The UK bank bail-out: some notes for idiots


11:42 am - October 14th 2008

by John B    


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Note 1: Lloyds TSB’s involvement in the government plan to stop RBS and HBOS collapsing is not evidence that Lloyds TSB’s own loanbook was dodgy, or that it had funding problems: rather, it’s taking the government bail-out money so it can buy a bank with assets equal to its own for half the price.

Note 2: it is probably true that as a shareholder, having the government take a majority stake in your company for far less than the price you paid isn’t ideal. However, if the alternative is that the company goes bust, then it’s still a pretty good deal for you. So anyone suggesting that the bail-out is bad news for HBOS or RBS shareholders is entirely clueless.

Note 3: if you were looking to ‘featherbed Scottish jobs’, then creating a nationalised HBOS would be a better way of doing that than the alternative of selling to an English-based bank with a large existing Scottish branch network.

Note 4: if, in 2003, you say “house prices are going to crash and we’re all fuxxored OMG OMG!!!!”, that doesn’t mean that you’re prescient for projecting a downturn in 2008, it means that you’re a moron (see also: anyone who thinks that the current problems invalidate the concept of fractional reserve banking, aka “the main thing which turned us from being really poor to being really rich”).

Note 5: the taxpayer isn’t “footing the bill” for anything. The taxpayer is getting an excellent portfolio of assets, which will be worth a great deal of money in five years’ time, for next to nothing. I don’t normally believe it’s appropriate for the government to engage in financial speculation, hence why people who think Gordon Brown should have run the government’s currency portfolio as a commodities hedge fund are morons, but in this particular case it’s an excellent call. Hell, I’m currently looking to buy Lloyds TSB stock because they’re so clearly undervalued today given the brilliant deal they’re doing [*] – and I’m certainly not getting the ‘borrowing at 5% and lending at 12%’ which makes the government’s preference shares an incredibly good deal.

[*] NB I’m not a UK retail banking analyst or fund manager, and I’m not qualified to offer financial advice in the UK or elsewhere. My view is based on publicly disclosed information only, and may turn out to be nonsense – I’m piling in a bit of spare cash, not my life savings.

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About the author
John Band is a journalist, editor and market analyst, depending on who's asking and how much they're paying. He's also been a content director at a publishing company and a strategy consultant. He is a regular contributor to Liberal Conspiracy and also blogs at Banditry.
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Reader comments


There’s probably also something to be said about the idiots who keep asking how much all this is going to cost taxpayers…

Yes good point – added.

Hmm… buying HBOS stock is probably a good idea right now too…

But I have a feeling the market may tank again once the recession news kicks in.

I’d be a bit warier about HBOS simply because without the Lloyds deal, they’d still be weak-ish even after the current capital round. Lloyds shares will rise in the short term if the HBOS deal collapses, because it’ll improve two-year returns; or they’ll rise in the long term if it goes through. HBOS shares will buy Lloyds shares if the deal goes through, but there’s a lot more risk there if it doesn’t.

I’m not sure the market has bottomed out yet, so I wouldn’t advise buying. At least not yet. I’d say it won’t be until after Christmas before you’ll manage to measure value with any accuracy.

I doubt the FTSE350 has bottomed out; but frankly if LTSB shares haven’t bottomed out (or near as dammit – I’ve no objections to going in at the start of a J-curve) then the implied value for secure UK banks implies a “shotguns, tinned food and bottled water” scenario.

Meanwhile, I’m loving the public’s ignorant comments on the excellent Robert Preston’s latest piece. Best so far is:

What we now have is Britain and the US with semi-nationalised banks trying to compete with free European and Asian banks like Santander and HSBC.

Err, yeah. Damn those free European and Asian banks like HSBC, Standard Chartered and Barclays…

I don’t understand Peston’s qualifications for the job he is in.

His credentials are his contact book, but the one-sidedness of his sourcing undermines his ability to report with impartiality (let’s leave aside the question of how his obvious political alliegences allow him to be manoeuvered with such ease) – perhaps he should talk to Andrew Gilligan about the trouble it can cause a BBC journalist.

But I have a feeling the market may tank again once the recession news kicks in.

Sunny – almost without fail, a new US President leads to a rally on shares. A spike in the Dow is likely to lead to increased value in the FTSE.

I think it’s as safe a bet as you can get in this Bear market. Expect to see a mild New Year recovery, only to see the real recession hit later.

The taxpayer may not be footing the bill, but our national debt exposure will go through the roof. The “official” level is at £550 billion, but when you add on PFI debts, nuclear decommissiong costs, Network Rail debt (i.e. quasi-private debt) and public sector pension liabilities, it’s over £1.3 trillion. That’s over 100% of GDP. Terry Smith (chief executive of money brokers Tullett Prebon) was on the Today Programme a few days back. He said that the government’s deal would lead all the short-sellers who have been testing HBOS, Bradford and Bingley etc to test the “credit worthiness of the guarantors, the government.”

The problem isn’t fractional reserves as such, so much as the fact that the reserves are not determined by any market mechanism: http://blog.iea.org.uk/?p=129

Is everyone who disagrees with you ignorant, an idiot or a moron?!

Are you one of those stockmarket bulletin board “rampers”?

For what it’s worth:

“None the less, within the Sweden example lies a stark warning to Britain: for all Mr Brown’s insistence that the British public’s investment will be recouped, Swedish taxpayers got only half their money back.”

http://www.telegraph.co.uk/news/worldnews/europe/sweden/3189982/Financial-crisis-Gordon-Browns-bail-out-recalls-Swedish-solution.html

Isn’t Lloyds selling at around 0.8 x book value?
Cheap maybe, but not “shotgun” levels, especially when you consider that UK housing may have a further 20%+ to fall before anywhere near normal historic relationship with earnings is reached?

: the taxpayer isn’t “footing the bill” for anything. The taxpayer is getting an excellent portfolio of assets, which will be worth a great deal of money in five years’ time, for next to nothing.

You heard it here first – but at least John b isn’t on the hook for professional indemnity insurance. I personally believe that RBS have already written off a lot of the worst shite, but who can predict what is to come, unless you can prognosticate as well as john b? Was it not a month or 2 ago that he claimed that the damage to the UK economy was limited to some falls in the prices of a few houses?

The “official” level is at £550 billion, but when you add on PFI debts, nuclear decommissiong costs, Network Rail debt (i.e. quasi-private debt) and public sector pension liabilities, it’s over £1.3 trillion. That’s over 100% of GDP.”

No. You can only reach that kind of terrifying figure by counting all state-sector pensions at commercial pension accounting rates – which is not the way any other country does it (so ‘fine, but whatever’). The NR, nuke and PFI costs total a couple of % between them.

Is everyone who disagrees with you ignorant, an idiot or a moron?!

I’m not saying it’s causation, just correlation.

especially when you consider that UK housing may have a further 20%+ to fall before anywhere near normal historic relationship with earnings is reached?

…which is fine for Lloyds of “hello, put up a deposit, person with an income” mortgage fame, but buggerises HBOS of “hello, unemployed person, have 125% of your made-up income” fame.

It’s possible that the management of Lloyds are the worst people ever, but it’s more likely that they feel that taking on HBOS’s written-down assets for next to nothing in exchange for a couple of dividend-less years and a small, short-term government shareholding is a Good Idea.

i bought rbs shares last monday 13th oct 2008 for 59.8 and its looking pretty quite fancy hbos i am very new to this any advice anybody i am in this for long term value many
any hints or tips to look out for?

“’m currently looking to buy Lloyds TSB stock because they’re so clearly undervalued today given the brilliant deal they’re doing”

How much did you lose? The bailouts in there various forms are in no way a good deal for the tax payer. If they were a good deal an actual company would have bought them anyway – the government bought them because nobody else would and there’s a big big reason for that.


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