fishing is the only plausible reason I can come up with. But, in this credit crisis so far, bottom fishers have not done well. Expect more of the same going forward.

Related posts:

• Citigroup: the financial supermarket is dead
• Banks: are mergers in the offing?
• British banks are underestimating losses
• Global Bank write-offs and failures
• A brief note on upcoming bank earnings announcements

The major European banks have gotten into the swing of things with their own reporting season. Today, Deutsche Bank and HBOS reported earnings.

Deutsche Bank recorded a pre-tax profit of 642 millioneuros after writedowns of $3.6 billion due to the credit crunch. This takes Deutsche’s total writedowns toover $10 billion since the credit crunch began. This is not a Merrill, Citi, or UBS-style writedown, but significant nonetheless.

Deutsche said its writedowns came from “residential mortgage-backed securities [predominantly Alt-A], monoline insurers, commercial real estate, leveraged finance loans and loan commitments, and other positions.”
-WSJ, 31 Jul 2008

HBOS reported first half profits of £848 million (nearly $1.7 billion), down from last year’s £2.96 billion (almost $6 billion). With loan losses only increasing by 36% to £1.3bn in the first half and a less-than-estimated writedowns of £1.1 billion ($2.2 billion) for debt investments, the stock rallied on the news.

Overall, the two had decent results. However, one reason to focus in on Deutsche Bank is their exposure to the U.S. commercial real estate (CRE) market. Their U.S. subsidiary, Taunus Corp. has the fifth largest balance sheet in the United States at over $850 billion in assets. Deutsche Bank is a major player in the U.S. CRE market and no major losses there have yet to be recorded during the present downturn. That said, many commercial enterprises are beginning to go bankrupt as the economic slowdown in the U.S. takes hold — Mervyn’s and Bennigan’s some of the most recent. Even former high-fliers like Starbucks are shedding retail outlets, which should further lower CRE rents in the US.

As for HBOS, ther results are not yet reflective of the gathering economic and mortgage turmoil in the UK. HBOS is one of the leading UK mortgage providers and one should certainly expect greater loan losses in the second half of 2008 than in the first half.

To date, there have been nearly $480 billion in total writedowns from the global financial sector since the credit crisis began. We should expect many more as the real economy bite has yet to be felt on balance sheets.

Related posts:

• Another massive write-down: Deutsche Bank
• Bloomberg: $500 billion in writedowns by firm
• HBOS to raise new capital
• $467 billion in writedowns and counting
• More on HBOS

The U.S. House of Representatives has passed the housing bailout bill helping troubled mortgage borrowers, but also giving the U.S. Treasury Department a blank check to support Fannie Mae and Freddie Mac. The New York Times describes it this way:

Representative Barney Frank, Democrat of Massachusetts and a primary author of the legislation, said troubled homeowners might get relief within days of Mr. Bush signing the bill, because lenders have long known details of the legislation and could move quickly to help borrowers refinance. “Many of these institutions know this is coming,” he said. “I hope they will be able to take advantage of it right away.”

But the legislation, much of which has been debated and fretted over on Capitol Hill for months, also leaves numerous questions unanswered. The biggest unknown is whether the measure will be adequate to slow the downward spiral of home prices and help the economy recover from what many analysts now expect to be a prolonged slowdown.

Perhaps most significantly, the legislation hardens the government’s long-implicit assurance that it would step in to rescue the two mortgage giants who together own or guarantee about $5.2 trillion of the nation’s $12 trillion in mortgages. Currently, Fannie Mae and Freddie Mac guarantee financing for about 80 percent of new mortgages.

To accommodate a potential rescue for Fannie Mae and Freddie Mac, the bill raises the national debt limit to $10.6 trillion, an increase of $800 billion.

The Treasury Department has said it hopes never to use the authority to spend unlimited taxpayer funds — perhaps hundreds of billions of dollars — to maintain the solvency of the mortgage giants because they are in sound financial condition. Still, shares in the two companies rose sharply on Wednesday in a sign of the market’s positive view of having a federal rescue plan in place.

-NY Times, 24 Jul 2008

What I find most galling about this bailout is the taxpayer support for Fannie and Freddie. Think back to earlier in the week when a large global bank ran into problems with serious writedowns and was forced to raise capital. I’m not talking about Fannie or Freddie. I am talking about HBOS:

HBOS today revealed that take-up of the £4bn fundraising, which was unveiled on April 29, was just 8.29pc .

“The message is loud and clear: people still don’t really want to buy banking stocks,” Julian Chillingworth of Rathbone Brothers told Bloomberg.

“From an HBOS point of view, they have shored up their balance sheet and improved overall capital ratios. They have achieved what they set out to do.”

The volatile markets are likely to have played a major role in the decision to shun the rights as shares in HBOS fell to as low as 225p on Wednesday before closing at 254p as concerns about U.S. mortgage lenders Fannie Mae and Freddie Mac weighed on sentiment.

-Telegraph, 21 Jul 2008

Here are Fannie and Freddie’s weakness causing market panic that pulled down the entire global banking sector, helping HBOS to the record for the largest rump of shares EVER left in UK history after a rights issue. And, what happens later that week to these two publicly traded companies? They get a massive bailout from the U.S. government.

HBOS can’t place its shares because no one wants them — in part because of the GSE’s; they must actually fear for their very existence in the event of needing more capital. Meanwhile Fannie and Freddie get a gurantee from the government that the government will supply them with unlimited capital if they can’t place their shares. Does that seem fair to you? Does that represent free market economics? I think not.

What the U.S. government must do is end the charade that these are private sector companies, beholden to the same risk of failure of other companies. They are not. Freddie and Fannie have effectively been nationalized.

Related posts:

• Everyone’s talking about Fannie and Freddie
• Federal takeover of GSEs now in the works
• US government discusses Fannie and Freddie bankruptcy
• Fannie, Freddie to get $15 Billion from U.S. government
• Fannie and Freddie need $75 billion

Now that Friday has come to an end in the UK, we can give a post-mortem to the UK capital raising campaigns from Bradford & Bingley, HBOS and Barclays.

Bradford & Bingley shareholders have approved the bank’s £400m rights issue at an extraordinary general meeting in Sheffield.

The backing means the lender can now go ahead with its cash call, which had been restructured after private equity group TPG withdrew its financial backing.

Standard Life, one of the major shareholders backing the new 55p-a-share rights issue, told yesterday’s meeting it was “clearly disappointing” that shareholders had been called in to help the bank.
-Telegraph, 18 Jul 2008

Given the fact that Bradford & Bingley’s share price has fallen nearly 90% from its high about 2 years ago, you could hardly call this a success. In truth, Bradford & Bingley was on the verge of collapse and could not have survived without this rights issue.

Then there are HBOS and Barclays.

Shareholders have shunned multi-billion-pound fundraisings by Barclays and HBOS as investors owning more than 80 per cent of each chose not to take up their rights to buy new shares.

Barclays said on Friday that shareholders accounting for just 19 per cent of the UK’s third-largest bank had decided to participate in the £4.5bn offering. People involved in HBOS’s £4bn rights issue, which closed on Friday morning, expect an even smaller percentage of investors to have taken up their rights. The bank is expected to announce the level of acceptances on Monday.

Both Barclays and HBOS are guaranteed the proceeds of their share offerings, which were underwritten by investment banks and investors. Nevertheless, the poor response is ignominious, particularly for HBOS, which has seen its shares plunge by more than 40 per cent since the bank announced its rights issue almost three months ago.

The decision to avoid the share issues comes after a rollercoaster few days for global banking stocks, which saw a sell-off in the first half of the week sharply reversed in the past two days, helped by better-than-expected quarterly results from Citigroup and JPMorgan Chase.

-FT, 18 Jul 2008

Barclays avoided depending on the rights issue alone a few weeks back by pulling in Qatari money. Nevertheless, the low uptake by the Barclays and HBOS shareholders is a stunning rejection of the banks by its investors. Does this mean that capitulation has arrived? A month ago, I said:

When individuals, sovereign wealth funds and institutional investors stop giving these institutions more capital, the bottom will fall out of the financial services sector, and we will reach capitulation. As a result, some institutions will fail. But, at that point, the surviving institutions will be very cheap. Then, the financials will be screaming bargains and that is the time to buy.
-Credit Writedowns, Investors in Financials lose $10 billion, 16 Jun 2008

Given that HBOS and Barclays were up 10% and 14% respectively after the rights offer, this definitely doesn’t look like capitulation. I reckon that means much more pain in the British financial services sector lies ahead.

Related posts
Financials: catching a falling knife
Goldman thinks banks need even more capital
Investors in Financials lose $10 billion
European banks: still undercapitalised
Barclays taps Sovereign Wealth Funds
Barclays raises £4.5 billion from Asia and Mideast
B&B secures private equity rescue funding
Bradford & Bingley to issue profit warning
Debt financing gone
HBOS in trouble
Where’s HBOS?

Related posts:

• Barclays raises £4.5 billion from Asia and Mideast
• Barclays taps Sovereign Wealth Funds
• Bradford & Bingley to issue profit warning
• RBS couldn’t raise the money
• Bradford & Bingley is being shopped by the FSA

This is the latest M&A rumour making the rounds in financial circles. I caught this in Today’s Financial News.

And that may be the moment when National Australia Bank (NAB:Australia) makes a formal offer for the Australian branch of HBOS. NAB, the country’s largest bank, has already begun discussing the feasibility of an offer with advisory firms in London, but hasn’t yet approached HBOS with an offer.

HBOS Australia would be a logical expansion choice for National Australia. HBOS, headquartered in Perth, has capitalized on the mining boom in Western Australia, while National Australia is centered on the more populated east coast. And HBOS may be able to sell the subsidiary for as much as GBP 3.7 billion ($7.3 billion).

Now the question is, how much money does HBOS Australia make for its parent company, and how much is HBOS willing to sacrifice to stay afloat during the credit crisis?

As I see it, this is just a rumour. But, it is something to take note of as the UK housing market suffers and HBOS is in need of cash. We already know that Citibank is looking to shed its German operation.Ultimately, with more writedowns to come, banks should take what they can get.

Related posts:

• HBOS to raise new capital
• Deutsche Bank and HBOS hit by writedowns
• Lloyds gets HBOS for a song
• More on HBOS
• S&P cuts HBOS counterparty credit ratings

The UK is in the throes of the worst of the mortgage meltdown. Financial shares are tumbling. Home builders face collapse. Many top names in British housing and banking have been caught out and are getting a deserved swift kick: Northern Rock, HSBC, HBOS, RBS, Barratts, Bradford & Bingley, Taylor Wimpey — the list is long.

The bubble in the UK has been as bad as it has been in the US, — if not worse. All of this is having the expected drag on the real economy. The headlines in the British press say it all:

House sales ‘collapse’ to lowest in 30 years, says RICS
The economic disaster will get worse
Fears of widespread job losses grow as unemployed figures rise sharply
Housebuilders come crashing down

The question now is where this is going and what he means for government.

The Prime Minister Gordon Brown is taking a lot of heat as he was the Chancellor of the Exchequer (Finance Minster) under Tony Blair for 10 years and has his fingerprints all over many of the economic policies now being blamed for an economic malaise. It would not be surprising to see him leave office before his term is up.

Then, there is the Bank of England (BoE). Mervyn King, the Bank’s head, had egg all over his face when he had to recant his anti-bailout stance as Northern Rock succumbed to the first bank run in the UK since the 1800s and had to be nationalised. The BoE’s credibility has been dented by the Northern Rock episode.

So, as inflation increases, one wonders whether the BoE has the gumption to increase interest rates even while the whole of the financial sector and home building industry is in a state. After all, the UK did experience much more severe inflation than the U.S. in the 1970s. The UK Retail Price index hit 24.1% in 1975 and 18.0% in 1980. The U.S. never came close to those numbers. Therefore, the BoE is more likely to hit the brakes than the Fed, in my opinion.

Ultimately, I believe the UK is headed for a very hard landing — much more severe than the early 1990s. I reckon it may be something on par with the recession after the oil shock in 1973. GDP contracted 1.5% in 1974 and 0.8% in 1975. On the whole, that type of outcome might be welcome for the increasingly pessimistic British consumer.

Data Sources
A History of the Modern British Isles, 1914-1999: Circumstances, Events and Outcomes (A History of the Modern British Isles)

See also: Other posts under the label ‘UK.’

Related posts:

• UK retail sales drop most in 22 years
• Barclays taps Sovereign Wealth Funds
• Nationwide looking to buy targets in UK mortgage market
• S&P cuts HBOS counterparty credit ratings
• Mortgage distress shifts to prime borrowers

In April, I wondered aloud where HBOS was in this crisis in a post called “Where’s HBOS?”. Now, we know they are not immune to the problems infecting global finance.

The Guardian has reported on the difficulty HBOS is having raising money in the capital markets as its share price has fallen below the price of its offering.

“HBOS, the country’s biggest lender, was last night desperately defending its fundraising plans after its shares slumped to record lows, putting its £4bn cash call under severe pressure.

Shares dived through the 275p level at which the Halifax and Bank of Scotland group is trying to convince its shareholders to support a rights issue it needs to bolster its capital base.

The shares ended the day at 258p, down almost 12%. Other bank shares also touched new lows. Royal Bank of Scotland, which issued a subdued trading statement yesterday, ended at 212.2p, down 9% and barely above the 200p at which its rights issue, which ended last week, was priced. Alliance & Leicester ended 8% lower and Barclays was 4% down.
-The Guardian, 12 Jun 2008“

All hell is breaking lose in global finance. The second leg down in this credit writedown bonanza has now officially begun.

See the Credit Crisis Timeline for a full list of writedowns by institution.

See also: Other posts under the label ‘UK.’

Update: Related articles
2007 08 21 HBOS forced to tap balance sheet in illiquid markets
2007 12 14 HBOS shares slide on credit writedowns
2008 04 29 HBOS Plans to Raise 4 Billion Pounds in Share Sale
2008 04 30 HBOS dividend cut highlights need for reform
2008 06 19 HBOS writes off £1bn and warns on house prices

Related posts:

• RBS couldn’t raise the money
• B&B gets its money, HBOS and Barclays don’t
• S&P cuts HBOS counterparty credit ratings
• More on HBOS
• Barclays raises £4.5 billion from Asia and Mideast

The Sunday Telegraph is reporting yet another major Western bank is going cap in hand to sovereign wealth funds in order to stave off the inevitable crisis. This time its Barclays, Britain’s third largest bank. At a time when RBS is issuing a massive £12 billion of fresh capital by tapping its beleaguered shareholder base, Barclays must have decided it needed to go another route if it is to have success raising capital.

Executives at Barclays, Britain’s third-largest bank, are in advanced talks with overseas government-backed funds to secure a capital injection of more than £3bn.

The lender has stepped up talks with investors from China, Abu Dhabi and elsewhere in the Middle East and Asia as it looks to follow its peers by recapitalising its balance sheet.

Advisers to Barclays said this weekend that it wants to tie up the new capital within the next few weeks. The bank’s strong preference is to raise capital from sovereign wealth funds rather than through a rights issue.

China Development Bank, which already owns a small stake in Barclays, is among those with which the British lender is in talks as it comes under pressure from investors to boost its tier-one capital ratio.
-Sunday Telegraph, 08 Jun 2008

UK banks have been at the forefront of the credit crisis with HSBC, RBS, Barclays, Bradford & Bingley (B&B), and Northern Rock each being shaken by events. Northern Rock was nationalised after the first run on a British bank in more than 150 years, while Bradford & Bingley was stung by the downturn in the UK buy-to-let market. HSBC, RBS and Barclays have each suffered massive losses stemming from the U.S. subprime debacle.

Yet, the credit crisis has yet to hit the UK with full force. HBOS and Lloyds TSB have gotten off relatively lightly of the top five banks. However, other than B&B no other major British financial institutions have signalled they are ready to write-off millions in the UK domestic mortgage market.

After the huge sell-off on Wall Street on Friday due to turmoil at Lehman Brothers and with the unemployment rate, investors have to be nervous about UK financial institutions and their exposure to further write-offs and losses.

One should also note that Barclays seems relatively under-capitalised at a paltry 5.1% Tier 1 ratio. Six percent is the minimum standard in the U.S. to be considered well-capitalised. Expect many more write-offs in the UK in the months to come.*

Sources
Barclays lines up sovereign wealth funds for cash boost, Telegraph, 08 Jun 2008
List of banks in the United Kingdom, Wikipedia
De-leveraging redux, Credit Writedowns

See other blog entries under the label UK for more on the crisis in Britain. The Blog UK Bubble covers the UK daily and is well worth a visit.

See also: Other posts under the label ‘UK.’

Related posts:

• B&B gets its money, HBOS and Barclays don’t
• Abu Dhabi sovereign wealth fund loses $125 billion
• Will sovereign wealth funds pour yet more money into the West?
• Sovereign wealth funds cut exposure to U.S.
• Barclays raises £4.5 billion from Asia and Mideast

Another side effect of the credit crunch is the lack of availability of cheap debt financing for businesses. Companies have two alternatives: they can hold off on needed financing until the credit markets are more inviting or they can raise money through alternative means like convertible bonds and rights issues (equity offerings). According to The Telegraph, apparently, a lot of companies cannot wait because they are issuing equity right now to the tune of $100 billion over the next few months, $45 billion of it in the UK alone.

“About a year ago we knew that if we wanted to keep growing we’d have to raise more money.”

As the credit crunch continued to bite, Tyler knew that it was never going to be good timing. He waited until the GMH deal was complete and, two weeks ago, went for it.

“We were particularly concerned because no one had done a placing for ages.” he said. “But we were amazed that literally overnight, instead of being the only ones, we were suddenly one of many. “

After months of turmoil in the financial sector, investors had braced themselves for bolstering balance sheets at the banks. Royal Bank of Scotland, HBOS and Bradford & Bingley had announced plans to raise nearly £16bn.

But now companies as diverse as Johnston Press, the regional newspaper group, G4S, the security group, and FirstGroup, the rail and bus company, announced they were raising capital too. Now the City is bracing itself for fundraising by companies ranging from Barclays to Yell and Wolseley – although all three deny they have any need for the cash.

Last week the gloom that has recently enveloped investment banks was partially lifted with a sudden rush of activity in their equity capital markets division. One banker said: “Business has been slow for ages. But suddenly every chief executive wants to discuss capital raisings. We’re booked up to the nines.”

Based only on announcements by companies so far, $100bn of cash will be raised through rights issues over the next few months in Europe. Just under half – $45bn – will be raised in the UK. Analysts at Morgan Stanley predict that by the end of the year, these figures will have doubled.

-The Telegraph, 25 May 2008

This level of rights issuance has got to weigh on the equity markets. At a minimum, HBOS and RBS are taking it on the chin from investors. In another article in today’s Telegraph, investors in the two UK banks say they are worried.

More than 2m small shareholders in HBOS and RBS – owners of Halifax and NatWest among many other household names – could be forgiven for thinking that they are being asked to throw good money after bad.

The share prices of both banks have collapsed to less than half their value a year ago – and now they are asking shareholders to send them another £16bn in total. HBOS hopes to raise £4bn by offering its 2.1m investors the right – hence ‘rights issue’ – to buy two newly-issued shares at 275p each for every five shares they already own. RBS aims to raise a breath-taking £12bn from its 200,000 shareholders by offering them the right to buy 11 newly-issued shares at 200p each for every 18 shares they already hold.

It all adds up to a disappointment for anyone who bought shares in these banks expecting to receive a steady income. Worse still, both HBOS and RBS say they will pay their next interim dividends in yet more of their own stock instead of the traditional cash distributions. No wonder they are touchy about these rights issues being described as rescue issues.
-The Telegraph, 25 May 2008

It is reckless of HBOS and RBS to pay a fat dividend when they are writing down billions, issuing shares and should reasonably expect more to follow. At least the U.S. banks have slashed their dividends.

See also: Other posts under the label ‘UK.’

Related posts:

• B&B gets its money, HBOS and Barclays don’t
• UBS rights issue hits an air pocket
• HBOS in trouble
• Barclays raises £4.5 billion from Asia and Mideast
• RBS couldn’t raise the money

The Lex column in Yesterday’s FT highlights what many market players are thinking about the company’s £4 billion ($8 billion) rights issue: the economic outlook in the UK is worse than feared.

“The main potential explanation for the apparent excess capital is that the board’s outlook for the real economy is worse than stated. Retail bankers’ ears are fairly close to the ground and should hear a train wreck from a distance. That HBOS’s adjusted 2008 price/earnings multiple is six times suggests that the market hears rumblings too.”

-FT lex, 4/29/2008

It should be obvious to anyone watching the UK housing market that it is headed in the same directionas the U.S. market. HBOS is the biggest UK mortgage lender. Therefore, more losses are certain to hit HBOS in the coming quarters. The management at HBOS recognized this and has acted sooner rather than later. The only question is will £4 billion be enough.

Related posts:

• HBOS to raise new capital
• S&P cuts HBOS counterparty credit ratings
• Where’s HBOS?
• Lloyds gets HBOS for a song
• Rumour: NAB wants to buy HBOS Australia

As I predicted on Saturday, HBOS has gotten caught up in the global mortgage meltdown. Bloomberg reports:

HBOS Plc, the U.K.’s biggest mortgage lender, will sell 4 billion pounds ($8 billion) of shares to bolster capital depleted by asset writedowns and a deteriorating housing market.

As the UK housing market has only begun to turn down and the Halifax (which represents the H in HBOS) is the largest mortgage lender in the UK, you can expect a lot more of this in the months ahead. In the face of similar headwinds, many U.S. banks have cut the dividend. Will British banks follow their lead?

Read the Bloomberg article here.

See also: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.

Related posts:

• S&P cuts HBOS counterparty credit ratings
• Where’s HBOS?
• HBOS in trouble
• KeyCorp to raise $1.5 billion, cut dividend 50%
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Looking through old e-mails, I read an article from the FT in 2006 that surfaced claiming that HBOS (Halifax Bank of Scotland)were poised and ready to go offer loans for 125% of value. That’s right, HBOS thought it a good idea to cover 95% of the house price and loan another 30% over appraised value unsecured as a personal loan.

Now that the UK has joined the housing bust, one must ask where are the massive writedowns that have to be sitting on HBOS’ books? Why aren’t they looking to do another rights issue like RBS? I fully expect some pretty horrific things coming from HBOS as the housing crisis heats up in Britain.

The article touting this product when it was released goes like this:

HBOS to offer new mortgage at 125% of value

By Sharlene Goff

Published: November 3 2006 22:10 | Last updated: November 3 2006 22:10

HBOS, the UK’s biggest lender, is to start offering mortgages that allow people to borrow more than the value of their property, in a move that will make such products more accessible.

The owner of Halifax building society and BM Solutions, the specialist mortgage lender, is likely to launch a product within days that could allow buyers to borrow up to about 125 per cent of the value of their home.

The move coincides with accelerating demand for higher loans as cash-strapped first-time buyers go to extreme lengths to get a foot on the housing ladder.

Mortgage brokers have seen the take up of mortgages that provide more than 100 per cent of the property value rise by as much as 70 per cent this year.

Demand is being driven by graduates and young professionals who find they cannot save quickly enough for cash deposits and moving costs.

Some borrowers are also using the additional funds to pay down other debts such as personal loans and credit cards, as mortgage interest rates are typically cheaper.

The move by HBOS is seen as good news for borrowers as it is likely to bring down the current relatively high interest rates on these types of loans.

But brokers warn that borrowers will be plunged immediately into negative equity and could be trapped in their properties unless prices rise.

Ray Boulger, senior technical manager at broker John Charcol, said: “HBOS has the firepower to be quite aggressive in terms of pricing.”

The lender is likely to put significant pressure on Northern Rock, which currently has a monopoly in this market.

HBOS’s offering is expected to be similar to Northern Rock’s “Together” mortgage, which allows people to borrow up to 125 per cent of the property value.

Together is understood to bring in about £8bn of new business each year.

HBOS on Friday refused to comment.

Well, HBOS finally showed some sense. Two months ago, these ridiculous products were taken off the market. The Independent reported in February:

The 125 per cent mortgage was rendered extinct yesterday as the final lender withdrew from the market. Birmingham Midshires, owned by the Halifax, became the sixth mortgage lender this week to stop offering loans worth more than the value of a property, amid increasing nervousness from banks and building societies about defaulters and the spectre of negative equity.

The 125 per cent deal, typically structured as a 95 per cent mortgage with a 30 per cent unsecured loan on top, proved popular with first-time buyers. But the credit crunch has raised the cost of lending and mortgage providers are increasingly risk-averse.

Indeed!

UPDATE: The New York Times filed a report at 6:44AM EST on 27 Apr that HBOS is indeed thinking of a rights issue because they have credit losses. I anticipate some serious issues will be addressed there as the mortgage crisis takes hold in the UK.

See also: Credit Crisis Timeline for a full list of writedowns by institution and a timeline of the credit crunch.

Related posts:

• HBOS to raise new capital
• Can I borrow the full amount and an extra 25% too?
• Lehman fallout: HBOS and RBS are getting slaughtered
• Nationwide: guidance on its 125% LTV product
• HBOS in trouble