State to save HBOS and RBS

Government set to become biggest shareholder in top banks as Japanese weigh bid for Morgan Stanley

John Waples and Iain Dey

THE government will launch the biggest rescue of Britain’s high-street banks tomorrow when the UK’s four biggest institutions ask for a £35 billion financial lifeline. The unprecedented move will make the government the biggest shareholder in at least two banks.

Royal Bank of Scotland (RBS), which has seen its market value fall to below £12 billion, is to ask ministers to underwrite a £15 billion cash call. Halifax Bank of Scotland (HBOS), Britain’s biggest provider of mortgages, is seeking up to £10 billion. Lloyds TSB, which is in the process of acquiring HBOS in a rescue merger, wants £7 billion, while Barclays needs £3 billion.

The scale of the fundraising could lead to trading at the London stock market being suspended. This would give time for the market to digest the impact of the moves.

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Separately, the future of Morgan Stanley, the American investment bank, is also in doubt today following a sharp sell-off of shares and warnings of a possible credit downgrade from Moody’s the ratings agency. Mitsubishi UFJ Financial Group is reviewing the terms of a $9 billion (£5.3 billion) capital injection into the bank and may launch a takeover. HSBC, Citigroup, JP Morgan and Deutsche Bank are also assessing the situation. Morgan Stanley’s market value has slumped to $13 billion.

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Mervyn King, the governor of the Bank of England, has told the banks to ask for more than they need. This is to make sure that their capital position is strengthened sufficiently to absorb shocks and to withstand a long recession. Further capital is also available and the Treasury has increased the total amount to £75 billion.

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An auction process on Friday night determined that the collapse of Lehman Brothers will cost providers of credit default swaps an estimated $233 billion payout — which has to be paid in the next two weeks.

While much of the exposure is expected to sit with AIG, the insurance giant that has been partially nationalised, a number of banks are thought to have issued insurance against bank collapses that will now be called upon. Pressure is mounting on the International Accounting Standards Board to abandon its “mark-to-market” accounting principles, which many believe has been one of the key factors in causing the credit crisis.

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Questions also persist about the collapse of the Icelandic institutions, and the knock-on effects of their demise. It has emerged that the FSA told the London-based capital-markets business of Kaupthing to move some of its £20m cash pile out of a bank account held with its Icelandic parent company “several months” before the bank collapsed last week.

A senior source at Kaupthing Singer & Friedlander Capital Markets, run by former KBC Peel Hunt boss Tim Cockcroft, said the cash had been moved into four or five UK bank accounts following concerns raised by the regulator.

The news suggests the regulator may have been flagging concerns about Iceland to business customers while local councils and consumers continued to deposit cash with the banks.

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http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4926316.ece

The British constantly allude to the "high street" and every town and city seems to have a "high street." What on earth does "high street" mean?

http://www.bbc.co.uk/skillswise/glossary/index.shtml?00976

In other words, the large British banks that provide retail banking services.

The UK has far fewer banks than does the US. In the US, consolidation among banks was formerly prevented by laws which prevented branching, and later branching across state lines.

"An auction process on Friday night determined that the collapse of Lehman Brothers will cost providers of credit default swaps an estimated $233 billion payout — which has to be paid in the next two weeks."

It is now becoming apparent that by letting Lehman go under, the US has come close to setting off a cascading failure in the financial system.

As the credit default swaps involving Lehman unwind, some institutions may be unable to settle their share of the payments.

This triggers a new set of defaults to settle, and depending on who it is, settling them may cause additional defaults.

All the central banks can do is print more funny money to throw at it and make the rest of us eat the hyperinflation that will result.

I invested in guns and ammunition a few years ago.