How to stop bank nationalisation

I currently dont see the case for Lloyds to buy HBOs given the sovereign backing now available...plus NOT doing that deal gets rid of some competitive issues too.
bw

So, to sumarise your posting you are saying that this plan has not be very carefully thought out by the politicians.

So, no change there then.

As a LLOY shareholder nursing large (>70%) losses I can't help but wonder why the HBOS merger is such a good deal. The share price has got worse and worse since this deal was announced, Lloyds will be taking on all manner of mortgages sold at the height of the boom, and now it's lost its dividend (one of the main attractions of Lloyds shares).

Lloyds never showed the kind of large growth during the housing boom as it was more risk-adverse. Yet now it seems it wants to take on the downside of the growth-at-all-costs strategy even though it never saw the upside.

You need to talk about the Tier 1 ratios that are expected as a result of this hyper-capitalisation and discuss if they are with or without historical precident. Why in the past, when house prices have declined, have such enormous rights issues not been necessary?

Some might think that this hyper-capitalisation, the filling to the rafters of our banks with massive pools of cash might just be an over-reaction that may well end up costing us all in increased bank charges. Never before have banks been effectively expected to maintain such high tier 1 ratio and the cost of maintaining such a big wadge of bank capital in proportion to our own savings could be very high.

so does this mean the government's bright idea WITH strings is now going to be WITHOUT strings? For goodness' sake! Surely this was discussed/negotiated at the weekend? This certainly explains the rise in Barclays today!

What next then?

The magical appearance of those fabled balance sheets and off book debts?

Either I was off making a coffee, or I've just seen a BBC 6 oclock news without Robert Peston in his usual 6.15pm slot?

Hope hes out getting the details of how they can justify giving Northern Rock staff 50pc bonuses!

I thought that interest was paid on preference shares during the period they are held ilo of a dividend. Any monies made above and beyond the interest payment to preference shares are then paid out to the remaining shareholders.

I believe this is the Warren Buffet position with his equity stake in Goldman's.

Oh no!....have Laurel and Hardy overlooked a critical detail when plagueriseing Buffet's action with the US bank?....but now the rest of the World's governments are copying the Hardy plan......what to do now?.....it's already falling apart at the seems.

My suggestion would be make these banks show some transparency around their off balance sheet liabilities. Then small investor who have been well and truly misled may have some confidence to invest. Right now taking up the rights issues is chucking more money in to a black hole. I just hope the government has had more transparency than the rest of us about the size of these black holes.

Robert

You've hit a good point here.

There are two other points as well:

Lloyds TSB shareholders are so diluted that the earnings and capital per share are less with the government and HBOS involved than if Lloyds went it alone.

So as it stands many small shareholders including myself are likely to vote for Lloyds to remain independent. Over the last 5 years it has been a well run bank.

It is a great risk for shareholders and tax payers to see the government involved and potentially forcing the bank to lend to people who can't afford the repayments.

I for one would be prepared to buy into a rights issue if LLoyds went it alone to prevent the government from interfering.

LTSB shareholders of which employees and pension funds are the majority have been hoodwinked into holding the shares on the basis of glowing reports from the board of directors and then sold down the river to appease our government- what does loyalty give you - no forseeable dividends income for years-no share price growth prospect on a part government owned business-10% value of shares trading 10 years ago- as they said on the adverts we really are on the journey but where to - nationalisation!!

I am certainly no financial expert. However, surely it would make sense for Banks to offer a combination of Preference and Ordinary Shares so that both existing and new shareholders could buy one Preference Share when five Ordinary Shares are purchased, or a similar ratio. With a guaranteed yield on the Preference Share and a possible yield on the Ordinary Shares, this would seem an attractive offer to me. They could also lock in the investor for a period (say 2 Years) to help reduce the share price fluctuation caused by profiteering. I am guessing that there must be too many pitfalls in this approach otherwise it would have been done by now.

Whoever is in a hurry shows that the thing he is about is too big for him.  ~Lord Chesterfield

On Sept.30 Lloyds management issued their Interim Report which led with the following statement -

" Against this backdrop, Lloyds TSB continued to deliver good growth momentum in all its core businesses and is well positioned for a lower growth environment.
Given this strong performance and our confidence in the Group's future earnings performance, the board has decided to increase the 2008 interim dividend by 2 per cent to 11.4 pence per share. This increase demonstrates the strength of the Group's business model, balanced with a level of caution on the outlook for the UK economy.'"

Now a mere six weeks later we are told that the crisis is so severe as to require a government bailout that will cost shareholders five years worth of dividend payments?

The question is -
Were they lying then or are the lying now?

I agree - I invested in Lloyds earlier in the year because I knew it was the one bank which hadn't touched poisoned derivatives and had a responsible attitude to lending.

It seems to me that short to medium term, Lloyds shareholders are being punished for the rescue of HBOS. Isn't this the only reason Lloyds-TSB needs government money anyway?

Also, I don't want any combined bank to be lending at 2007 levels, especially not for the buy-to-let and dodgy self-cert mortgages which HBOS dabbled in.

I am very much inclined to vote against this merger!

So during these last 2 weeks we have been hearing you saying that the Government is dealing with our money, the tax payers' money, what we pay to the exchequer, etc etc.

Now all of a sudden you realised that the Government is actually going to make a fortune from the sale of the shares in these Banks.

Is it because you just realised this is going to happen Robert, or is it because the Government and therefore the Tax payer is going to be better off after the sale of these shares?

Time to make your mind up, Robert!

Do you want the Governments, and I say Governments, to intervene with our money and give us something back in return, or push the existing shareholders to buy, buy, buy, so that the Banks would not require the Government's assistance.

If it's the latter, why did you not suggest this a week ago or better still 3 weeks ago Robert?

This is simply the taxpayer being softened up to give concessions to the banksters. All hope is now lost.

So, the banks and shareholders are going to end up with the best of both worlds, whilst the taxpayer gets shafted. Nothing changes here then.

Anyway, who cares? - in another few weeks or months the UK will have to worry about a drastic reduction in food imports (the baltic dry index is down 74% since May this year) - greedy little bankers clinging on to their wealth and power will be the least of our worries.

The scahdenfreud in Iceland will be palpable in every corner of the UK.

And then, of course, we'll start to see how the British public really feel about the bankers that have caused this catastrophe.

Can't have your cake and eat it. There are prices to pay for systemic financial and economic system failure, rooted within the banking systems around the world.

As a taxpayer, if the stability of our UK economy is at stake, then market forces must prevail.

Investors in RBS, HBOS and LTSB - tough turkey.

You bet your ranches on the management of those banks, and they failed. You want to receive dividends post rescue, tough again. Preference share taxpayers come first.

The alternatives to "self interested investors" would have been corporate failure and world financial system failure. Investor losses in rescued banks, whilst regrettable, are small compared to potential world financial chaos. Not often that the Government has led correctly in times of crisis, but they have here.

We are always given the advice "the value of investments may go down as well as up" in all financial service products ads.

Neer do wells would be best placed to remember such sanguine advice when it comes to "looking after their own". Perhaps when bank managements are purged and proper and enforced financial regulations - strong but still light touch wherever possible, are in place, perhaps a more ordered manner of running banks and providing credit will evolve. Until then, stop complaining and take the medicine.

why would anyone buy shares if they get no dividend? That is why the shares in question went down in value. Everyone expects a return on their investment, one way or another.

I have just discovered your blog. must compliment you on your clear presentation of facts and opinions - as a long standing depositor and small investor in Lloyds TSB who hasn't got the funds to play the buy and sell game, I am grateful to know that someone has realised that we are about to be punished for the misdoings of HBOS - why should we be denied any return in the form of dividend on our investment when HMG has been only too happy to offload the problems of HBOS on to us.

If you should happen to read this tell your bosses at BBC that an educational series on economics, free markets,etc, pitched at a similar level to their excellent but sadly rare, science and maths progs. would be very welcome,

I don't know what is right here. I just think that whatever the government does, it needs to focus on having a working banking system for the real economy, however pitiful that real economy may look thanks to the intelligent policies of the past decade. Its the seed that we need get to germinate if we want to eat in the coming decade! So whatever is needed to protect and fertilise the seed should be done and the rest of the so-called banking sector can go hang.

Robert Peston is suddenly doing a bit of a u turn with regard to RBS, now that Stephen Hester is to be installed as CEO. As far as I have been able to make out from various newspaper articles, Robert is approximately 47 and read PPE at Oxford. Stephen Hester is approximately 47 and read PPE at Oxford. A coinicidence?

Mr P, you're blogging like a advocatus diaboli. To think taxpayer's wonga should end up being pocketed by the shareholders.

Again, Bradford and Bingley.

You buy the Shares, a few weeks later the Gov't seizes the company, and you lose everything.

You just can't trust them.

all the banks should be fully nationalised or not, but this partial ownership will only cause problems down the road, if the market faulers again it will be the government that wil have to fork out the majority of losses so the government should take full control and reap the rewards. sadly this governments namby pamby methods will ultimately cost the taxpayer more thus cuts in public spending,nhs and military.
weak government will and is costing the voting public of this country hardship they shouldnt have to endure and thus should be replaced by a strong government that will firstly look after the whole of the people first and foremost.

Sounds to me like the banks, having taken, with both hands, the calming effect of the announcement of this deal, and a willingness to cart away in lorry loads, the tax payers' money, now want to renegotiate the "the downside" of the rescue. Put more simply, they want to have OUR cake and to eat it!

While I thank every waking minute that I am not our Glorious Leader, if I was, I would now tell the banks two things...

A/ Given the level of public investment, the Lloyds/HBOS tie-up is no longer necessary (HBOS now has our, taxpayers, support) nor is it in the public's interest on competition grounds.

B/ The rescue plan stays as is. If the banks don't like it, let them go swim in those shark invested international money markets and HMG will nationalise them, within the week, for half the current price.

PS: Our Glorious Leader's Great Plan, is the Swedish Plan of the 1990's writ large. Plagiarism is an ugly thing. Journalists should not be letting him get away with the claim of having had an original thought!

As a small shareholder in Lloyds TSB I certainly hope the deal to buy HBOS falls apart.

LTSB has been well run and is relatively well capitalised.

The purchase of HBOS is highly risky for LTSB shareholders.

Much better to scrap the deal and go the Barclays route which LTSB is very capable of doing and have nothing to do with Government money and 12% pref. shares (non tax deductable to add insult to injury).

Let them create a Scottish RBS / HBOS debt wreck if they want to but
if the Government is so keen on getting the LTSB / HBOS deal done it should be much less onerous on LTSB shareholders and stop treating us as criminals.

John McFall has just appeared on Channel 4 news and, without being put under any pressure, acknowledged that the government was, effectively, reviewing the terms of its bail-out on a day-to-day basis because no one really knows what the next stage will be in this developing situation.

The bail-out will occur, overwhelmingly in the format that has been established, but the precise arrangments are clearly subject to constant review.

There is absolutely no reason why the dividend policy cannot be re-written, and clear reasons why it should be.

Income funds are massive investors in Lloyds TSB, HBOS and RBS - and they feel obliged to ditch these shares once future income has been removed from them. The scale of the sell-off must considerably depress the share prices of these banks, and add to the sense of fear felt by small shareholders, who, in turn, will feel that they have to cut and run.

By amending dividend policy, share prices could be strengthened over the next few weeks and, as RP suggests, this will encourage shareholders, especially those in large funds, to retain their holding and buy into the rights, therefore reducing taxpayer involvement.

You got the point, Robert.
What took the 'experts' at the Treasury so long to realise that shares without dividends over an extended period of time
will lead to bank shares being sold, the rights issue not being taken up by
current shareholders and the government having to buy most of the new shares.
Unless the government wants to control the banks, they are depressing the bank share prices unecessarily by excluding dividend payments. Could dividends be paid in shares initially?

here we go again -pestonomics.

are bbc staff drug tested?

what happen to the 'euphoria' analysis of this morning rob? another great call-not.

Robert,
Your whisper about shares looks flawed. There are 16.5bn Ord 25p shares issued. To raise £15bn at today's price (64.95p) will require the issue of 23bn new shares. If every shareholder subscribed on a one for one basis, the outstanding 8bn shares, presumably to be held by the Treasury, would represent a 20% stake. And no dividends, etc?
Non-runner.
More thinking needed

The reason no-one is buying shares in banks, nor will they in the near future, is the threat of complete nationalisation of the banks. There has been no compensation to any shareholders for the nationalisation of b&b or northern rock, so why would anyone buy rbs, lloyds or hbos now? With almost no chance of capital growth taking place while the government is in charge, taking away their dividends is just a further stab in the heart of shareholders. The government is punishing the wrong people here...it is not shareholders that have done wrong. Shareholders are the major victim of this credit crunch.

I agree with the positive comments about this rescue plan (actually, I think we all know that positive comment is part of the rescue - the same way that pomp & circumstance is a power reinforcement).

Mr Peston's point makes sense.

I can't think of any other way to influence the Govt to improve the plan accordingly, than to comment here.

If someone knows better, please tell me.

Get the institutions to buy bank shares again.

Seems odd that shareholders should prefer dividends to paying off preference shares that cost 12%pa from post-tax profits.

But getting out of the clutches of the Government may look more attractive than the benefits of an HBOS merger. Perhaps Lloyds could even end up by doing a Barclays, and raising capital elsewhere?

Good piece of work, Bob. I am so cheese off as I am holding over 15k Lloyds shares and seeing its value disappearing since the Board decided to merge with HBOS. You lot heard about Chinese Takeaway????? This is worse than that. I wish the Lloyds board stopped being silly by picking up such a moribund. It is bad bad bad news and let the Government nationalise it, as it might as well this is the last big Mortgage provider in waiting for nationalisation anyway. I invest Lloyds for long shot and hoping for regular dividends not floundering with poor acquisition decision by some Whimp who listening to Gordon Brown.

Given that we taxpayers, or at least the great majority of us, didn't in any way cause this mess, but are having to pay for it, I believe we should nationalise the banks completely. This is on the basis that without our support they'd be worthless. Any shareholder value is totally dependent on this bailout, therefore it is unfair and inequitable that they or any future shareholder should profit, until such time as we, the taxpayer/owners, sell our shares back to the market.

Gordon pinched Railtrack, he pinched 98% or so of British Energy (and is in the process of flogging it off to the French), he pinched Northern Rock, he pinched Bradford and Bingley (and didn't even wait before selling off the good bits and trousering the cash) and now he's pinching large chunks of RBS and HBOS, and just for good measure he's conned Lloyds into it as well.
Presumably the Lloyds board will get their gongs in the New Year list, and Gordon will flog off his nice new assets in time for a spending splurge just before the election.

There are several mistakes in this package but the most obvious one is the lack of dividends until the prefs are paid off.

It's in Labour's interests for the ordinary shares to rise, for if they don't the Government has a very transparent loss at any time between 8am and 4.30pm on a trading day on its investment.

Imagine Cameron pointing out regularly that the Government has lost ?5b or ?10b or ?15b or ??.

The Government may be keen to steal a large proportion of RBS and LLOY/HBOS at a knockdown price from its shareholders by not allowing dividends, but it might be a Tory Government that benefits from the uplift after divis recommence in a few years.

It can't even fully nationalise in future should the highly transparent share prices drop without claiming the ords are worth next to nothing with therefore its equity investment largely worthless.

Therefore the success of this massive ?37b investment by Gordon Brown and Labour as we approach the next election in 18 months is dependent upon the ords rising.

The curtailment of ordinary dividends will be a drag on the share price until after the next election as with a fair wind the prefs won't be paid off until about 2010/11.

This is a grave mistake probably made in the heat and excitement of the negotiations where clearly the government were in pole position and being very dictatorial in their bid to fleece shareholders, so I'm not surprised this point is now being reconsidered in the cool light of day.

As an RBS, LLOY and HBOS investor who has lost a fortune, also on the nationalisations of BB and NR, nievely thinking I was investing in stable blue chips in an investor/saver friendly country, and not anticipating the gross incompetence of the BoE, Government, FSA, auditors and bank directors, all of whom will no doubt wish to avoid negligence accusations as they are all at fault, I am buying up in the market my entitlements in all three banks at prices below the offer prices, as politically the Government must now make these deals work, or face much criticism even from this hopeless Tory opposition. A contrarian view which not many might share, even if they could find the cash to take up the shares, and stomach zero divis for years!

I hope the public does not forget that the sight of a run on a British bank, given London's standing as the premier financial centre, and the subsequent errors of judgement by the authorities contributed substantially to the lack of confidence which is now resulting in recession. Sadly London will have difficulty retaining its standing with long term consequences for the whole economy.

Foreign (not to mention domestic) investor confidence in the UK has also been severely dented (many foreigners have invested in British banks only to see their investemnts practically wiped out), again having long term implications for the UK economy.

Robert,

at any point in time, in a highly liquid market such as RBS shares, save for an arbitrage which you'd have to be pretty sharp to act on, there is no difference in a rights issue between:

1) exercising your allocated rights and taking up the shares.

2) selling your allocated rights / receiving lapsed rights proceeds.

The underlying share price is therefore irrelevant when deciding whether to take up your entitlement or not which is not quite what you are suggesting!

If shares are priced above the exercise price, then that premium is priced into the market for the rights accordingly.

Hopefully our pension fund managers are aware of this....

Robert

There most certainly will have to be adjustments to the conditions.

Yet again it demonstrates lack of understanding on behalf of the politicians. If I were an investor, with the knowledge that government would be taking 10% on its preferential shares before I got my cut, and had to wait 12 months for that cut, I would be dumping bank shares like billy ho.

Now, if government comes into this on an equal footing, relax the dividend issues, I might, but only might, be interested and come to the party. I suspect there are investors out there who feel the same. As it stands, the deal is dead, the government will have to take the lot. Its a rather expensive and unnecessary vote catcher, not a bank saviour.

Robert a few days ago you were telling us that £10 was available in the market for £6.60 ' as you were so confident that the deal would go ahead, you all but recomended readers to go buy HBOS shares. What happened? you don't seem so confident today! oh and the deal has also been renegotiated!

The deal is a poor one, not because the government has fairly asked banks to pay a high rate on the pref shares so that taxpayers are compensated for their (not Gordon Brown's risk), but because Lloyds are overpaying for HBOS. HBOS asset quality is uncertain and we are only just entering a very severe economic downturn. HBOS is over dependent on wholsale funding which is a long term problem and nothing has yet been devised to cure this long term funding gap except for wishful thinking. Lloyds shareholders are likely to own only 35% of the enlarged group, this alone is a massive barrier to the deal, it is very rare for the bidding companies shareholders to end up in the minority!

Fortunatly we still live in a democracy and this extends to voting by shareholders on large deals, so for all your so far misplaced confidence in this deal, it remains in my view far from certain that it will ever be consumated. My view is clearly shared by the market.

I know.. why doesn't the government just undertake to buy the shares at whatever price is going, no conditions. That way the market will get lots of confidence, and the government won't have to buy the shares at all!!! Brilliant!

So Lloyds are paying about 30% less for effectively half of HBOS so they are actually paying more than they were before.
They should have done what HSBC tried and offer nowt for the company, and in fact HSBC is welcome to it.
Lloyds would get the £5bn needed from a private rights issue without question if it drops the takeover of HBOS as it would in effect go back to the staid practical banking that it has been doing, which newsflash is what all banks will have to get back to.
They raised around £700mn in a private placing after they announced the HBOS deal.
Hell I would borrow ONE BILLION Pounds if I could get my hands on a 12% preference share for 5 years.
This deal has to be scrapped!

There must be a reason why the banks would agree to these deals. As other posters have said the directors have not exactly been forthcoming about the state of thier finances in the past.
If they agree to something which is not in the interest of their shareholders surely this is illegal.
The Government HAS to stick to its guns and take the consequences, if it folds up now it will have no credibility left.
If the banks can survive without the government why haven't they done something before now.

It has very little to do with nationalisation. The impetus is to reach a balance where money required by the banks in question can be aquired, and the party putting the money on the table gets something of value in return.

The matter is in flux and the deal is only done when the parties involved both believe it is mutually advantageous. If the banks involved believe the deal is onerous then they will look elsewhere, and are almost certainly in parrallel talks. The most liklely mistake-maker in this transaction is the government.

The government is used to dictating not negociating. The government is not at ease in the commercial environment and is the novice whatever Brown would like to think. Given a level playing field you would have to expect the banks to run rings around Brown. I know who I would put my money on.

The report that the government was trying to demand the banks take more money than they wanted to was an alarm bell. The fact the government wants lending to return to 2007 levels was an alarm bell. If I were running a bank I would be reluctant to have somebody making politically driven instruction on policy for a part ownership. I would say - push off, you will be gone shortly.

The banks are not a unified group with common interests they are competitors who are interested in individual profit and gaining market share. It is a mistake to see them as a commonality.

There has to be the suspicion that Brown is muddying the water with political ambition, to score over the banks in any deal. If so it is devisive and will reduce the chance of a deal working - to the detriment of economic recovery and the consumer.

Little comes out other than what the govenment wants the public to hear. The banks are reluctant to discuss business openly, and the sort of demands likely to be made on them in policy and the detail of business will make them walk if they can. Could be the right outcome for them.

However in all of this it should be realised that profit is not just about volume. High profit can be generated from small volumes, but that is not what the government wants, in reality it wants low profits on high volumes. Equally toxic paperwork has a value, and the value is variable and depends on the horizon. There is a balance between selling too cheaply and muddling through. There is a case for hanging on to an asset which is grossly undervalued particularly when the party in negociation is making it plain they will do 'whatever it takes' to get the housing market going again. Would you sell something half price if you could wait 2 years and get the real price. Unlikely.

It is less than conclusive that the government actually knows what it is doing. Until it is clear that the government knows what it is doing then I am afraid I remain to be convinced, too many basic mistakles have been made to date to suddenly expect a brilliant performance. The danger in all of this is that the taxpayer only ends up with buying the really damged stock and that ecomonic recovery is damaged.

I agree with most of the comments already made regaring Lloyd's shares. I bought their shares as it was one of the few AA rated banks in the world with no American sub-prime problems. Why buy into a bank has problems. Say NO to the takeover of HBOS and watch the shares rocket

'Private investors have been "spooked"
I fully agree the stupid decision to ban the banks from paying dividends to ordinary shareholders will kill these three bank once for all. Otherwise if follow the US model with governemnt taking minority stake and higher valuation with no limit on dividends payment, then share will rebound and the tax payers' money investment will have a real chance to make a good profit, otherwise if these three goes, next in line will be hsbc, barclays and the whole financial system will collapse in front of our eyes, because there is no plan 'b'. So the treasury and GB should now revise the terms of bail out plan and allow the banks to run as privately and independently as possible, also most crucial issue is allowing the banks to pay dividends to ordinary shareholders to attract private and income-based fund investment. This is the only way for getting out of the deephole they dug. Another issue is regarding investor confidence, driving bank share prices down and so-called nationalise happened to NR and Bradford & Binley and even happening now by nationalising more banks will once for all completely utterly destroy the stock market and investor confidence in the heart of UK economic life. The hourable thing GB, AD and this government to do is coming out clean and say an apology to share holders and investors, after all these investors are the real rock of British economy, the investors are both tax payers and investors who day in and day out driving the UK ecomony moving forward. Rob their shares and nationalise banks without paying proper conpensation to share holders will totally destroy investor confidence. If the government come out tomorrow morning and announce that they will properly pay conpensation to Northern Rock and Braford Binley share holders, then I can say the market panic will disappear and confidence will return in no time.

I don't understand why the prefs have to yield 12% - a terrible penalty especially as not tax deductible and it's not as if they are risky given the massive equity injections. The Americans are using 5% plus warrants which seems much less penal and allows the equity tier one to build up faster to the benefit of all.

Why would anyone want to stop the nationalization of the banking system? As I see it, it is inevitable. All these people making fortunes without contributing anything to society, it's criminal. The whole thing could be simplified if the Bank of England had a branch in every major city. Then people, individuals and businesses could get funding on demand. Subject to the usual of course.

Comment 8 re off balance sheet items. Why are such things allowed?

Given that the derivatives market is so huge and unregulated how can any bank shares be classified other than junk ?

There are no fixed rules on capital levels to back up the derivatives and no fixed limits on the size of the bets being placed.

At a moments notice any of the banks could fail.

Isn't it time the derivatives market was just wiped out ?

I note that the UK credit risk level was 40+, america 28 or so and germany 24 or so. Is this another example of the UK being "best place to weather the storm ?".

The point that singularly fails to be put across here is that we need the banking system to work. The issue here is not bonuses although great press and yes that should be curbed to a degree.

(By the way, Mandelson, he worked every hour god sent? Paid a few million? Easier to become a politician? Take no responsiblity and blame everyone else!)

FYI - This was not a problem caused by Margaret Thatcher, or have we forgotten that New Labour has been in power for over 10 years and has done nothing. The Bank of England needs to be in control of all banks and National debt, we may then have had some money to stave off recession (oopps sorry, this wont get published, cant down Nu Labour)

As for the re-capitalisation plan, due to the fact that many pensions and investment funds rely heavily on dividends to make a profit to be returned to investors, I strongly feel that this plan will not work. Our pensions rely on these dividends.!!!

I have some HBOS shares and think that Lloyds TSB are buying HBOS at a very cheap price especially revised offer of 0.605.
I do not know the extent of "toxic" assets of HBOS. However, I suspect that they are not a lot. Vast majority of people will continue to pay their mortgages and there is still shortage of houses in the UK.
HBOS has been a very successful bank over recent years. Lloyds TSB were not that successful and, ironically, it has turned up to be their luck. The problem of HBOS and other banks is that wholesale (interbank) money are difficult to get because of INTERNATIONAL crisis.
It was a job of Goverments to regulate macro economy, macro financial flows and restrain mad rises in house prices. Goverment failed to do that over the years. I do not blame "greedy bankers". They are commercial company that operated within the environment created by our society and Goverment.
Now, I wish I had access to true view of HBOS prospects to assess whether HBOS can swim independently without Lloyds. Maybe they can.

Robert,

A bit rich.

What was the share price of RBS just before the confidential discussions were taking place with the banks? I mean the the day before you broke the story about them saying 'bring it on'.

Then what was the price after the story broke?

Now, if the government wanted to buy the banks on the cheap, wouldn't it be convenient to break the story and reduce the share price?

Who was your source of the 'bring it on' story?

I thought there were rules about conducting takeovers? (ie confidential market sensitive information) or do they not apply to bbc reporters and 'sources'?

In the case of RBS by my calculations the govt would only have 30% instead of 60%.

Nice one.

As an experienced professional investor I was hoping someone would start the debate on this.
The Lloyds Bank´s directors´prime duties are to its shareholders. To agree to a massive ordinary capital raising offering no dividend for FIVE years, in return for a mere STG 1 billion in preference capital from the Government, is indefensible from a shareholder value perspective. Surely Lloyds could obtain the preference funding from the market, a la Barclays, and offer dividends on the new ordinaries. This would both placate shareholders, who have to vote for all this, AND massively reduce the likely underwriting shortfall the Government faces.
Turning to the general principle of dividends I´ll write another blog.

Hi Robert,

Once again, for the record, this labour government (which put paid to the economics of boom and bust) is absolutely incompetent. They clearly have no grasp of the problems which surround the banking system and it shows.

Gordon Brown was a useless chancellor and Alistair Darling (what a surname to have, 'Darling') is equally inpet.

What we are witnessing is the biggest deleveraging event to ever happen, period. No amount of cash injections into the system are going to make any iota of difference. The world, and especially the UK where borrowings are 3 times GDP, needs to deleverage. This is going to mean a considerable amount of pain. There is nothing they can do about it.

If they are serious about tackling the problem then, like any good business they will put together a well thought out BCP strategy to pick up the pieces afterwards and make sure that the recession/depression is not too bad.

I very much doubt anyone in this government has enough brainpower to understand the importance of BCP. (in politic speak, Plan B)

Hi,

It could well be that the government is playing a sly game here. Insist that no dividends are to be payed out before the recapitalisation and then a little way down the line decide that they will, after all, pay out a dividend. This will create a surge in share price which they will be able to sell into thus making a profit for the taxpayer.

Although, that is maybe a little too far fetched.

I think that this won't be the last time the taxpayer will be called upon to recapitalise these banks. The real economy has only just started to turn down and the problems with credit card default and loan default hasn't really started yet. Also, house prices have a long way to fall (maybe another 30%) before we reach a bottom.

This is just the end of the beginning.

This comment has been referred for further consideration. Explain.

Lloyds TSB was one of the most solid of the UK banks with an excellent credit rating. When first announced, the proposed takeover of HBoS seemed attractive but it now looks as though the Lloyds management has been stiched up by the government.

I am sure that Lloyds could have gone the same way as Barclays in raising capital but the taxpayer taking up to 43% of the new group for the privilage of Lloyds sorting out the mess at HBoS is a bit rich. Losing the dividend for 5 years is totally unacceptable. No wonder the share price has collapsed.

In the deal's present form there cannot be any upside whatsoever for Lloyds shareholders, management or staff and probably customers.

Why would any shareholder vote to accept this deal? I, for one, will not.

Presumably Lloyds TSB negotiating team is being headed up by Mugabe.

Say one thing to get an advantage and then do another thing once the immediate emergency is over.

The banks now know that they have the government, us, over a barrel and that they can just carry on as they like. On and on..

It is quite straightforward to design a restriction on payment of ordinary dividends that is consistent with the Preference Capital´s prior ranking! For example, one could stipulate a maximum payout ratio of say 40%. This would be calculated on the total of preference and ordinary dividends as a proportion of NPAT BEFORE preference dividend. From this total the preference dividend would be deducted to derive the amount of ordinary dividend payable out of FUTURE earnings. On this basis the smaller the amount of preference raised the larger the residual available to pay ordinaries. So Lloyds standalone could pay sensible dividends but HBOS and RBS would be quite restricted.
And it makes sense to allow the banks to refinance the preference as soon as public markets allow. Work in progress?

May seem crazy but I keep reading what appear to be conflicting stories regarding future dividend payments. Perhaps someone could please clarify if the proposed takeover goes ahead, will ordinary shareholders in Lloyds TSB (like myself) receive any form of return whatsoever - I understand it is unlikely a cash payment will be paid but is there to be any allocation in lieu of dividend paid in the form of extra shares?. Or, are we to (hopefully) rely on capital appreciation to improve our lot. Thanks

I'll vote against the merger. I have faith in Lloyds TSB, to the tune of six figure deposits and shares.

I don't want the government's dead hand, or the government's hamfisted botch jobs, ruining a bank that is sufficiently well run for me not to be worried about my investments with them.

in response to #33

You can write/email HM Treasury directly if you feel passionately about these questions.
See the following web site:

https://www.hm-treasury.gov.uk/contact_us.htm

I think there might just be other reasons for Lloyds TSB's shareholders to refuse to approve Lloyds' takeover of HBOS, apart from their annoyance that the deal would make them wait much longer for dividends! Like the fact that they would be exchanging shares in a relatively robust, conservatively run bank, for a much bigger but weaker one with a big government stake, for instance!

Remember that the Lloyds "merger with" (i.e. takeover of) HBOS was originally arranged by the government to save HBOS. Surely Lloyds shareholders ought now to tell the government to take a running jump. Refuse the merger, and let the government bail out HBOS on its own.

Robert
1. I thought that normally the payment of prefs. (either dividends and/or sale of shares) always takes precedence over ordinary shares. Once payment of prefs. is made then any remaining goes to ordinary shares. That is the point of a preference share. The investment community must be aware of this arrangement as they thought it up. Are the Treasury requiring something different?
2. The number of prefs. ahead of the ordinary shares will depend upon the the number of prefs. the Treasury takes up. The way you explained it implied that private capital can take up as much of the new equity as it wants alongside (or instead of) the Government money up to 100%. Therefore, for example, if private capital takes up the lot then there will be no Government held prefs. and nothing stopping private investors getting dividends etc. Is there enough private capital around for this to happen.

Blah, Blah, Blah! what ever the twists turns the financial community gets itself into in trying to unravel a mess of it`s greed, or trying to make a steal of a deal.
they should hear the word on the street. It`s the concern that if Westminster has Rbs in it`s grasp whats the point of voting for the SNP at the next general election.
Ta, Ta! Mr Salmond?
Hello to the Tory party in Scotland!
Big Gordon will not be shaking in his boots,
Glenrothes suddenly seems a friendly place for a party for the labour party.

It is most disappointing that the positive news that Northern Rock has repaid over 50% of those funds initially borrowed has not been mentioned in amongst the comments posted, and indeed the way that the BBC are reporting on these issues.

Positive news in these hard times should be lauded. God knows the BBC , amongst others did it's best to crucify Northern Rock 12 months ago.

As for those that question hard work and effort with material results being rewarded with a bonus, for employees that have endured 12 months of extreme turbulence and uncertainty of whether they would be continuing in employment, having also lost their stake in the company, through no fault of their own, having seen their other investments fall dramatically, whether through pension growth ,through personal investment, property values etc,why should they continue to be vilified for helping to take their employer forward to meet specific objectives that reduce the Tax payers exposure I do not know!

So Gordon Brown has decided that the banks shall not pay dividends to the holders of ordinary shares but they will have to pay the interest on his Government's preference shares. Sounds fair. Or does it? Who will lose out? Given that the major holders of bank shares are pension funds that is all of us. Not only that but the interest on the preference shares is a stealth tax by any other name serving to reduce the banks' retained profits and consequently the amount of dividend they will be able to pay when permitted. So the taxpayer ends up paying twice - once for the interest on the money borrowed to buy bank shares and again through reduced income for pension funds. Classic Brownian economics!

If I now own a very tiny part of 60% of the Bank which holds my investments, can I ask them to NOT loan to other Banks? Why is this necessary anyway?
(Do I own a tiny part.....?!)

Is Gordon Brown "the man who saved the world"?

Robert, if you cast your mind back to what you wrote last month on the LTSB takeover of HBOS, you will see that it was a rescue. You even claimed there was personal involvement by the Prime Minister.

Now that the banks are being recapitalised, is there really any need to drag LTSB into this? At the moment it is a healthy institution. HBOS is being bailed out in either event. Instead of agonising over the embarrassment of being seen to change its mind, surely the government should focus on HBOS and leave LTSB to make its own decisions? Then the dividend issue becomes a moot point. LTSB shareholders may keep theirs if it does not request government funds, and HBOS shareholders should lose theirs as it is to receive them.

Besides, have you considered the consequences of further consolidation of the banking system if there is a further blow to confidence? Competition is the best insurance against runs: unhappy depositors who withdraw their money from one bank simply transfer it to another bank electronically or by cheque. This can then be loaned interbank, even if such lending has to be backed by the government. But some institutions have had so much business that good inflation-beating accounts are hard to find. Choice in the high street between distinct banking groups is becoming limited. Further consolidation of the largest banks could lead to those depositors choosing cash for want of satisfactory alternatives. It would be unwise to overlook that in finance, competition is not just a free market luxury disposable in a crisis, it is essential to confidence.

Re

I agree with (#36) TimAllenthwaite that the banks should be taken over by the nation, to keep the economy going and to clean up the system, but not with the incalculable hidden liabilities that they seem to have.

Government could buy a small 'clean' one and use it to acquire the worthwhile parts of the others at fire-sale prices as they are forced into bankruptcy or capitulation.

It's no time for niceties.

See today's File on Four :

https://bbc.kongjiang.org/www.bbc.co.uk/radio/podcasts/fileon4/

It's a chiller !

Who cares about this anyway? It does nothing to reduce the debt in households which will continue to depress consumer spending and magnify the economic recession we're going into. Do we really believe that we can talk our way out of this?

#49 says "Why would anyone want to stop the nationalization of the banking system? As I see it, it is inevitable. All these people making fortunes without contributing anything to society, it's criminal. "


Since New Labour came to power in '97 the UK banks have made a massive contribution to UK PLC via Corporation tax do you honestly believe that would happen if HM Treasury took over?

High ups in banks have made some very very bad decisions over last few years of that there can be no doubt but to nationalise them all would be a disaster.

We are at it again trying to deal with one problem (in this case banking) in isolation from the rest of the problem - Global social economics. as I have tried to get over in all my comments for the last 2 weeks, but it fails to be recognised, is why do we always try to deal with one bit at a time I don’t care if its capitalism or communism or socialism or any other dogma political flavour colour all of which have their merits and their flaws we need a solution to a very pressing problem maybe the biggest we’ve faced for a hundred years.

So we try to fix it by tinkering at bits nobody stops to work out what happens when you take proposals to their logical conclusions As our great leader Gordon was recalling the visionary powers of the leaders in the last world war I thought of the one at the beginning who on the steps of the plane said “Peace in our time” what happened to him he just did not think it all through to its logical conclusion

We will never have a uniform picture to work with if we only seek to change half the pieces of the jigsaw at a time but we aren’t even trying to change anything we are just trying to stick back in the pieces that have popped out and then we wonder why things don’t look any different.

Governments taxpayers any old (or young) fool can stick money in a bank it’s easy especially if it’s some one else’s. It takes a special kind of fool to run one (blindfolded I hear).
Yes we need a little piece in our time and if our PM’s done that hen well done but we have not time to take a complacent sigh of relief we need to get the big thinkers the tacticians, the inspirers and the leaders in to place now to reshape the entire social economic package for the rest of the 21st century.

Biggest challenge is for this event we are all on the same side if there is an enemy t is within us. Like it or not this is not a fight between right and wrong, good and evil, this philosophy or that philosophy. It is not about conflict it is about how to devise a universally excepted policy that everyone can subscribe to that allows for every individual to coexist in a system of cooperation to build a sustainable system.

Everything we do economically, politically and philosophically is built on the principal of balancing all the views from left to right on plank with a pivot point underneath called the balanced view this is a seesaw or set of scales. To keep a balanced society we try to manage everything by asking administrators to desperately run round the middle trying to keep a balance.

what we need is to put a prop under each end of the plank so that it become a bridge and then we can find some leaders to lead us to a permanent rehearsed and thought through solution based on sustainable cooperation and modified by proactive analysis of our development.

My humble observation is that my wife has just come home, having wrestled with financial issues in Washington DC all day, and demanded a large gin and tonic. Should I be buying up shares in the drink's industry while this fiasco goes on?

Definately time for a breather then.
No rush any more.
Act in haste repent at leisure.
Crisis over for now.

This is my first response to Robert's blog.
I have been reading the comments made of various subjects and find all of them very interesting.
However I believe we are in a situation where unintended outcomes are often overlooked. My understanding it that the powers that be will dictate the dividend policy of the banks who take their money (our money) If dividends are not paid to ordinary shareholders, this means that pension funds who must be heavily invested in the banking sector will suffer a double blow. Low share prices and lack of income. This will imact on the very people who need this most. Those who are about to retire and the money purchase pension funds of the masses. Without going into the injustice of the public/private pension arguement, this will cause severe hardship to the very people the Govn't profess to help. Ultimately all hell will break loose on this issue and I fear a significant political backlash. Our dear leaders fail to understand the everyday lives of the majority of the population!!!!

@ #49 Cryloman
[quote:]
Why would anyone want to stop the nationalization of the banking system? As I see it, it is inevitable. All these people making fortunes without contributing anything to society, it's criminal...
[end quote]

I feel much as you do about the criminality, and it may be related to your question about nationalization. I suspect someone's goal at this stage is to insure a major consolidation of banks, but to specifically avoid nationalization. The consolidation is happening bigtime in the U.S.A., and I would bet the banks which survive will not be nationalized. And it may not just be because nationalization is against the "culture" in America.

The argument for consolidation is that it is necessary to prevent banks failing and restore stability to the financial system. But there may be another reason. If there are fewer banks, there will be fewer board members, and banking will easier to control.

The question then becomes: Who will exercise this control?

@ #51 JackMaxDaniels wrote:
[quote]
Given that the derivatives market is so huge and unregulated how can any bank shares be classified other than junk ?...

Isn't it time the derivatives market was just wiped out ?...
[end quote]

Maybe the derivatives *will* be wiped out after the fear and uncertainty they cause has served the purpose of eliminating all but the "right" banks, those which survive and/or are consolidated.

The more I read about this crisis, the more easily I could be persuaded there is some sort of conspiracy afoot. Hopefully not, but only the invisible hand of incompetence operating in the markets.

This comment has been referred for further consideration. Explain.

Spot on, Robert, about RBS. And by my calculations, RBS will only have to raise 3bn, perhaps less, to ensure that the bank is kept out of state control.

Re HBOS, I think there is still a chance that with the present trend in its share price another bid may come in for it (or the BOS elements of it) as soon as Lloyds publishes its merger prospectus.

I am new to this , I usually leave these sorts of things to my so called interlectual betters only looking at the stock market to check my aviva shares.(gained from having a norwich Union endowment Policy)
now looking with more scrutiny it seems a weird way to run an economy as if the stock exchange were a branch of Ladbrokes, surely if we are in a free market economy , any other companies no longer being able to trade would have gone into liquidation thus the free market would have run its course.
it seems to me obviously that capitalism as it is used now is dead. And the only reason its being proped up is so a load of city punters do not have to prove their point by working, but how lucky they are after reading the form in the equivalent
of the Racing Post
The rest of us could get by with an organised Barter system and do away with those people trading bits of paper.
Perhaps we should hit the wall

My concern with the government loaning the banks with tax payer’s money is this.

1) Are they charging the banks interest and if they are will this be past back to the tax payer?

2) When the money is paid back to the government will the tax payer be reimbursed or will the money just get soaked up by the treasury?

"I will get a peerage for helping you out like this, won't I Gordon?"

"Of course you will."

What goes around….. Once upon a time robbery was taking money from a bank, not putting it in

Robert Peston is right and what rocket scientist thought a no dividend policy would be attractive enough to raise capital or get the shareholders to accept the deal. I agree with all the other Lloyds bloggers who say that their current position is totally at odds with what was said only weeks ago. Their statement on their website about the deal is totally disingenuous and I urge people to write to J Eric Daniels as I have done. Victor Blank should do his deals in the boardroom not at a cocktail party. I fully expect him to be made Lord Blank for services to getting the Labour Party off the hook.

#84 "it seems to me obviously that capitalism as it is used now is dead. And the only reason its being proped up is so a load of city punters do not have to prove their point by working, but how lucky they are after reading the form in the equivalent of the Racing Post"

I am reminded of JK Galbrath's arguments in "The Great Crash" He believed that speculation, not investment, was the true purpose of stock markets. He said: "Wall Street, in these matters, is like a lovely and accomplished woman who must wear black cotton stockings, heavy woollen underwear, and parade her knowledge as a cook because, unhappily, her supreme accomplishment is as a harlot."

If a normal business took out a massive loan in order to survive, at a high interest rate because it was viewed as high risk and as a result of having to pay back the loan couldn't offer a dividend for several years then most people would say this was normal business and good business for the bank offering the loan (provided the business didn't go bust).

Why is it different when the same rules apply to a bank and the loan is supplied by HMG?

If the banks are going to have these preference shares to pay off then surely it is in the best long term interests of the shareholders to use all spare cash to get them off the books asap rather than worrying about the short term effect on the share price of no dividend?

The banks went to HMG to ask for the money. If their balance sheet really is sound enough then why did thay ask in the first place unless they were expecting a free lunch? If the price is too high for Lloyds TSB then let them dump the HBOS deal and see if the market will lend them the money. The fact that this is not happening suggests that the board knows that they can't.

To suggest that RBS might now become a viable bank without the help of the taxpayers money (a bank that is able to trade normally) is purely speculative and rumour mongering. In making such utterances you are simply helping to create the sort of uncertainty that unsettles peoples confidence in the money markets at the very time when the UK government at this moment in time is trying to erradicate that problem.

In suggesting that the banks are right and the government scheme (to use taxpayers money to stop the banks from collapsing) is flawed is just simply misleading. The actions taken by the government might not represent the best deal from the banks and the shareholders point of view but it was the only lifeline on offer at a time when the shareholders and big financial institutions were reluctant to take the same risks that the government were imposing on the taxpayers.

Even though the money markets are still in serious finacial difficulties it seems as though we have learned nothing from the credit crunch. The people operating within the financial markets are still trying to maximise their gains, without risk to themselves and at the taxpayers expense. I hope the government/s hold firm on this and will not allow such shenanigans to happen.

So, the banks (and some of the investors) consider the worse is over and the banks want to wriggle out of commitments they made to the Treasury.

Of course, even three times as strong capital adequacy ratio wouldn't have been enough to get out of the trouble - it was the trust in the government and the government's determination and credit rating that saved these banks last week.

What will they do if the trouble comes back? How many times can they play this game?

And why, oh why, weren't they allow to fail?

"Lloyds TSB's shareholders could refuse to approve Lloyds' takeover of HBOS, because of their annoyance that the deal would make them wait much longer for dividends to be resumed than would happen if Lloyds were to stay independent."

Lloyds TSB shareholders should vote against the whole deal in any case - it is a political stitch up and they are the victims. Stay independent - Lloyds TSB is a well capitalised bank - get rid of VB - he seems to be a Brown stooge!

When I acquired some preference shares, on the merger of Birmingham Midhires with HBOS, my Dividend was a set percentage that remained the same from year to year.

Holders of ordinary shares were still paid a Dividend, but it varied from year to year. It could have been more or less than the Dividend on my preference shares.

The only advantage of my preference shares, as I understood it, was that if HBOS went bust (which didn't seem likely at the time), the holders of the preference shares would have first call on the assets of the business when it was wound up.

So I don't have a fudamental problem with holders of ordinary shares being paid a Dividend, provided the Dividend isn't excessive. That's been the problem in the financial system, its excesses....

I presume the Governments thinking was that it is Taxpayers money and we want to get it paid back as soon as possible so we can spend it on the conflict in Iraq and Afghanistan...

I don't actually mind if the Government holds the preference shares indefinitely, as its provides some ongoing control over the Banks and a steady income from the dividends. But if they do want to get rid of them, surely the preference shares can be traded on the stock market like my preference shares in HBOS were?

If the Government pays say £1 per share but they eventually end up trading at £1.50, sell them off Darling !

If you are a shareholder in a business that is paying out 12% in interest on it's preference shares, surely you would want the board to redeem those prefs at the earliest opportunity, rather than pay a divi.

In this way, in the long run, the value in the company will be maximised and everything comes back in the end to the shareholders anyway.

However, taking more of a helicopter view, what company could possibly survive if it had a bust business model, huge potential liabilities (in the form of CDO's), lack of public trust and state intervention?

For this reason I would not touch any of these bank shares with a bargepole and if I was already a shareholder I would be rushing for the exit along with everyone else.

It might be better to have government control over banks as then government will be able to stop excess that happen in the bank; its good for long term.

As things stand interest rate is too high and it should be cut further.

The logic is HBOS and RBS were more at risk due to high expsoure to property market in the UK and high leverage respectively. Are there any numers to say the losses bad loans from Uk property are significant. Whilst provisions are up I'm not sure there is anything yet to suggest a property crash, or is that still to come?

OK bigwaldo so say we're going to pay £200bn for Northern Rock. How much do you think we'll have to pay for a failed HBOS. Without Lloyds higer ammount of assets HBOSs' model is unworkable in the next two to four years.

Sure you can encourage competition or you can set sail an independent HBOS bank onto the vagaries of the market. The stock market would rip it apart atm. You have two choices HBOS to merge with Lloyds or it becomes a fully nationalised bank. If it became a fully nationalised bank the government becomes fully open to risk that it's huger than the whole UK rescue plan. Your choice, but it ain't time to blindly follow Peston's cat amongst the pigeons post of last week. Supposed competition with a government bank or the merger.

I would add a caveat to this in that it is now that others such as Tesco's can make and take a real market share in retail banking. It is up to them to start a clever advertising market. As Peston has pointed out retail banking is a money making machine, it's time a corporation shakes up the monoliths and retaining competition. Oh the irony Tesco's maintaining competition!

I think the Board of Lloyds TSB should either withdraw the offer (about which they have told shareholders nothing) or resign. They are said to be the most efficient bank in the country yet the share price has gone from £10 on 1 May 1999 to £1.60 now. If Mr Daniels is as happy with the bid as reported then I believe he should tell us why, or move aside. Am I missing a political dimension here, with members of the Board said to be friends with Mr Brown? Laugh on Mr Benn - youve got your wish

While the government are in nationalisation mode, perhaps they could consider giving the TSB back to the trustees, from whom it was stolen?