| .News .News. News. News. News. News. Banks merge/fail as crunch bites, UK/US announce rescueIn a turbulent time that will be remembered for many years to come, the credit crunch claimed a slew of victims recently. Lehman Brothers filed for bankruptcy and shed thousands of jobs, AIG needed US government help to avoid collapse, Merrill Lynch was forced into a takeover by Bank of America and the remaining US investment banks – Goldman Sachs and Morgan Stanley – both applied to become commercial banks in order to be able to take deposits and give themselves a chance of riding out the financial crisis. In the UK, HBOS was forced into a merger with LloydsTSB to save it, Nationwide took over the Cheshire and Derbyshire building societies, Yorkshire swallowed the Barnsley building society, and Bradford & Bingley (B&B) joined the Rock in government hands. None of these events dissipated the financial crisis gripping the world however, as Iceland’s economy imploded and RBS and HBOS shares fell by nearly 40 per cent on 7 October, prompting the UK government to announce a £50 billion equity rescue plan the next day for the country’s banks. The £500 billion rescue package includes £200 bn in extra liquidity for the markets and a £250 bn loan guarantee to encourage inter-bank lending. The first banks to take up the government’s offer on 13 October were RBS and LloydsTSB/HBOS, which respectively agreed to sell a 60% and 40% equity stake in their business to the UK government for £20 bn and £17 bn respectively. More banks are expected to join the humiliating part nationalisation scheme in the following days. The move follows the US government’s earlier £390 billion bail-out for Wall Street firms, which now includes a £142 bn part nationalisation scheme itself, similar to the UK government’s initiative. Many EU countries also acted to counter fears of a complete collapse by announcing a similar £750 bn bail-out The UK’s government’s bail-out plan involves giving eight of country’s largest banks the money that they need to stabilise their capital ratios, up to an initial figure of £50 billion, in return for an equity stake in the business. In effect, it is a part nationalisation involving some of the High Street’s largest institutions and clearing banks, such as RBS, LloydsTSB/HBOS, and possibly the Banco Santander-owned Abbey group, which also now includes the Alliance+Leicester and parts of B&B. The more vulnerable banks, such as RBS, will take up the money first, with others joining later if it is deemed necessary. Barclays Bank is to stay outside of the UK government's equity scheme because it wants to protect its right to pay shareholders a dividend and to be able to set its bonus package for leading staff, without having to abide by governmental restrictions on such matters. The bank is therefore planning to raise £7.3 bn from Arabian state investment funds and the royal families of Qatar and Abu Dhabi. The move would give middle eastern investors a 32 per cent stake in Barclays. Whether money is gained from the UK taxpayer or other investors, it's obvious that moves to shore-up the capital reserves of UK banks are timely and needed if bankruptcy is to be avoided. An additional £200 billion is available from the UK government in the form of liquidity to the markets and the Labour party government is also guaranteeing any loans that the banks make to each other for the next three years, up to £250 bn, in an effort to get the money markets moving again and eliminate the ‘stickiness’ that has gummed up the financial sector recently with institutions unwilling to lend to each other. Taken together, the package is the biggest financial rescue plan to be implemented since the post-WWII period and it comes with strings attached, such as preferential treatment for the taxpayer’s shares and a limit on executive pay, bonuses, dividend payouts, and other matters; all to try and win the general public’s backing for the plan, something sorely lacking when the US government first proposed its £390 bail-out plan, which was initially rejected by the House of Representatives. Commenting on the UK move, the Chancellor Alistair Darling, said: We are working closely with the Governor of the Bank of England [Mervyn King], the Financial Services Authority and financial institutions [themselves] to put banks on a longer-term, sound footing.” More frankly, Vince Cable, the opposing Liberal Democrat Treasury spokesman, who supports the recapitalisation idea, said: “We are dealing with an emergency problem here. It is the only way these banks are going to be able to survive the storm.” European fallout Bradford & Bingley was effectively nationalised on 29 September as the government took control of £50 billion of mortgages and loans, with Spain’s Banco Santander paying £20 billion for its savings unit and branches. The UK government is however expecting the industry to pay for its excesses this time with the industry-funded Financial Services Compensation Scheme expected to cover any losses it makes in future as a result of taking on B&B’s mortgages and loans. The price could rise as high as £9 billion. The still to be confirmed £12.2 billion deal for LloydsTSB to take over HBOS will mean the combined entity holds nearly a third of Britain’s savings and mortgage market but competition watchdogs won’t block the deal as it has government backing. The Nationwide deals to acquire the Cheshire and Derbyshire building societies are similarly backed and will create a mutual with £191 billion in assets and 15 million members. The takeover of the Barnsley building society by the Yorkshire was announced on 22 October and was precipitated by the loss of £10 million in deposits held with bankrupt Icelandic banks. 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. "The proposal follows swift, pre-emptive action from the board of the Barnsley in approaching the Yorkshire to seek a merger after the identification of possible losses of deposits with Icelandic banks," the two societies said in a joint statement. In a fast-moving situation, who knows what institutions will fall next or if the UK government’s rescue plan will finally calm the febrile markets? It promises to be a bumpy ride for the sector, as it has been for the last month or so, but one thing that can be said for certain is that the fallout is likely to accelerate the shift in economic power from west to east, and the number and size of IT contracts available to the major vendors from the financial services sector is likely to fall sharply as budgets evaporate or are severely squeezed. Jobs are also likely to be shred from the financial services sector fast, with possibly hundreds of thousands of positions disappearing over the next year. For a full report on the possible affects of the crunch on the technology sector please read FST’s credit crunch feature here... |
  
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