And, unlike the American one, ours goes straight for the jugular - George Soros style. I’ll explain what I mean by that in just a second...
First, let’s dig the bones out of this rescue plan. It’s £250 billion, and it breaks down as follows:
- £200 billion is earmarked to improve liquidity. It will be available to banks through the Bank of England’s special liquidity scheme, which has been running since April. This measure means that, short term, banks will be able to borrow money and lend it on. But, of course, that relies on them being willing to do so...
- That’s where the other £50 billion comes in. This directly targets banks’ solvency problems, as opposed to their liquidity problems. The government will put the money directly into banks, as part of a sorely needed process of recapitalisation
The government has identified seven banks and one building society it will help (others are invited to apply and will be judged on a case-by-case basis). They are: Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide, Royal Bank of Scotland (RBS), Standard Chartered.
So what are they going to do with this £50 billion? Well, the first £25 billion they’ll use straight away. The aim is to raise the banks’ Tier 1 capital ratios — in essence, the cushion of money that stands between them and going bust. The other £25 billion they’ll hold in reserve.
To give you an idea of where these numbers have come from, HSBC has a Tier 1 ratio of 7.7%. Investors’ confidence in HSBC hasn’t been hit like it has with other banks. In fact, HSBC this morning announced it will observe Tier 1 requirements, but will not use the government lifeline to do it.
By comparison, RBS and the combined Lloyds/HBOS phenomenon (if that ever goes through) have Tier 1 ratios below 6%. The Barclays figure is 6.3%.
The government estimates it’ll take about £25 billion to get these capital ratios up towards HSBC levels. Presumably they’ve chucked in the other £25 billion for good measure.
This bailout differs from the American one in that it doesn’t buy up the toxic assets. Instead, it puts the money directly into the banks, taking an equity stake in return. This is similar to what George Soros proposed as an alternative to the US bailout.
There is a chance that the British government could eventually turn a profit from the preference shares and warrants it’ll be looking to get. But if it does, it’ll have to wait for it. In the meantime, this bailout places further strain on the UK’s public finances [the subject of my latest special report, which you can read right here.]
So now the big one. Will this bailout work?
The market doesn’t seem to think so. The FTSE 100 fell more than 7% this morning... at the time of writing it’s down 4.4%.
The truth is, there’s no one magic bullet that will fix this mess. Not even nationalising part of the banking sector. Finance is going through the Great Deleveraging, a process that will leave the entire industry smaller than it is now.
That means there’s more pain to come. Confidence won’t return until the pain stops, and investors see before them a sustainable banking industry. We’re a long way away from that yet.
However, it’s not all doom and gloom. As Garry White explains below, long term investors should be on the look out for opportunities. A lot of value will be uncovered as this crisis rumbles on...
The next shoe is due to drop tomorrow, when the Bank of England decides what to do with interest rates. There are some making noises about a full one percentage point cut. But I don’t think they’ll go that far — if they did, it could look like an act of panic.
Half a point is certainly plausible, though, while no cut at all would require a lot of explaining. One thing I’m certain of, though — interest rate cuts, like today’s bailout, are small steps on a long and rocky road.
The financial authorities are engaged in a battle to save the very system they oversee. That’s not something you achieve with one or two meetings and a quick policy announcement.
The FTSE looks cheap for long term investors
"I’ve had a letter from a reader," Garry White told me the other day. "He says he bought BHP Billiton back in the 1970s, on a price-earnings (p/e) ratio of 3. He sold it on a p/e of 35. Now that’s investing!"
Garry’s been looking at p/e ratios himself. And he’s noticed something interesting...
Compared to other major markets, the FTSE 100 looks exceedingly cheap. Investors who play this right could set themselves up for some very exciting gains.
Find out how here.
Until tomorrow
Ben Traynor
Editor
Fleet Street Daily
PS Make sure you read tomorrow’s Fleet Street Daily. I’ll be sending you a complimentary report which tells you exactly how to go about protecting your wealth by investing in gold. Don’t miss it.
PPS BREAKING NEWS — I was just about to send this to be published when the news came through. The Bank of England, the US Fed, The European Central Bank, and the central banks of Canada, Sweden and Switzerland have undertaken an emergency, co-ordinated interest rate cut. Each has cut rates by half a percentage point. More on this tomorrow...
The Daily Reckoning - Fear is back
It’s the end of the world as we know it — and we feel fine. Really.
Usually, markets stumble along, day after day. But occasionally, their hearts start racing and their palms sweat. They stop sleeping at night and begin pacing the room. When this happens, one of two emotions has gotten the better of them — greed or fear.
Greed made fools of investors for many years. At its height — probably in 2006-07 — people were ready to do the damnedest things with their money. The moms & pops bought an extra house — sure it would go up. The masters of the universe sold moms & pops’ debt to each other. Rich investors gave their money to hedge fund managers — and paid them hundreds of millions for gambling it away. Others paid fortunes to executives to run companies they didn’t really understand into brick walls they didn’t see coming. But, for many years, everybody was getting rich; so what was not to like?
Now, fear is back.
You can read the Daily Reckoning in full here.
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