US Treasury Unveil Cunning Plan
US Treasury Secretary Geithner is today expected to lay out details of his plan to address the issue of toxic banking assets. The Treasury's latest brainwave is to clear toxic assets off bank balance sheets will giving investors access to low-cost government loans that could effectively allow them to borrow as much as $6 for every $1 put down as equity.
Isn't that how we got into this mess in the first place?
European Bank Losses Dwarf Those in the US
European banks may be in far worse shape than their American counterparts says John Mauldin, best-selling author and recognized financial expert, who is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore. If what he has to say is true then we could see the pound and euro go a lot lower against the dollar yet. And after Friday's announcement of massive losses at HBOS, he may well be on the right lines:
Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.
As my kids would say, "Really, Dad, you think so?" Europe is somewhat larger than the US, so think what my gold-bug friends would say if the US decided to borrow $25 trillion to bail out US banks. The dollar would be crucified! The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.
Waterfield reports, "National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors -- particularly those who lend money to European governments -- have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
"The Commission figure is significant because of the role EU officials will play in devising rules to evaluate 'toxic' bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries."
Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.
Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany's problems, they may have a long wait.
Big Banks 'Technically Insolvent'
The big US and UK banks are all "technically insolvent" experts warn.
Shares in the big banks have been under pressure all week as fears grow that the government could 'do a Railtrack' by simply confiscating the banks without paying compensation to shareholders.
At the moment Lloyds and RBS seem to be the "bookies favourite" candidates for nationalisation.
However experts warn that nationalisation of the two banks would increase national debt enormously, from 45% of GDP to about 300%. RBS alone has liabilities of nearly £2 trillion.
Meanwhile in the US much-touted economist Nouriel Roubini recently said that US banks are also "insolvent" and credit crisis write-downs there will total $3.6 trillion.
"If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion," added Roubini.
Bank of America's purchase of Merrill Lynch could be the ruin of it, analysts say. The bad assets of the brokerage firm were apparently both huge and well-hidden by management, the brokerage firm's board, or the auditors.
Citigroup's shares yesterday fell to a 17-year low just a few days after announcing a $8.29 billion loss, twice as much as analysts estimated.
There's going to be more tears before bedtime over this lot.
Forget Blue Monday, Today Is Brown Wednesday
Figures today show that unemployment rose by 131,000 in the Sep/Nov quarter, taking the number of people out of work to 1.92 million. The number claiming jobseeker's allowance increased by 77,900 to 1.16 million, according to the Office for National Statistics. Unemployment in the Sep/Nov quarter stood at 6.1%, the highest in a decade, and will surely be significantly higher now.
Meanwhile the number of job vacancies fell to 530,000 in the October-December quarter, the lowest figure since the Office for National Statistics began keeping records in 2001.
Mortgage lending fell by 30% in 2008 the Council of Mortgage Lenders said today.
Meanwhile the inflation rate declined to 3.1 percent in December from 4.1 percent the month before, the biggest drop since records began in 1997.
Gordon McBroon's £100 billion extra to bailout British Banks is already looking like a drop in the ocean.
RBS shares set the ball rolling shortly after the announcement Monday, weighing in with a £20 billion loss, and seeing it's shares fall by two-thirds. Lloyds joined the party yesterday with it's shares declining by as much as 47% at one stage.
Today it's Barclays turn, with it's shares falling as much as 35% already this morning.
Investors are panicking to get out before the whole lot get nationalised.
Analysts working for RBS told the City that "the domestic UK banks are technically insolvent on a fully marked-to-market basis".
Jim Rogers, a veteran US investor, said the UK economy was "finished". Telling Bloomberg: "I would urge you to sell any sterling. It's finished. I hate to say it, but I would not put any money in the UK."
Not So Much A Piggy Bank As A Penny Bank
Following on from RBS's near 66% drop yesterday, Lloyds TSB and Barclays have joined in the fun this morning as fears mount for the future of the entire UK banking industry.
Lloyds shares were down 25% at midday, trading at less than 50p each, having earlier plumbed to 33.8p, a 20 year low.
Barclays are also in the penny-bank club hitting a 17 year low of 70.5p.
By contrast, RBS shares soared to the dizzy heights of 13.1 pence.
The entire market is in meltdown with any one, or all, of the big banks now being seen as prime candidates for nationalisation.
The banks new motto: Be sure your sins will find you out.
RBS Shares Plunge By Almost Two Thirds
Shares in Royal Bank of Scotland tumbled by almost two-thirds after it announced a loss of over 20 billion pounds ($30 billion), the biggest loss in British corporate history.
That's one fifth of this mornings announced government lifeline gone by lunchtime on day one!
At 2pm GMT shares in RBS were down 56.2% at 15.2p, having hit a 23-year low of 12.2p earlier in the day.
They're Off: Two US Banks Fall At The First
National Bank of Commerce trained in Berkeley, Illinois and Bank of Clark County of Vancouver, Washington were first fence fallers in the 2009 Grand US National Banking Steeplechase.
Both banks were closed by regulators on Friday. There were 25 fallers in last years race, up from only three in 2007.
The favourite for this year's race is the heavily backed, Bush trained, Toxic Bank.
Bank of America, trained in Washington by Ben Bernanke is second favourite. A flood of late money for him, $138 billion to be precise, would make this a popular winner as everybody in the US seems to be on him.
Henry Paulson's runner, Citigroup, is also well fancied, but carries a lot of weight for a 197 year old.
Meanwhile the Bernie Madoff trained entry, Ponzi Scheme, was withdrawn under orders, so if you backed him you've lost your money I'm afraid.
People Don't Know Where The Bodies Are Buried
There's nothing like hitting the ground running is there? Never can a US president-elect have had so much on his plate on Day 1 in office.
As fears of much greater than originally anticipated credit losses at top US banks mount, the new Obama regime are said to be considering widespread sweeping steps to kick-start lending.
There is talk of the creation of a so-called "Bad Bank" which would take on billions of dollars worth of troubled securities, reducing bank write-offs and freeing up cash.
If some of the likes of Bank of America and Citigroup are questionable, then everybody is questionable. Nobody knows where the bodies are buried. Are the book value of assets actually worth the paper they are written on? It seems to be a case of "if in doubt, do nowt."
It's becoming increasingly apparent to Obama and his advisers that the removal of all the mutual mistrust in the marketplace, is the only way to get lending back on an even keel.
Interesting times lie ahead. Expect action sooner rather than later.
RBS Cuts 3000 Jobs
The Royal Bank of Scotland (RBS) is to cut about 3,000 jobs in the next few weeks, according to reports this morning.
The positions will go in its global banking and markets workforce, spanning more than 50 countries. Jobs are likely to go in the City of London.
It is understood the bank's High Street operations, and those of subsidiary NatWest, will be unaffected.
RBS, which predicts its first annual loss this year, hopes to raise £20bn as part of the government's bail-out plan.
The bank employs about 170,000 people, of which roughly 100,000 are in the UK.
Earlier this month the group's new chief executive, Stephen Hester, signalled a round of cost cuts in the wake of the bank's rescue package from the Government.
UK: Barnsley Building Society Taken Over
The Yorkshire Building Society is to takeover its smaller rival, the Barnsley Building Society.
The Barnsley said it was protecting itself against the possible loss of up to £10m deposited with Icelandic banks.
The deal is the latest in the trend towards further consolidation among the UK's building societies.
The deal is expected to be completed by the end of the year and there will be no windfall for Barnsley savers, nor will there be a vote of members.
Darling Outlines His Cunning Plan
Alistair Darling has announced details of his cunning plan to save the British banking system.
The government are going to make £50 billion of extra capital available to eight of the UK's largest banks and building societies.
In return the government will get preferential shares in each of them, namely Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.
As part of the package, a further £200bn will be made available by the Bank of England for short-term borrowing to provide liquidity to banks and building societies.
Exactly what happens if you're not one of these eight and need liquidity (and who doesn't?) seems a bit unclear. The Treasury has said that other banks would be able to "apply for inclusion" into the plan.
What criteria they must fulfil to get to play with the big boys, or whether they must borrow at inflated rates from the big boys themselves also seems unclear.
It seems that there will be strings attached for those wanting/needing to participate to prevent them from simply taking the cash & carrying on as before.
HBOS shares are up 25%, RBOS 11% and Lloyds TSB 4.66% in early trade but the FTSE100 is down overall, 128.92 points lower, or 2.8% at 4476.30 as at 8.20am BST.
The pound is a little firmer on the news, rising to $1.7525 from $1.7455 yesterday.
US Have A Cunning Plan To Get Us All Out Of This Mess
They just haven't quite worked it out yet. But they're going to work on it across the weekend and get back to us.
U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke plan to work through the weekend with Congress on the plan to deal with toxic bank assets choking the financial system.
Well, that was good enough to drive up the U.S. stock market by its biggest percentage gain in six years and powering a rally in the dollar.
The news sent Asian shares soaring this morning. Japan's Nikkei jumped 3.5% by afternoon trading. The Shanghai Composite was up 9.5% and Hong Kong's Hang Seng soared 6.5% by noon.
Exactly what form this "cunning plan" is going to take, how much it will cost, and who foots the bill remains to be seen.
There is speculation that one plan being discussed involves legislation that would force lenders to renegotiate mortgages that homeowners are having difficulty paying.
Another possibility is establishing a government agency that would take on the debt.
Meanwhile, UK and US authorities announced plans to curb short-selling of stocks.
At one stage on Thursday, Morgan Stanley's stock dropped as much as 42 percent and Goldman as much as 25 percent, adding to several days of huge declines that have wiped out tens of billions of dollars of market value. However, after news of the moves by authorities in the United States and the UK, they recovered, and were both trading higher in after-hours trade.
World Banking Sector In Turmoil
In the US Morgan Stanley is said to be considering a merger with Watchovia Corp. Such a deal would leave Goldman Sachs as the only independent Wall Street investment bank, after Merrill Lynch sold itself to Bank of America to avoid the same fate as bankrupt Lehman. Shares in Morgan Stanley and Goldman, the biggest U.S. securities firms, tumbled the most ever yesterday as the deepening credit crunch fueled concerns about their ability to fund themselves without the access to deposits that banks have.
Wachovia itself, the fourth-largest U.S. bank, plunged 21 percent yesterday after saying it would support $494 million of Lehman credits held by its Evergreen Investments money market funds.
CNBC reported Morgan Stanley is in talks to possibly be acquired by China's Citic Group, citing an unidentified person. Beijing-based Citic Group is China's largest state-owned investment company. Citic Securities Co., 23.4 percent owned by Citic Group, in March abandoned a proposed $1 billion investment in Bear Stearns Cos. after the Wall Street brokerage was bought by JPMorgan & Chase Co.
Credit-default swaps on Morgan Stanley, which insure against a default of the company's debt, rose yesterday to levels typical of companies in distress. Sellers of credit-default swaps on Morgan Stanley demanded as much as 21 percentage points upfront and 5 percentage points a year today to protect the company's bonds for five years, according to broker Phoenix Partners Group. That means it would cost $2.1 million initially and $500,000 a year to protect $10 million in bonds.
Deutsche Bank AG has said it is taking steps to slow credit-default swap trades that expose it to the risk of failure among Wall Street firms, according to three investors told of the policy.
Lloyds TSB's takeover of HBOS to save Britain's biggest savings bank from collapse could see 1,000 branches closed and cost 40,000 jobs according to the Times.
In Australia this morning Macquarie Group Ltd., Australia's largest investment bank, plunged a record 23 percent on fears for it's safety in the face of a global financial meltdown.
