The UK has begun a partial nationalization of its major banks. The move may well include some of Britain’s largest financial firms such as Barclays (BCS) and HSBC (HBC). The government views it as the only way to secure confidence in the banking system, even if it has to take substantial ownership in the institutions to accomplish that.
What the UK government will do with its shares over time is a mystery. Perhaps in several years, it can sell them back to the public. If they have any value.
According to the FT, "Under the plan, announced by the Treasury on Wednesday, seven leading banks and the Nationwide Building Society will initially apply for £25bn in permanent capital to raise their Tier One capital ratios, with a further £25bn available as a stand-by."
Every postman in the UK will get a share or two.
The British move is undoubtedly being watched by the US Treasury and the Fed. Paulson’s $700 billion bailout plan has clearly brought no confidence to the banking industry. Bank of America’s (BAC) shares fell over 20% at one point yesterday as it struggled to raise $10 billion in a common share offering. The market value of Morgan Stanley (MS) was down more, over 30%, even though Japan’s largest bank, Mitsubishi UFJ, has agreed to put money into the investment bank.
What was once unimaginable is now only unprecedented. For the US to mount a plan to buy preferred shares in it largest banks over the coming weeks would probably take a commitment of $400 billion given their relative size compared to large UK banks.
A nationalization program in the US, added to Paulson’s plan and the Fed’s increase of funds available at it discount window to $900 billion could take the value of saving the country’s financial system to more than $2 billion.
The idea of letting banks fail and having the system sort itself out with the financial help of George Soros, Warren Buffett, and sovereign funds is becoming more attractive by the day.
Douglas A. McIntyre