UK to buy into large banks in bold move
The UK government unveiled one of the broadest bailouts in the global financial crisis, potentially injecting tens of billions of pounds into some of the country's largest financial institutions, people familiar with the matter said.
As part of the plan, the British government will offer to buy stakes in Royal Bank of Scotland Group PLC, Barclays PLC and soon-to-be-combined HBOS PLC and Lloyds TSB Group, and provide other assistance that could total as much as £50 billion ($87.9 billion).
The plan was hastily put together Tuesday, and it is not clear what the response from the banks will be. A person close to the matter said the banks will likely be briefed overnight on the terms. Treasury Chief Alistair Darling said late Tuesday an announcement would come before the markets open Wednesday.
The move represents a bold gamble for Prime Minister Gordon Brown, who is facing a tenuous political future as the credit crisis takes a heavy toll on the U.K. economy. Mr. Brown has been harshly criticized for his handling of the early stages of the crisis, which included the U.K.'s first bank run in more than a century.
The government's efforts could prove critical to London's role as a global financial hub rivaling New York. London has, in recent years, seen its financial sector boom, handling global capital equal to the UK's entire annual economic output, far more than any other country in the world. In recent years, Barclays and RBS have built trading operations that rival US commercial banks and Wall Street firms.
The U.K. plan would stretch the government's finances at a time when it is already facing a large and growing budget deficit. Economic growth ground to a halt in the second quarter as housing prices dropped and inflation rose to roughly 5% from about 2% at the beginning of the year, and the government is expected to exceed its self-imposed borrowing limits because of the troubled economy.
U.K. officials rushed to finalize a plan on Tuesday after a tough day for U.K. bank stocks. RBS was one of the biggest losers, its shares diving 39% to 90 pence. HBOS fell 42% to 94 pence. Barclays fell 9% to 285 pence, while Lloyds dropped 13% to 225.50 pence.
The government's measures are aimed at propping up a banking sector that has suffered greatly as the global credit crisis has frozen the credit markets the banks rely on for funding. The plan contrasts sharply with the approach taken by the U.S. with its $700 billion financial-markets bailout fund. While the U.S. program is aimed at taking toxic assets off banks' balance sheets, the U.K. plan is aimed at boosting the banks' capital so they can restart the lending that is crucial to economic growth.
Many analysts were doubtful, however, that the U.K. plan would ease a problem at the center of the current crisis: the unwillingness of banks to lend to one another except for extremely short periods. Banks including RBS and HBOS raised large amounts of capital earlier in the year, and they still face funding constraints. Bruno Paulson, a senior analyst at Sanford Bernstein in London, predicted a capital injection would boost investor confidence in the banks, "but the real issue is whether it will be enough to restore confidence" in the credit markets.
The problem has intensified in recent weeks, after the bankruptcy filing of U.S. securities firm Lehman Brothers Holdings Inc. stoked concerns about other bank failures. In one sign of persistent mistrust among banks, the overnight sterling London interbank offered rate, or Libor, the stated rate that banks charge each other to lend, sharply increased Tuesday to 5.84% from 5.08% on Monday. A plan to aid the credit markets more directly could be part of the package or come at a later time, people familiar with the matter said.
As the British government was hammering out details, other countries continued to make their own moves Tuesday to try to restore confidence in their banks, their markets or both. Tiny Iceland looked to Russia for an emergency loan and seized control of a second big bank. Russia announced it would inject about $36 billion into its own banks, a month after it put together a $120 billion bailout of its financial markets. Australia's central bank slashed its key lending rate, whetting investor appetite for more dramatic rate cuts around the globe.
President George W. Bush spoke Tuesday with his counterparts in the U.K., France and Italy, seeking coordinated international solutions to the economic troubles. "We live in a globalized world," Mr. Bush said at a Tuesday appearance in Virginia. "...We want to make sure that all of us move in the best coordinated way."
Like the U.S., Germany and other countries, the U.K. has been forced into a series of ever-bigger moves it had first resisted, each made in hopes of stanching the flow of problems. Last week, U.K. authorities moved to nationalize mortgage-lender Bradford & Bingley PLC after its stock price fell 28% and investors fretted it wouldn't get access to enough funding to stay afloat.
The Bank of England tried to shore up confidence in British institutions by allowing banks to swap hard-to-sell securities for government bonds.U.K. banks have been trying drastically to cut back lending and shrink their balance sheets. In the six months ending in July, U.K. bank assets declined by £340 billion, marking the sharpest drop on record in absolute terms, according to Citigroup Inc.
U.K. banks are especially vulnerable because they depend more on credit markets, and less on customer deposits, for the funding they need to make loans.
The loan-to-deposit ratio among U.K. domestic banks is 143%, up from 105% in 2000, according to a recent Credit Suisse report. A report by Citigroup last month estimated that the six largest domestic U.K. banks -- including Barclays, RBS, HBOS and Lloyds -- depend on lending markets for a combined £542 billion.
Under the plan being discussed among Mr. Brown, the U.K. Treasury, the Bank of England and the markets regulator Financial Services Authority, the government may enhance deposit guarantees, people familiar with the plan said. Britain already raised its guarantee on consumer deposits to £50,000 from £35,000 but has no such protection for corporate deposits, which could be included. The U.K. wants to keep deposits from flowing to countries such as Ireland and Germany that have moved to guarantee all deposits. European Union finance ministers also agreed Tuesday to raise minimum deposit insurance across the bloc.
Any U.K. capital injections would also likely be accompanied by new rules on the amount of capital banks must set aside to cover potential losses -- a requirement that could lower banks' profitability in the long term.
The government is trying to construct the deal so that all banks participate. If the structure is voluntary, some might opt out, leaving banks that participate with the stigma that they need the cash. That leaves open the possibility that banks will be forced to take some investment. The government is likely to seek considerable protection from losses, possibly by buying stakes through preferred shares that rank above common stock, meaning the government would get paid dividends before other shareholders. The shares could pay the government a dividend of as much as 9%, a person familiar with the matter said. They may also be convertible into common equity, giving the government the chance to participate in any future share-price increases.
At least part of the investments could also be in common shares, but at prices well below where the banks' stocks traded only recently.
The bank executive with perhaps the most on the line is RBS CEO Fred Goodwin, who only a year ago was the chief architect of the largest banking acquisition ever, the $101 billion purchase of Dutch giant ABN Amro Holding NV. That deal, at the height of the market, is now weighing heavily on RBS' finances.
Mr. Goodwin, nicknamed Fred the Shred for his cost-cutting prowess, has been known as one of the few bank chiefs able to make mergers work. But the ABN deal is sorely testing his shareholders' patience, and has been a source of concern in the markets. Some see little benefit for RBS in the ABN pieces it acquired, which include its investment banking and markets operations in London, wholesale operations in the Netherlands, as well as wholesale and wealth-management units in Asia, Middle East and Eastern Europe. The bank has said it is still happy with the quality of the underlying ABN assets.
The ABN deal has already proved toxic for one of the other buyers, Fortis NV. The Dutch-Belgian bank was recently forced to sell its ABN stake as part of a plan to be nationalized by the Dutch government.
Low on capital after the purchase of ABN, Mr. Goodwin has already raised £12 billion by selling shares to existing shareholders at a discount in a so-called rights issue early this summer. He also tried but so far hasn't been able to sell RBS's insurance unit. The Edinburgh-based bank reported a pretax loss for the first half of £691 million, largely tied to write-downs on credit investments gone bad.
Another bank expected to receive a government capital injection is U.K. mortgage lender HBOS. HBOS, which Lloyds TSB agreed to purchase last month in a government-supported rescue deal, was one of the U.K. banks most reliant on lending markets, rather than customer deposits, to fund its mortgage-lending business.
—Alistair MacDonald contributed to this article.
Write to Dana Cimilluca at dana.cimilluca@wsj.com, Sara Schaefer Muñoz at sara.schaefer@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com
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