British banks to get cash infusion from government

LONDON — The British government injected an unprecedented 37 billion pounds ($63 billion) into some of the country's leading banks Monday to avoid a full-scale collapse of the sector.

In return for the rescue, the Royal Bank of Scotland Group PLC, Lloyds TSB Group PLC and HBOS PLC will cede major stakes to the government and halt cash bonuses for bank board members this year. The banks also will be required to lend more money to small- and medium-sized businesses and homeowners in a bid to rescue the country's housing market.

"The action we are taking today is unprecedented but essential to all of us," said British Prime Minister Gordon Brown. "We must in an uncertain and unstable world be the rock of stability upon which people can depend."

The humiliation of holding out the beggar bowl to the government prompted the resignation of a handful of senior executives at the banks, where the government will now have the right to appoint board members and fix dividends.

The deal will leave taxpayers owning as much as 60 percent of RBS and 43.5 percent of the merged Lloyds HBOS bank _ the two are in the process of combining.

The government said its stake in each of the banks is strictly temporary, but the subsequent transformation of the sector is on the massive scale of the postwar bank nationalizations in the 1940s and the privatization of the industry in 1980s.

"The hope is that today will mark a watershed, with vast measures of government reassurance finally rekindling some confidence in the shattered banking sector," said Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers.

The government said that it will buy 5 billion pounds ($8.6 billion) of preference shares directly and underwrite 15 billion pounds ($25.7 billion) of ordinary shares in RBS. The preference shares carry a fixed interest payment _ the equivalent of a dividend _ of 12 percent.

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If no other investor comes forward to buy those shares, as many analysts anticipate, the government will invest the full 20 billion pounds ($34.5 billion) itself.

It is investing a further 17 billion pounds ($29.2 billion) in LLoyds TSB and HBOS.

The country's two other major banks, Barclays PLC and HSBC PLC, are not receiving a government handout.

Barclays said it will try to raise more than 6.5 billion pounds ($11.3 billion) without the government's help, while HSBC Bank PLC, Britain's other major banking group, last week received a 750 million pound ($1.29 billion) injection from HSBC Holdings PLC, its international parent company.

The takeovers of the three banks mark the implementation of a 50 billion pound ($86.8 billion) rescue package announced by Brown last week to shore up British banks, which have been buffeted by the global credit squeeze.

The London Stock Exchange overall greeted the news as positive, with the FTSE 100 index rising more than 5 percent. But the bank shares remained under severe pressure, with HBOS sinking 30 percent, Lloyds dropping 21 percent and RBS losing 16 percent.

Economists said the falls indicated that the bailout alone might not be enough.

"There are several reasons why we are skeptical that this will kick-start bank lending," said Vicky Redwood at Capital Economics about the plan to spur the housing market by committing banks' to return to last year's level of loan ability.

Redwood said that even if the government succeeded in increasing the level of credit, it was unlikely demand would be there to meet it.

Brown was quick to reassure taxpayers that they would get a fair deal from their new ownership of the banks, saying there would be "no rewards for failure."

No dividends will be paid until the government's preference shares have been fully redeemed and future executive salary will be based on performance "and long-term value creation," Brown said.

"This crisis has proved beyond doubt the virtues of the sound business practice of rewarding responsible risk-taking and not irresponsibility," he added.

Among the high-level casualties resulting from the announcements are RBS chief executive Steve Goodwin, who will be replaced by Stephen Hester, currently chief executive of British Land.

The bank said that Goodwin _ who last year earned more than 4 million pounds, including a 2.9 million pound bonus, will not be receiving any severance payment.

Chairman Tom McKillop will be retiring at the group's annual meeting in April. Johnny Cameron, RBS's chairman of global markets, is leaving the board immediately.

HBOS chief executive Andy Hornby and Chairman Dennis Stevenson will leave their posts when the merger with Lloyds is completed.

Brown stressed that Monday's action needed to be accompanied by reforms to the international banking system.

"We must now put in place new structures and new rules for the future," he said. "This cannot simply be a short-term rescue to paper over the cracks. Only a surgical approach that gets to the root of the problem will now work to ensure the problems do not return."

Along with the bailout, Lloyds and HBOS said Monday that the terms of their merger would be altered so that Lloyds would be paying less than previously agreed for HBOS.

Lloyds had previously agreed to give HBOS shareholders 0.83 shares in Lloyds for every HBOS share held. It will now give just 0.605 shares for each HBOS share.

Comments

[PT6]

Thank You Europe for the Boost! The US BAILOUT is one Obama helped Design!

If the Market Rebounds which it should do now that the WORLD HAS BAILED OUT ALL THE CORRUPT BANKS Obama should Benefit!

Or is this Market Rally the “October Surprise” Repubs have planned as they always do near an election?

Remember Repubs always “jack up” the market during voting season to give themselves a boost!

Certainly, we must make Point that “MASSIVE COSTS for this BOOST IS BORN BY THE TAXPAYER and MIDDLE CLASS! Demos must “take full credit for any improvements in the market” as we have supported the Bailout at a much higher percentage than the Repubs did.

However, we must be cautious if it continues or watchful if it tanks again to make sure we are supportive.

A sustained run is a benefit for Democrats than it is for the Repubs. Democrats be clear this is what we hoped to achieve!

We must point out that just because Wall Street may be happy that does not translate to Main Street and McCain is NOT TRYING any more than BUSH to help Middle Class America.

Reform of Washington and Wall Street can not be left in the Hands of the people WHO COST Americans Trillions of dollars for a "FAKE WAR" and a "FINANCIAL CRISIS" like the Great Depression.

Remind Americans they lost $2000 in income under Repubs while gaining $7,500 under Democrats.

Also, Wall Street tends to do better under Democrats than Repubs.