‘Read my lips – no new taxes.’
That’s the promise, made in 1988, that’s widely credited as having scuppered George Bush Snr’s re-election chances come 1992. Because unfortunately for George the elder, he did end up raising taxes. And even voters – who are a forgiving and undemanding bunch a lot of the time, given the way that politicians generally mess them about – wouldn’t stand for such a blatant U-turn, especially when it meant money coming directly out of their pockets.
None of the UK’s banking chief executives have actually said: “read my lips – no big rights issues” in so many words. But after merrily hiking dividends and generally strutting around like the credit crunch was water off a duck’s back, they might as well have.
Yet now – according to press reports – it seems that the Royal Bank of Scotland is about to go to shareholders, cap in hand. Shareholders – like voters – are also a pretty passive bunch a lot of the time.
But they might be demanding some heads on plates in return for their cash on this occasion…
RBS close to launching a rights issue
Royal Bank of Scotland (RBS) is apparently set to raise between £5bn and £12bn in a rights issue. The bank hasn’t commented yet, but we’ll be getting the full details next week at the interim trading statement.
Before anyone starts worrying about their savings, remember that as Justin Urqhart Stewart tells the BBC, “this is not a customer issue, it’s a shareholder issue”.
Basically, the bank needs to raise more money to give itself a bit of breathing room. RBS is one of the most ‘thinly capitalised major lenders’ in Europe, as Richard Fletcher puts it in The Telegraph. It has an equity tier one ratio of just 4.25% (the UK average is 5.5%, and it shouldn’t drop below 4%). Banks need to keep a “certain cushion of cash relative to the amount of risk on their balance sheet”, as Alex Potter of Collins Stewart explains to the BBC. The reason that RBS’s is so small, is mainly down to its takeover of Dutch group ABN Amro last year – a fight which Barclays must be thanking its lucky stars it lost.
The timing is perhaps the most interesting thing. Reports of the capital raising comes after Gordon Brown’s big meeting with the banks earlier this week. The Government is trying to get the mortgage markets moving again – voters don’t like falling house prices, after all – and it seems that in return for pumping more money into the markets, it expects banks to start clearing the air around their opaque balance sheets.
Other banks are likely to follow suit
RBS is extremely unlikely to be the last bank to have to raise further capital. The Telegraph quotes one ‘senior banker’ as saying: “Almost every British bank is going to be thinking about a rights issue at the moment and the next three to four weeks will be crucial.” The good news for the other banks is that once RBS has blazed the trail and taken the initial wave of criticism, the way will be open for them to follow suit.
The reality is that up until now, banks have been scared to admit to any problems – and they may have had a point. The massive slump in HBoS’s share price last month on the flimsiest of rumours showed just how ready investors were to panic.
If one of the smaller, more widely-scrutinised former building societies had been the first to announce a rights issue, there may well have been a much more dramatic reaction – people are still primed for another Northern Rock going off.
But the meeting with Brown has given them an excuse. And RBS is also a much more stable bank in the public perception – the chances of people misinterpreting headlines about fund raisings and forming a queue outside their nearest branch of RBS are pretty low.
Is this the beginning of the end of the credit crunch?
And indeed, the stock market this morning has actually sent RBS’s shares higher. Normally you’d expect them to fall – after all, a rights issue means more shares, which means existing shareholders are diluted. But clearly investors hope that this is the beginning of the end of the credit crunch – now that RBS has broken the ice, banks will start to bite the bullet, and things might start to improve.
It’s a nice thought. But even if this marks the beginning of a clear-out, there’s a long way to go. The US banks started this process a while ago, and they’re still coming up with regular writedowns. Yesterday Merrill Lynch said it was open to raising more funds, after writing down another $9.7bn in its first quarter, even though it said it didn’t need more money just a fortnight ago.
And along with the writedowns, chief executive John Thain warned that he was “concerned about the risk of the market problems seeping into the real economy.” Where’s he been for the past year, I wonder? The ‘real economy’ in the US is now almost certainly in recession.
And it’s only going to get worse, both there and over here. As the writedowns keep rising, so do the job losses. The Telegraph reports that London is likely to see more than 3,500 City job losses announced today. “Recruitment experts said the scale of the job losses was the worst since the dark days of the 1991 recession.”
We’ve more on why there’s plenty more pain to come for the financial sector in the latest issue of MoneyWeek, out today. If you’re not already a subscriber, you can receive your first three issues free by clicking here.
Turning to the wider markets…
Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email
The FTSE 100 fell 65 points as mining groups slipped back, to close at 5,980.
Across the Channel, the Paris CAC-40 rose 7 points to end the day at 4,862. And in Frankfurt, the DAX-30 fell 21 points to 6,681.
On Wall Street, US stocks were flat. The Dow Jones rose 1 point to end at 12,620. The broader S&P 500 rose 1 point, to 1,365, while the tech-heavy Nasdaq fell 8 points to close at 2,341.
In Asia, Japanese stocks headed higher, with the Nikkei 225 closing 78 points higher at 13,476.
Crude oil was trading at around $114.90 this morning, while Brent spot was trading at $112.04.
Spot gold was broadly flat, trading at around $945 an ounce this morning. Platinum was also higher, at around $2,069, while silver was trading at $18.43.
Turning to forex, sterling was trading at 1.9951 against the dollar, and at 1.2512 against the euro. The dollar was last trading at 0.6273 against the euro and 102.5 against the Japanese yen.
And elsewhere, rice futures rose for the fifth day in the row, reports Bloomberg, on fears that export curbs in Chain and Vietnam are set to spread to other nations, as countries struggle to safeguard supplies for their own populations.
Our recommended articles for today…
Are central banks really to blame for the housing bubble?
– As far as Robert P. Murphy is concerned, it’s obvious: artificially low interest rates lead to malinvestments, which then require a recession to correct. However, when two economists he respects argue that the Fed isn’t to blame for the housing bubble, he decides to investigate their claims. To find out whether or not the Fed is to blame, click here: Are central banks really to blame for the housing bubble?
Should you buy a timeshare?
Tom Bulford decides to take the plunge and investigate buying a timeshare. Although wary of the traps of permatanned real estate agents, he does think it would be nice to stay somewhere with clean carpet. To find out if the figures make sense, click here: Should you buy a timeshare?
On Wall Street, US stocks were flat. The Dow Jones rose 1 point to end at 12,620. The broader S&P 500 rose 1 point, to 1,365, while the tech-heavy Nasdaq fell 8 points to close at 2,341.
In Asia, Japanese stocks headed higher, with the Nikkei 225 closing 78 points higher at 13,476.
Crude oil was trading at around $114.90 this morning, while Brent spot was trading at $112.04.
Spot gold was broadly flat, trading at around $945 an ounce this morning. Platinum was also higher, at around $2,069, while silver was trading at $18.43.
Turning to forex, sterling was trading at 1.9951 against the dollar, and at 1.2512 against the euro. The dollar was last trading at 0.6273 against the euro and 102.5 against the Japanese yen.
And elsewhere, rice futures rose for the fifth day in the row, reports Bloomberg, on fears that export curbs in Chain and Vietnam are set to spread to other nations, as countries struggle to safeguard supplies for their own populations.
Our recommended articles for today…
Are central banks really to blame for the housing bubble?
– As far as Robert P. Murphy is concerned, it’s obvious: artificially low interest rates lead to malinvestments, which then require a recession to correct. However, when two economists he respects argue that the Fed isn’t to blame for the housing bubble, he decides to investigate their claims. To find out whether or not the Fed is to blame, click here: Are central banks really to blame for the housing bubble?
Should you buy a timeshare?
Tom Bulford decides to take the plunge and investigate buying a timeshare. Although wary of the traps of permatanned real estate agents, he does think it would be nice to stay somewhere with clean carpet. To find out if the figures make sense, click here: Should you buy a timeshare?
On Wall Street, US stocks were flat. The Dow Jones rose 1 point to end at 12,620. The broader S&P 500 rose 1 point, to 1,365, while the tech-heavy Nasdaq fell 8 points to close at 2,341.
In Asia, Japanese stocks headed higher, with the Nikkei 225 closing 78 points higher at 13,476.
Crude oil was trading at around $114.90 this morning, while Brent spot was trading at $112.04.
Spot gold was broadly flat, trading at around $945 an ounce this morning. Platinum was also higher, at around $2,069, while silver was trading at $18.43.
Turning to forex, sterling was trading at 1.9951 against the dollar, and at 1.2512 against the euro. The dollar was last trading at 0.6273 against the euro and 102.5 against the Japanese yen.
And elsewhere, rice futures rose for the fifth day in the row, reports Bloomberg, on fears that export curbs in Chain and Vietnam are set to spread to other nations, as countries struggle to safeguard supplies for their own populations.
Our recommended articles for today…
Are central banks really to blame for the housing bubble?
– As far as Robert P. Murphy is concerned, it’s obvious: artificially low interest rates lead to malinvestments, which then require a recession to correct. However, when two economists he respects argue that the Fed isn’t to blame for the housing bubble, he decides to investigate their claims. To find out whether or not the Fed is to blame, click here: Are central banks really to blame for the housing bubble?
Should you buy a timeshare?
Tom Bulford decides to take the plunge and investigate buying a timeshare. Although wary of the traps of permatanned real estate agents, he does think it would be nice to stay somewhere with clean carpet. To find out if the figures make sense, click here: Should you buy a timeshare?