The Great Debate UK

How will the privatisation of RBS and Lloyds affect gilt supply?

–Sam Hill is UK Fixed Income Strategist at RBC Capital Markets. The opinions expressed are his own.–

The return of RBS and Lloyds to the private sector is moving up the agenda but as the UK government prepares to set out the strategy for privatisation, the spotlight will, once again, fall on the gilt market and the public finances.

Equity injections approaching £70bn at the nadir of the financial crisis may have provided the banks with a lifeline, but the imprint on the UK’s public finances remains severe. Along with restructuring loans and compensating depositors for failures at other domestic and foreign financial institutions (e.g. Bradford and Bingley, Northern Rock, the Icelandic banks), recapitalising these banks required the government to turn to the gilt market for financing. In financial years 2008-09 and 2009-10 cash totalling £120bn was raised solely for these interventions. This was on top of the £240bn cash requirement needed to plug the rest of the budget deficit.

It was always intended that RBS and Lloyds should only have a temporary period of public ownership but the share prices have not recovered sufficiently to allow the government to fully break even on its investment. On examination though, £13.8bn of the cash raised for supporting Lloyds and RBS was recorded at the time as a permanent hit to the public finances, largely reflecting the loss on buying some shares above the prevailing market level, and should be deemed irreversible. The government therefore has the opportunity to stick to the break-even principle, by targeting privatisation proceeds sufficient to recover the portion of the intervention recorded as temporary. That amounts to £55.1bn, or a 61 pence target for Lloyds shares and 410 pence for RBS.

from The Great Debate:

A blueprint to make banks behave

Banking integrity has become an oxymoron. Top bankers need to change this and take responsibility for tackling ethical issues. For this to happen, every part of the organization – from senior management to human resources managers to those on the trading floor and beyond – should be assessed according to the contribution it makes to promoting ethical values, not just the bottom line.

The investigations into the LIBOR rate-rigging scandal showed how commonplace bribery among dealers had become. For example, between September 2008 and August 2009 a single trader at the Royal Bank of Scotland had made corrupt payments to interbank brokers on 30 occasions, by means of risk-free transactions known as "wash trades."

from James Saft:

Britain eats (leverages) its young

James Saft is a Reuters columnist. The opinions expressed are his own.

Four years, several failed banks and at least one global recession later, Britain has finally discovered what its young people need: 19-1 leverage.

Britain has announced a new housing initiative, the centerpiece of which is a plan to entice first-time buyers into buying newly-built properties with as little as 5 percent down.

from Felix Salmon:

Lagarde leads from the front on Europe

Going into the Jackson Hole conference, everybody was breathlessly awaiting Friday's speech from Ben Bernanke, which turned out to be incredibly boring. The most important speech of the meeting, by far, came on Saturday, and came from the new head of the IMF, Christine Lagarde. In decidedly undiplomatic prose she came right out and said what needed to be done:

Two years ago, it became clear that resolving the crisis would require two key rebalancing acts—a domestic demand switch from the public to the private sector, and a global demand switch from external deficit to external surplus counties... the actual progress on rebalancing has been timid at best, while the downside risks to the global economy are increasing...

from Felix Salmon:

Why the Fed needs to replace bark with bite

Antony Currie has a response today to those who say that the Fed's U-turn on swipe fees "makes it look as if it can be cowed by the kind of intense lobbying the banks unleashed." (Yes, that would be me.)

Antony reckons that the final figure of 21 cents "is actually a decent compromise," and that "the Fed made the right call" -- but it's not entirely obvious why he thinks that. He says that the lower 12-cent figure was opposed by banks (duh) and "other senior banking authorities"; this is true, but it's not in and of itself a reason to backpedal.

from Felix Salmon:

Greenspan squanders his final reserve of credibility

Thank you, internet: Henry Farrell and his commenters have all the snark so desperately required in response to Alan Greenspan's ludicrous op-ed in the FT. And they're not alone: as Alex Eichler notes, "everyone is laughing at Alan Greenspan today". Greenspan could hardly have made himself look like more of an idiot if he'd tried, not only because the "notably rare exceptions" construction is so inherently snarkworthy, but also because it's so boneheadedly stupid. Anything which normally makes money is a good idea if you ignore the times that it doesn't work.

That said, it's worth looking in a bit more detail at Greenspan's nutty ramblings, because scarily they're actually representative of what much of the financial sector believes these days. (And Clive Crook, too.) The context is the GOP-controlled Congress, which has the ability to hobble or even abolish key parts of Dodd-Frank. And Greenspan is urging them on, saying that the early consequences of Dodd-Frank "do not bode well". In order to do this, he first sets up a straw man, saying that Dodd-Frank was designed to "readily address" the causes of the financial crisis. It wasn't, of course, but Greenspan pretends it does, and proceeds to give five examples of how it fails to do so, helpfully delineated with bullet points.

The silent revolution in banking

Sanjeev-SinhaBy Sanjeev Sinha

Media coverage of the banking industry was once confined to newspapers’ business pages, but has now spilled over to headline coverage. Recently the remuneration of bankers has been treated with even more interest than the salaries of top football players.

Yet while newspaper readers have become familiar with the LIBOR rate and discussions about cash reserves, there has been a long process of banks restructuring operations that has nothing to do with mergers or nationalisation. A behind-the-scenes revolution has been taking place, driven not only by the need for cost saving but, more importantly, to improve efficiency, and enable them to compete in global markets. Increasingly, banks have been looking at outsourcing a wider range of functions as a response to global market challenges.

from Felix Salmon:

Goldman’s Facebook plan falls apart

When the news came out that Goldman Sachs was orchestrating a private offering of Facebook shares at a $50 billion valuation, those shares overnight became an even hotter commodity than they had been up to that point. Check out the results of the periodic SecondMarket auctions: the three auctions in December, before the Goldman news was public, cleared at between $21.01 and $22.75 per share. The first auction after the Goldman news, by contrast, cleared at an all-time record of $28.26 per share -- that's a valuation of over $70 billion.

Clearly the Goldman news moved markets -- a lot. And equally clearly, that's very problematic in terms of securities law. Andrew Ross Sorkin explains why Goldman now feels forced to restrict its offering to non-US investors:

from Felix Salmon:

Dealing with Britain’s overpaid bankers

Bagehot has a very odd column about Britain's overpaid bankers. Part of it is spot on:

One shorthand description for the New Labour boom years is: Gordon Brown let a deregulated City rip, then used the tax revenues to fund a dramatic expansion of the state.

from Felix Salmon:

Facebook doesn’t care where Goldman gets its funds

The NYT is reporting that Goldman Sachs only made its $450 million investment in Facebook after its in-house private equity fund, Goldman Sachs Capital Partners, passed on the deal.

Many people -- including the NYT -- have been talking a lot in recent days about the "ancillary business" that Goldman is likely to get as a result of this investment, including fees from any future IPO and wealth-management fees for looking after Mark Zuckerberg's fortune. There's no formal agreement about any such things, I'm sure, but the general understanding seems to be that if Goldman scratches Facebook's back by raising a couple of billion dollars for it now, then Facebook will scratch Goldman's back in future with various lucrative bits of investment-banking business.