Sunday, October 12, 2008

Brown's bailout plan

Gordon Brown arrived at the Elysee Palace in Paris today for the latest international leg of his campaign to promote a British bank bailout plan among world leaders.

Despite the UK not being part of the euro, Brown met President Nicolas Sarkozy of France ahead of a summit of the 15 eurozone members and will brief them on the plan in which the Government will inject billions of pounds into struggling banks in return for preferential shares.

The plan is being looked upon favourably by Western leaders – including the Bush Administration – as a way of injecting confidence and liquidity into the financial system whilst retaining a politically favourable stake for the taxpayer. Europe also looks set to follow suit.

This weekend exact details began to emerge about how much the British Government will inject into the top UK banks.

The unprecedented move will make the government the biggest shareholder in at least two banks. Royal Bank of Scotland (RBS), which has seen its market value fall to below £12 billion, is to ask ministers to underwrite a £15 billion cash call. Halifax Bank of Scotland (HBOS), Britain’s biggest provider of mortgages, is seeking up to £10 billion.

Lloyds TSB, which is in the process of acquiring HBOS in a rescue merger, wants £7 billion, while Barclays needs £3 billion.

The scale of the fundraising could lead to trading at the London stock market being suspended. This would give time for the market to digest the impact of the moves.


update (13 oct 08)

RBS is to raise £20bn with a further £17bn to be put into HBOS and Lloyds TSB. Barclays intends to raise £6.5bn without government help.
Taxpayers will own about 60% of RBS and 40% of the merged Lloyds TSB and HBOS.
The chief executives and chairmen of both RBS and HBOS are to quit, after their banks were forced to ask for the bail-out.
The Treasury cash forms part of the government rescue plan announced last week.

BBC business editor Robert Peston said the announcement would "count as perhaps the most extraordinary day in British banking history" and was "an absolute humiliation" for the banks.
As part of the banks' announcements:

  • Lloyds and HBOS said they had renegotiated their merger, reducing the amount of Lloyds TSB shares that HBOS shareholders will receive.
  • RBS said chief executive Fred Goodwin was quitting with immediate effect to be replaced by British Land boss Stephen Hester. RBS chairman Tom McKillop is to retire.
  • HBOS chief executive Andy Hornby and chairman Lord Dennis Stevenson said they would stand down from their posts.
  • RBS and Lloyds TSB/HBOS will return mortgage and small-business lending to 2007 levels, which is much more than they are currently lending.

Other developments included:

  • Major central banks saying they would offer financial institutions an unlimited amount of short-term dollar loans to help stem the crisis.
  • London's FTSE 100 index rising by about 6% as investors reacted to the news, with banks among the winners.
Gordon Brown said the bail-out was: "unprecedented but essential for all of us", and would thaw frozen money markets. The investments were assets and, "not just money being pumped in", he added, saying the government was: "not a permanent investor in UK banks". "Its intention, over time, is to dispose of all the investments it is making as part of this scheme in an orderly way," Mr Brown said.
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.

The government will buy £5bn of preference shares in RBS and another £15bn of ordinary shares if, as many expect, the bank is unable to find willing private investors. "It's immensely regretful we're coming to shareholders to raise funds again, it's something we feel bad about," said RBS chairman Sir Tom McKillop.
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. Lloyds TSB and HBOS said the deal was still on, but that the terms had been renegotiated. A £12.2bn deal was agreed last month, but the value of HBOS shares has since plunged and the extent of the recapitalisation has highlighted its weakness.
Under the revised deal, HBOS shareholders will get 0.605 Lloyds TSB shares for every HBOS share they hold.
Under the original deal they would have received 0.83 Lloyds TSB shares.
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.

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