British banks are 'technically insolvent'
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Independent Minds
Britains biggest banks are "technically insolvent", Royal Bank of Scotland said yesterday, as the global banking industry was rocked by another day of turmoil, including the announcement of $23bn (£16bn) of new losses from Merrill Lynch and Citigroup, the giant US institutions.
Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that "the domestic UK banks are technically insolvent on a fully marked-to-market basis".
The warning does not mean British banks are about to go bust, because the assessment is purely theoretical, and RBS said the position was "not unusual at this stage in the economic cycle".
However, it will add to pressure on the Government to provide more support for the country's banks. Treasury officials are now set to spend this weekend in talks about a fresh round of measures, which could be unveiled as early as next week, to free up lending to households and major corporations hit by the credit crunch.
The value of Barclays fell by a quarter in stock market trading yesterday, amid a series of wild rumours about its finances, although the bank said it saw no need to comment on the drop. Its board said in a statement last night that it knew "no justification for the fall".
The statement said next month the bank expected to report that profits before tax for 2008 were "well ahead" of the £5.3 billion forecast by analysts.
City analysts said the bank had been targeted by traders after regulators lifted a ban yesterday on the short selling of financial stocks. Barclays' share price, along with the value of other British banks, was also hit by dismal news from the international markets, including the announcement on Thursday night that the Irish government was nationalising the Anglo Irish Bank. In the US, Bank of America announced yesterday that it was taking a $20bn injection of emergency funding from the US government, subsequently revealing that Merrill Lynch, the investment bank it rescued last year, had lost more than £15bn in the final three months of last year.
Citigroup, once the world's largest bank, announced more than $8bn of losses for the final quarter of last year, and revealed plans to split itself in two.
Treasury officials were still discussing plans to help British banks last night but the proposals are likely to include up to £100bn of new guarantees for the wholesale markets that underpin mortgage and other loans.
Other possible measures being considered include state support to help Britain's largest companies raise their own funds. Another option is to launch a "bad bank" to remove tainted assets from the banks' balance sheets, though while this policy is under consideration, it is thought to remain some way off.
Other proposals include ring-fencing the toxic assets within bank balance sheets. Lord Mandelson, the Business Secretary, has also talked of easing the terms of the Government's £37bn bank bailout in order to kickstart lending. Downing Street made it clear yesterday that the Government remained committed to doing "whatever is necessary to help British businesses and families get through this global financial recession".
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Comments
The whole thing can only work with constant 'consumption' by the public. That's fine if the world's natural resources are essentially infinite, as was the case back in the 17th century when modern banking started. We now know that isn't true any more. But we're still behaving as if it is, like lemmings rushing towards a cliff.
The only person i hear talking any sense about this right now is the Democrat Congressman Denis Kucinich, who's been calling for the Federal Reserve to be nationalised (it's currently a private institution).
I have also been recommending the 'Money as Debt' video to people - It's quite long, but definitely worth the time. Here is the link again:
http://video.google.com/videoplay?d
Surely it is not beyond the ability of our governments and economists to create a more stable system that serves the people better, and is not in the hands of private companies.
School boy error.
Please correct
The media need to focus on yesterday?s falls in the last hour of trading; it was purely organised short selling. I have open long positions in RBS,LLOY and BARC as I see value at these prices which are trending 1978 lows.
Having watched the falls live through my level-2 system, it was extremely aggressive and out of character. The force of the shorts in Barclays must have been around 2 billion to bring the stock down to 95p within 30 minutes without any rumour of a profit warning.
Barclays had no choice but to come out and make a statement to protect share holder interests late last night.
Barclays quote:
Our results will be well ahead of analyst forecast; quoting we know of no reason for today?s fall in our share price.
The fall in Barclays share price was down to one reason and one reason only! Organised bear raid from U.S hedge funds.
How long will the FSA continue to see U.K banking stocks eroded to the floor once again?
Until the FSA step in with a new ban to protect share holder value, I see further share price erosion.
Now for the solvency phase.
UK banks will continue to contract for at a couple of years in my opinion as they adjust to the loss of the "carry trade" funds present in the money markets until the 4Q of 2008. Given their business will contract by, say, 30% over the next couple of years, can a profitable business be constructed from what remains?
Undoubtably yes, but the businesses will need to contract further. Lloyds/HBOS will take a huge mauling, with 10s of thousands of jobs going, almost exclusively at Halifax in England and LloydsTSB in Scotland. At least something will survive, in my opinion. RBS, I think is beyond hope, it will be broken up, with European banks such as Santander favourite to pick up the UK retail arm.
Of course the Bank of England acting in this way would be some sort of insider trader. They, or the FSA, are probably in the best position to determine the RELATIVE values of different banks. If this is the case, then the risks are minimal.
Now for the solvency phase.
UK banks will continue to contract for at a couple of years in my opinion as they adjust to the loss of the "carry trade" funds present in the money markets until the 4Q of 2008. Given their business will contract by, say, 30% over the next couple of years, can a profitable business be constructed from what remains?
Undoubtably yes, but the businesses will need to contract further. Lloyds/HBOS will take a huge mauling, with 10s of thousands of jobs going, almost exclusively at Halifax in England and LloydsTSB in Scotland. At least something will survive, in my opinion. RBS, I think is beyond hope, it will be broken up, with European banks such as Santander favourite to pick up the UK retail arm.
Short-selling consists of selling shares you don't own, but have borrowed.
Why isn't short-selling considered fraud, therefore?
And secondly, why would anyone lend shares to a known short seller? The value of the borrowed shares is expected to decrease, indeed it's the aim, so this seems a very curious way to behave with one's assets.
What people don't realise is that you CAN instruct your broker not to lend out your shares to anybody. I am speaking for the US now but presume that this is the case in the UK. Obviously as a small shareholder you would make very little difference but I have seen it done succesfully here in the US when a group of shareholders managed it on a message board, albeit with a thinly traded stock and low float. Don't forget that institutions that have long positions would allow their shares to be shorted as they would, if they had any sense, have an option (probably a put) on the same stock to lock in the profits on the way down-thus being a "win-win" situation. Hope this explains it a little.
The modern financial fiasco is just a situation where the gamblers namely the hedge fund managers and derivative mangers are no longer able to settle their gambling debts resulting in people losing their life savings and pensions.
Indays gone by these people were called pirates; nowaday the sons and daughters of pirates dress up as city bankers and conn the world in parting with our; after all we are the fools who bought into the scam.