UK News

Insights from the UK and beyond

from 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 Felix Salmon:

Europe’s insoluble problems

Mohamed El-Erian is calling for massive recapitalization of the banking system:

The global financial system is being refined "day in and day out," El-Erian said, and as a result the balance between public and private is shifting and regulation is altering. "This is not being done according to some master plan," but in reaction to a series of crisis management interventions.

None of these piecemeal policy moves restored confidence in the markets, he said. What is needed is a coordinated and simultaneous set of policy actions globally in four areas: restoration of credit markets, elimination of deteriorating assets from balance sheets, injecting capital quickly into the banking system, and regulatory forbearance.

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:

When investment banks hire risk-takers

Matt Taibbi is quite right about the $2 billion of rogue-trading losses at UBS. Basically, investment banks hire for risk-takers; they shouldn't be surprised when this kind of thing happens.

The brains of investment bankers by nature are not wired for "client-based" thinking. This is the reason why the Glass-Steagall Act, which kept investment banks and commercial banks separate, was originally passed back in 1933: it just defies common sense to have professional gamblers in charge of stewarding commercial bank accounts.

from Felix Salmon:

Dimon vs Vickers

It's beyond ironic -- closer to moronic, really -- that Jamie Dimon would give an interview to London's very own Financial Times, complaining that international bank-regulation standards are “anti-American,” on the very day that the Vickers Report -- Robert Peston calls it "the most radical reform of British banks in a generation, and possibly ever" -- is released.

It's literally unthinkable that the US Treasury would ever dream of doing to JP Morgan what the UK Treasury, here, seems to want to do to the likes of Barclays and RBS. This is a Volcker Rule on steroids -- all retail banking will be ring-fenced and forced to operate with enormous amounts of capital, much more than Dimon is complaining about. It's essentially a break-up, in all but name, of the big banks with both retail arms and investment-banking operations. And it's designed, quite explicitly, to strengthen the UK's banking system by reducing the amount of risk and bolstering financial stability.

from Felix Salmon:

How the UK wants to deal with its biggest banks

In the Republican presidential debate last night, there was unanimity on most issues, including the new orthodoxy on the right that bank regulation -- like any other regulation, for that matter -- is a Bad Thing, and a sign of the government overreaching. It's important to remember that this is not the way that right-wing parties behave elsewhere in the world. Consider for instance the UK, which seems to be cracking down on banks in a manner which would make even Barney Frank blush:

Britain's biggest banks will be forced to put a firewall around their retail operations, the chancellor will announce on Wednesday at the Mansion House...

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:

Immoral bankers

The UK's Institutional Investor Council has issued a blistering report on the excessive fees that investment banks charge companies to issue new shares -- fees which one issuer are "usually immoral". It certainly seems that way, looking at this chart: fees have been steadily increasing over time, even as the discount at which the new shares are issued has got larger and larger. The bigger the discount, of course, the less risk taken on by the underwriter, since the more that the share price would have to plunge overnight in order for the underwriter to risk losing money on the deal.


Yes, this chart includes the financial crisis, and it stands to reason that fees for rights issues would rise during a crisis. But we're not in a crisis any more, and the fees aren't coming down to their historical levels, even though the discounts are still enormous. And it's notable that fees hit these highs on a percentage basis just as the amount of underwriting was surging:

from The Great Debate UK:

EU stress tests: for banks or governments?

- Laurence Copeland is a professor of finance at Cardiff Business School. The opinions expressed are his own.-

Worries about Europe’s banking system go back at least to 2007, but whereas the U.S. (and UK) banks appear to have weathered the storm, there are fears that for European banks the worst may lie ahead.  Concerns centre on four areas.

from Felix Salmon:

BP: Now more evil than Goldman Sachs

There will be rejoicing in the corridors of Goldman Sachs tonight: BP has finally overtaken it in the most-loathed company stakes! Yes, Goldman is still plumbing depths rarely seen in the modern era. But BP, even after putting aside $20 billion and grovelling to the president, continues to implode: it's now hit a level of -47.6 in the latest BrandIndex poll. That's not far from Toyota's low point, which was -52.7 at the end of March, but it's going to be a much harder fight back for BP than it was for Toyota.

It's amusing to remember that earlier this year BrandZ put out a piece of glossy research saying that the BP brand was the 34th most valuable brand in the world, worth $17.283 billion. (Love the specificity there.) Is it possible for a brand to have negative value? If so, BP has probably achieved that distinction at this point.