Monday, 21 July 2008

Banks reveals rights issue disaster

Only 8.3 percent of HBOS investors took up the offer of £4 billion new shares. Barclays did a little better, managing to offload around 19 percent of their £4.5 billion

The HBOS underwriters must be sweating. On Friday, the market capitalization of HBOS was about £10 billion. With the new £4 billion of shares, the underwriters now own something like 27 percent of the bank. If the price continues to collapse, the underwriters will be looking at huge losses.

Today's rights issue failure illustrates the collapse of confidence in UK banking. The banks have only themselves to blame. They pumped up the housing bubble, and like a ravenous dog, those overinflated house prices are coming back to maul them.

There is a deeper problem. Today's pathetic attempts to raise additional bank capital have almost certainly closed off rights issues as a mechanism to shore up bank balance sheets. As the housing crash accelerates and arrears begin to rise, banks will begin to accumulate losses. At the moment, UK banks have insufficient capital to absorb these losses. Deferring dividends might help a little, but in the end, some weaker banks could drift towards insolvency.

The banks look like they have exhausted market solutions for resolving their lack of capital. Sovereign wealth funds won't touch them; rights issues are infeasible; this leaves only one other source of capital; the taxpayer.

26 comments:

Anonymous said...

Agreed. I've been saying for a few weeks now that the capital window is closed. This nails it shut.

Nick

Anonymous said...

Alice, I agree with everything you write - especially the inescapable consequences of a housing market dropping like a stone.

I'm surprised that most predictions being put into the public domain presently of the likely drop in the housing market are so benign.

If one looks at the shape of the up and down movement in Real House Prices (your piece of 15 June) around the 1989 peak, and physically magnifies that shape and superimposes it over the 2007 peak, the real drop looks close to 60% this time, not through until maybe 2015-2017.

So current talk of 25% or 30% is out because it is only working in nominal prices, and giving the public a false hope. Such benign predictions are only prolonging the agony of the present crisis.

I'm sure plenty of smart money knows this and it is in part this that is causing the utter fear surrounding bank stocks.

I think someone should write for one of the major newspapers (Sunday Times?) on the likely real drop based on the assumption of a repetition in the shape of the real house prices graph - and the assumption of a 4% inflation long-term in the RPI which you made - because the sooner this is understood by the wider public, the sooner we will get some real solutions to the plight of the big lenders.

If that solution is nationalisation of a HBOS and Barclays, so be it.

Blessings,

B. in C.

aSteve said...

Curiously, however, the share price remains relatively high ~270p...

If only 10% of the rights issue was taken up, shouldn't we have expected more of a fall in the share price? HBOS is clearly not worth anything like the rights issue price, is it?

Anonymous said...

asteve,

There is horrendous market manipulation at the moment in addition to the usual delusional bulls. Last week's SEC/Fed/Treasury short squeeze seems to have been purely to goose stock prices just long enough for the banks to perform emergency capital raising.

HBOS is having a Wile E Coyote moment.

Nick

aSteve said...

Have you evidence you can share for that assertion, Nick?

slim said...

The taxpayer bailout draws closer.

CWS said...

B. in C. dare we hope for a 40 percent crash?

Anonymous said...

The biggest bubbles of the past 30 years: gold in the 70s, Nikkei in the 80s, Nasdaq in the 90s, all had drops of at least 50% before stabilising and then regaining up to 1/3 of the drop (and then falling back again for a period of low activity for some 5-10 years). Given that the UK property bubble is (was) at least as big as the aforementioned, I think we can assume that a 50%+ decline is not out of the question.

Anonymous said...

Alice,

More fantastic stuff. Keep going your blog is great !

I think we end in deflation myself but superb work. All of the sites linking to established news articles are in no way as informative as you.

Great.

Whitby Bridge said...

Of course.

The tax-payer.

We've got plenty of money.

Anonymous said...

asteve

http://globaleconomicanalysis.blogspot.com/2008/07/panic-by-fed-anatomy-of-short-squeeze.html

Nick

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

I received the following comment. It contained one or two rather colourful expressions of women, which I couldn't allow.

However, I am in general loath to delete any comment, so I took the liberty of removing the expressions and letting the comment go through.

The original comment has been deleted.

Alice


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Also more than enough to pay off our national debt, fund the Iraq war for twenty years, repair our infrastructure, and bail out the US housing market. Still think that our biggest problem is China? Think again. Its the 1% club. That means every big name celebrity, athlete, executive, entrepreneur, developer, banker, and lottery winner. Along with many attorneys, doctors, politicians, and bankers. If they are rich, then they are part of the problem. Their incredible wealth was not 'created', 'generated', grown in their back yard, or printed up on their command. It was transfered FROM US TO THEM. Directly and indirectly. Its become near impossible to spend a dollar without making some greedy pig even richer. Don't be fooled by the occasional loss of a millionaire's fortune. Overall, they just keep getting richer. They absolutely will not stop. Still, they have the nerve to pretend as if they care about ordinary people. ITS A LIE. NOTHING BUT CALCULATED PR CRAP. WAKE UP PEOPLE. 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WITHOUT LOANS FROM CHINA. Now, we have a more obscene distribution of bottom line wealth than ever before. We have a sold-out government, crumbling infrastructure, energy crisis, home forclosure epidemic, credit crunch, weak US dollar, 13 figure national deficit, and 12 figure annual shortfall. The cost of living is higher than ever before. Most people can't even afford basic health care. ALL BECAUSE OF GREED. I really don't blame the 2nd -5th percentiles in general. No economy could ever function without some reasonable scale of personal wealth and income. But it can't be allowed to run wild like a mad dog. ALBERT EINSTEIN TRIED TO MAKE PEOPLE UNDERSTAND. UNBRIDLED CAPITALISM ABSOLUTELY CAN NOT WORK. TOP HEAVY ECONOMIES ALWAYS COLLAPSE. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. The American dream will be shattered. and thats just the beginning. Greed will eventually tank every major economy in the world. Causing millions to suffer and die. Oprah, Angelina, Brad, Bono, and Bill are not part of the solution. They are part of the problem. THERE IS NO SUCH THING AS A MULTI-MILLIONAIRE HUMANITARIAN. EXTREME WEALTH MAKES WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. WITHOUT WORLD PROSPERITY, THERE WILL NEVER BE WORLD PEACE OR ANYTHING EVEN CLOSE. GREED KILLS. IT WILL BE OUR DOWNFALL. Of course, the rich will throw a fit and call me a madman.. Of course, they will jump to small minded conclusions about 'jealousy', 'envy', or 'socialism'. Of course, their ignorant fans will do the same. You have to expect that. But I speak the truth. If you don’t believe me, then copy this entry and run it by any professor of economics or socio-economics. Then tell a friend. Call the local radio station. Re-post this entry or put it in your own words. Be one of the first to predict the worst economic and cultural crisis of all time and explain its cause. WE ARE IN BIG TROUBLE.


So what can we do about it? Well, not much. Unfortunately, we are stuck on a runaway train. The problem has gone unchecked for too many years. The US/global depression is comming thanks to the 1% club. It would take a massive effort by the vast majority to prevent it. Along with a voluntary sacrifice by the rich. THATS NOT GOING TO HAPPEN. But if you believe in miracles, then spend your money as wisely as possible. Especially in middle and lower class communities. Check the Fortune 500 list and limit your support of high profit/low labor industries (Hollywood, pro sports, energy, credit, pharmaceutical, cable, satelite, internet advertising, cell phone, high fashion, jewelry, ect.). Cancel all but one credit card for emergencies only. If you need a cell phone, then do your homework and find the best deal on a local pre-pay. If you want home internet access, then use the least expensive provider, and share accounts whenever possible. If you need to search, then use the less popular search engines. They usually produce the same results anyway. Don't click on any internet ad. If you need the product or service, then look up the phone number or address and contact that business directly. Don't pay to see any blockbuster movie. Instead, wait a few months and rent the DVD from a local store or buy it USED. If you want to see a big name game or event, then watch it in a local bar, club, or at home on network TV. Don't buy any high end official merchendise and don't support the high end sponsors. If its endorsed by a big name celebrity, then don't buy it. If you can afford a new car, then make an exception for GM, Ford, and Dodge. If they don't increase their market share soon, then a lot more people are going to get screwed out of their pensions and/or benefits. Of course, you must know by now to avoid those big trucks and SUVs unless you truly need one for its intended purpose. Don't be ashamed to buy a foreign car if you prefer it. Afterall, those with the most fuel efficient vehicles consume a lot less foreign oil. Which accounts for a pretty big chunk of our trade deficit. Anyway, the global economy is worth supporting to some extent. Its the obscene profit margins, trade deficits, and BS from OPEC that get us into trouble. Otherwise, the global economy would be a good thing for everyone. Just keep in mind that the big 3 are struggling and they do produce a few smaller reliable cars. Don't frequent any high end department store or any business in a newly developed upper class community. By doing so, you make developers richer and draw support away from industrial areas and away from the middle class communities. Instead, support the local retailer and the less popular shopping centers. Especially in lower or middle class communities. If you can afford to buy a home, then do so. But go smaller and less expensive. Don't get yourself in too deep and don't buy into the newly developed condos or gated communities. Instead, find a modest home in a building or neighborhood at least 20 years old. If you live in one of the poorer states, then try to support its economy first and foremost. Be on the lookout for commercial brainwash plots on TV. They are written into nearly every scene of nearly every show. Most cater to network sponsors and parent companies. Especially commercial health care. Big business is fine on occasion depending on the profit margins and profit sharing. Do your homework. If you want to support any legitimate charity, then do so directly. Never support any celebrity foundation. They spend most of their funding on PR campaigns, travel, and high end accomodations for themselves. Instead, go to Charitywatch.org and look up a top rated charity to support your favorite cause. In general, support the little guy as much as possible and the big guy as little as possible. Do your part to reverse the transfer of wealth away from the rich and back to the middle and lower classes. Unfortunately, there is no perfect answer. Jobs will be lost either way. Innocent children will starve and die either way. But we need to support the largest group of workers with the most reasonable profit margins. We also need to support LEGITIMATE charities (Check that list at Charitywatch.org). This is our only chance to limit the severity and/or duration of the comming US/global depression. In the meantime, don't listen to Bernenke, Paulson, Bartiromo, Orman, Dobbs, Kramer, OReiley, or any other public figure with regard to the economy. They are all plenty smart but I swear to you that they will lie right through their rotten teeth. IT MAKES THEM RICHER. Like I said, you are welcome to run this by any professor of economics or socio-economics. If thats not good enough, then look up what Einstein had to say about greed, extreme wealth, and its horrible concequences. I speak the truth. GREED KILLS. IT WILL BE OUR DOWNFALL.

Anonymous said...

How long before HBOS goes the way of NRK?

Anonymous said...

Very long, rambling posts without paragraphs remind me of when schizophrenics talk.

Nick

doggett said...

"Very long, rambling posts without paragraphs remind me of when schizophrenics talk."

I wouldn't know, never having heard schizophrenics talk. But, strip out the verbosity, the unfocused rambling and the anger, would you argue that the writer doesn't have a point?

CityUnslicker said...

The underwriters played dirty by shorting their own stock.

Seems to have worked for now.

I can't see HBOS having the issues you imply with the £4 billion to cover losses on mortgages.

it is not as if every mortgage is going to crash for all eternity. Most people are paying off over 25 years. A few very tough years approach and banks will make no monoey or even consistent losses. Ho hum for them.

Not the end of the world for everyone - although you there will be plenty who suffer.

wildgoose said...

A point that was foretold by Hillaire Belloc in his book "The Servile State" - written before the First World War and looking eerily prescient.

Anonymous said...

CWS - just look at Alice's graphs of 15 June - or even the one on the front of the housepricecrash.co.uk site, which shows less.

The way up each bubble takes about as long as the way down, and the new trough only represents a mild gain over the previous. So if one jots a repetition of the shape assuming the same modest long-term real gain, the real price drop coould easily be say 57%.

Then one has to make an RPI inflation prediction to come to a nominal figures, maybe over 30% over say nine years (the government is letting the RPI ride to erase the debt). I'm incline to think about 30% in nominal terms and nearer 60% in real terms, but if inflation is more benign in a semi-collapsed economy, then yes, nearly 40% is clearly possible even in nominal terms.

At the moment, every month you rent you save some money! Beware of the bull traps and false dawns on the way to the bottom. Just keep looking at the real prices graph, and when it looks like the bottom, after a period of pretty slow end-decline as at the end of the last bubbles, we will be there. In the south, you will have to anticipate the bottom a little and go early, as the national figures will be dominated by the sag for peripheral parts of the country while the turn has happened in London and the south east.

Here endeth the lesson...

B. in C.

Anonymous said...

I wonder why people rush for to call the bottom in housing. The bottom lasts for well over a year. You are competing with the average nubbin in the street who is at least 6 months behind the trend. This isn't currency trading. No need to rush.

Nick

Anonymous said...

Nick - good point - and the wait will be for quite a few years yet. B. in C.

aSteve said...

Nick, it is helpful to try to estimate the bottom - because, for some of us, aspects of our lives are on hold.

If I thought the bottom would come in 6 months, my life-plan would be different to that if I expected 18 months or 2 years or more.

In fact, it is more complicated than that... it likely won't be most cost effective for me to buy at nominal bottom - because my savings are earning less than the equivalent mortgage rate and I'm paying substantial rent... not to mention that I'd rather live somewhere I can be happy for as much of my life as possible. I'm not getting younger.

Anonymous said...

asteve: I watched the last boom go down, with the assist of a real house prices graph, buying a house in the southeast in '93 - I caught the SE bottom I think, though nationally the bottom came in Jan 96. I know what you mean by 'life.. on hold'...

Even in '93 many sellers were expecting still to get close to '96 nominal prices, so there was little top quality property on the market and I had to find someone serious about selling.

The only other way to judge the bottom was to establish rental value and use the old rule of thumb that one wants a ten per cent return - half to cover inflation and half to cover maintenance costs.

I really do think, from that experience, that the bottom may not come for eight, nine or ten years after the 2007 peak, if not longer, i.e. 2015-2017.

This is the voice of painful experience...

B. in C.

aSteve said...

When it comes to my long-term fianancial well being, I note that it is not the real price of houses that will dictate the optimal purchase for me, but the nominal price.

I think that nominal price will correct far faster than the real price - thereafter, of course, I need to establish motivated sellers for the type of property I want to own... (a spacious 3/4 bed detached in a semi-rural location without excessive grounds - but not on an estate, or a main road - in the South with OK road-based communications.) I am not interested in a property that has been "renovated" - I'm looking only to buy a shell... it will be unique and my home - I've no desire to suffer someone else's sub-par tastes. ;)

I expect that the optimum time to try and buy is when the specific market that interests me hits bottom. The properties that interest me most are "in need of updating" or "would benefit from refurbishment" - though I realise I could gut a place that has already been renovated if the price is right. Since 2004, the properties I've liked the look of have been snapped up, I presume, by "developers" intent on a cosmetic makeover and a return to the market for 50% more than the excessive price they paid. When that market dies, I expect to see interesting properties on offer. I'm looking for location and something with decent sized rooms and structurally sound.

I don't think that 2009 is inconceivable.

Anonymous said...

Asteve - well, on your side is the reality that we have never had a banking crisis of these dimensions and building bubble of these utterly absurd dimensions. so I hope you are right. I took the option of finding a job which included accommodation and saving like crazy.

The advantage of buying at the real bottom rather than taking a nominal view was how my salary dwarfed the eventual mortgage I took, which meant it was easy to pay off completely in a few years. That way one really does pay a lot less, as one saves a huge amount on interest payments.

And after that one can save again, and look for the next bottom to move up, if necessary - accumulating real wealth rather than the notional value in a property.

Blessings,

B. in C.

Anonymous said...

B in C

I'm so glad England isn't full of people like you. I don't mean that in a bad way. I just wouldn't like to have to compete with people with that level of foresight. I much prefer being a wolf among sheep.

Nick