Margareta Pagano: There's no gain, just pain – you can bank on it

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The Independent Online

As Al Pacino said in Carlito's Way: "Here comes the pain." And it's going to be serious pain, with more of the UK's high street banks in deep trouble. Their shares were in freefall again last week, with investors wanting to know when they were going to start repairing their balance sheets. But which bank will be first to break cover and how will it do so? Will it be through rights issues, fire sales or bringing in new strategic investors?

Royal Bank of Scotland, Barclays and HBOS are the banks most in need of urgent fixes. Once the star of the banking industry, Sir Fred Goodwin of RBS – known as Fred the Shred for his slash and burn tactics – is under the greatest pressure. Having swallowed ABN Amro for £53bn last year, he now needs a bit of fattening up himself. RBS is one of the most stretched of all European banks and may need as much as £12bn of fresh capital to bring its equity ratio back to the right level.

The Credit Suisse banking analyst Jonathan Pierce – who spotted Northern Rock's failings way ahead of the market – reckons Sir Fred has six options to get himself out of the shredder: tapping shareholders for new money; selling assets, cutting the dividend; buying a big US bank to give RBS the capital it needs; bringing in an outsider investor; or doing nothing. Of all the choices, Mr Pierce is right in opting for the rights-issue tactic, arguing that it is not too diluting and the easiest way to restore capital and confidence. He is not confident, however, that Sir Fred will grasp the urgency, and has cut his target for RBS from 455p to 400p.

That's why banking shares are so depressed; the market has discounted the rights issues it expects over the next few weeks when the banks reporting season starts. RBS's shares are down 43 per cent on the year, while Barclays, HBOS and Alliance & Leicester are all 37 per cent lower. Investors know the banks will have to turn to them for cash, but think privately that banking chiefs are in denial.

Even the most cautious estimates are for £77bn of new capital to shore them up. Yet the latest estimates from Standard & Poor's, show even more may be needed. The ratings agency says losses from securities backed by sub-prime mortgages could soar to more than £133bn, while it has down-graded or put on credit watch another $534bn worth of assets related to the US sub-prime market. This could spark further writedowns of another $175bn on top of the $100bn already written off.

If you think the numbers are mind-boggling, it's because they are. But liquidity will come back into the markets and the banks will start lending to each other again only when they get their houses in shape. Then perhaps the vicious circle in the credit markets can be squared.

Cash is King

Equally mind-boggling was the £22bn from Microsoft for Yahoo!, Wall Street's biggest hostile takeover, while a Chinese company made history with the country's biggest overseas purchase when Chinalco bought a stake in miner Rio Tinto Zinc, sending share prices soaring around the world. While both deals set records, what they showed most was how cash is still king.

Dancing around SocGen

Crédit Agricole's boss, René Carron, likes to tango. He is also shrewd, having worked his way up from herding cows at his tiny farm in the Savoy mountains to running Agricole, Europe's biggest bank. Mr Carron is a hero in French banking circles, but an unconventional one. He emerged from the shadows a few years ago to take command of the long-running battle against BNP Paribas for control of Crédit Lyonnais. He won. Since then, he has waltzed his way through Europe. In the UK, he eyed Alliance & Leicester, but decided then (maybe not now) that it was too expensive.

Not surprisingly, Mr Carron, who is said to have hired Lazard as an adviser, is being touted as a king-maker in any bid for troubled Société Gé*érale,. The other main contender involved in a potential break-up remains BNP. But the mood in Paris is that SocGen should stay independent if it can. If that changes with an outsider bid, then expect Mr Carron and his rival at BNP, Michel Pébereau, to be at the table.

Neither would be allowed to take the retail branches as that would give them too big a market share, and too many job losses, but they might cherry-pick some of the wholesale banking. That leaves investment banking up for grabs, which would need a truly strong partner, maybe one of the other big savings banks. Even Mr Carron's tango is not up to the hip-swinging of investment banking.