A Tale of Two Banks www.pan-asset.co.uk

Feb. 10, 2009 - PRLog -- A Tale of Two Banks On both sides of the Atlantic we are waiting for the next plans to save the banks and reflate the economies. The US market has rallied a little in expectation of agreement on the Obama reflationary package, as the Senate debates the balance between tax cuts and spending increases, and its overall magnitude. In addition the money markets actions are beginning to have some effect.  In the UK we are awaiting the detail on the revised banking package, to see how much insurance is going to be offered for bad loans held by banks, and what it will cost.


Meanwhile the Fed, the Bank of England and the Treasuries are thinking about whether to ease the money supply further through a variety of techniques, including underfunding of deficits, direct purchases of treasury bonds  and injecting more cash into the banking system through money market operations generally. There has been some easing in credit markets as a result of the actions taken so far.


The authorities both sides of the Atlantic are committing large sums to the tasks of assisting the banks and reflating the economy. There have been differences of view on how to do it, but each side has now been influenced by the other - or by similar ideas – to the point where there are common strands to the actions. The US has injected some new capital into banks; the UK is now looking at purchasing or underwriting bad assets. The US did nationalise a couple of mortgage banks, as did the UK. The only difference has been the UK’s decision to take a substantial stake in RBS as well. This difference could turn out to be important, as it has placed a large sum of taxpayers money at risk in the UK and posed big management questions for the government over how far should it intervene and what should it try to do with its large bank?


The publication of Barclays results in the UK highlighted the contrast between their performance in 2008 and that of RBS. Barclays announced a profit of £6.1 billion, with write offs at a manageable level, where RBS is suggesting total write offs and losses of £28 billion. This leads people to ask how two large UK registered global banks could end up with such a different performance.


There are three possible explanations. The first is that RBS was badly managed, complicated by their decisions to acquire a large number of overseas assets near the top of the market, whilst Barclays has been better managed. The second is that RBS’s new management have decided to take a very pessimistic view of their banks assets at the beginning of their regime, to make recovery easier. I would hope that auditors and the government as owners would ensure the figures are realistic and in line with current understanding of potential bank losses, so this rules the latter explanation out.  The third theoretical possibility is that Barclays will find more losses later. I rule this out, as I am sure the Directors and auditors will have crawled all over the figures, well aware of the need for prudence in these conditions.


The most likely explanation is that RBS was less well managed, and took on too much in its acquisitions which have cost its shareholders dear. It remains surprising that the government did not undertake proper investigations of their likely 2008 results before finalising the purchase of the shares. I remain to be convinced that things were so desperate they needed to finalise everything in a single week-end. It subsequently took a long time to get round to buying the shares and putting the money in, time which could have been used for due diligence followed by changing the terms of the deal in the light of the discoveries. That would have protected the taxpayer interest more.


As Barclays points out in their 2008 results, it was the Regulator’s demand for higher capital requirements at such a sensitive time which has led to Barclays not paying a dividend. That call to increase the demands at that worst of all possible times was the background to the panic share buying by the government. It did not help the banks re-establish confidence, and it left the taxpayer stranded with some shares which soon dropped in price.


Could it work from here? Yes it could. That will depend less on the reflationary package of the President, and more on the actions of the main world authorities in money and bond markets. On both sides of the Atlantic there have been signs of second thoughts in bond markets about just how much governments need to raise, with some fall in Treasury bond prices. It should urge western governments to greater caution in their spending, so they do not try the patience of the markets too far and cause long term interest rates to rise too much.

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