RBS nationalised as part of rescue deal - LONDON
Britain to also take major share in merged HBOS-Lloyds; bonus culture to go
By NEIL BEHRMANN
IN LONDON
ROYAL Bank of Scotland (RBS), HBOS and Lloyds TSB, three of Britain’s leading banks, have effectively been nationalised.
In a dramatic announcement to the stock exchange, the government signalled that taxpayers would be investing £37 billion (S$94.8 billion) and would get a controlling stake of RBS and a large proportion of a merged HBOS/Lloyds TSB.
Premier Gordon Brown unveiled plans to potentially take a 57 per cent stake in RBS and the government may end up owning 43 per cent of the combined Lloyds TSB-HBOS group.
On news of the part nationalisation, bank shares slumped. The dramatic move, however, restored some stability to equity and credit markets. After slumping by 9 per cent last Friday, the FTSE 100 index rallied by almost 6 per cent in early morning trade yesterday.
The index then fell back mainly because banking shares tumbled. Shareholders were concerned about the government’s purchase of a majority stake in RBS and the bulk of the shares in the expected merger of Lloyds Bank and HBOS. RBS agreed to accept £20 billion from the government; HBOS, £13 billion; and Lloyds TSB, £4 billion.
Barclays said that it would not need government funds and instead asked private investors to purchase a further £6.5 billion in new shares. HSBC also said that it did not want UK government capital.
The good news, however, was that the UK government’s move and a European nation agreement to prop up the banking sector are at last providing some welcome relief for credit markets. Money-market rates in Europe have at last begun to fall as banks gained confidence that they would be backed by unlimited funding from governments and central banks.
The euro interbank offered rate, Euribor, for one-week loans, dropped 26 basis points to 4.37 per cent yesterday, the biggest decline this year, according to the European Banking Federation.
The London interbank offered rate, Libor, for three-month dollar loans, dropped seven basis points to 4.75 per cent, the largest drop since Dec 28, the British Bankers’ Association said.
The rate declines are the first signs that the interbank lending gridlock is beginning to ease, thus allowing banks to lend more to companies. Libor determines the rates on US$360 trillion of credits and credit derivatives and if lending, as hoped, returns to normality, companies will have the working capital to carry out business.
In a move that will be popular with the British electorate, the government is stamping on the despised banking bonus culture, regardless of mismanagement and poor performance. RBS chief Fred Goodwin has been ousted and has been forced to forego a £1.2 million payoff. RBS chairman Tom McKillop will step down next April. None of the remaining directors in the three banks will now get cash bonuses. Nor will the three banks pay out any dividends until the government’s interest in preference shares has been fully repaid.
Insiders describe the talks between the UK Treasury, the prime minister and Chancellor Alistair Darling as ‘brutal’. Mr Darling insisted that there would be ‘guarantees’ that the banks increase lending to small firms and assist mortgage-holders at risk from losing their homes. Three government directors will take seats on the board of RBS, while two directors will go on Lloyds TSB’s board.
The government’s emergency decision comes after the failure of the banks to raise private capital last week. The UK Treasury is buying RBS shares at around 65.5 pence each, compared with the 546 pence price of a year ago. The government aims to make a profit for the taxpayer once the market recovers and eventually sell off its shares. ‘If you allow the banking system to go down, everybody else will come down with it and you can’t allow that to happen,’ Mr Darling said.
Meanwhile, the UK Financial Services Authority (FSA) promised ‘immediate action’ if bank and broker bonus policies were not reformed. In a letter to city chiefs, FSA chief executive Hector Sants said that there was ‘widespread concern’ that excessive bonuses had ‘contributed to the present market crisis’.
The letter said that remuneration policies for traders and bankers ‘frequently gave incentives to staff to pursue risky policies . . . to the detriment of shareholders and other stakeholders, including depositors, creditors and ultimately taxpayers’.
Source : Business Times - 14 Oct 2008
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