Putting The Banks To Rights

Rob Mackrill - Tue 22 Apr, 2008

RBS is first up with the shareholder begging bowl. More will follow

Britain's big banks are broke. Well not broke exactly, but hard up for cash.

The bankers pin striped suits are looking pretty tattered and torn these days, like they've been sleeping rough under the arches.

The big four banks (RBS, HBOS, Barclays, Lloyds TSB) need a whopping £37bn to get them out of the hole, says JP Morgan. RBS is short £13bn and looking to plug most of that with a £12bn rights issue announced today. It hopes to raise a further £4bn selling off assets including its insurance arm. As the FT would put it, under-pressure CEO Fred Goodwin is "Rights Said Fred". This is necessary, and the first of many, says Bank of England boss Mervyn King:

"I'm pleased that banks have recognised the need to raise capital. I expect we will see more of it in the coming weeks."

Not surprisingly, their rights-issue shares are likely to be cheap too... RBS is offering 11 new RBS shares for every 18 held, at 200p each. Even allowing for the near 5% drop in the share price this morning to 354p, that is a chunky 44% discount to the prevailing share price. Shareholders can expect more shares in lieu of cash from the interim divi, says ODL Securities.

Given JP Morgan calculate HBOS needs £11bn, Barclays £8bn and Lloyds TSB £4bn, there are no prizes for guessing those still in the queue. Needless to say bank shares weigh on the FTSE 100 today as they take another pounding from disillusioned investors.

And lest we forget how we came to this point it was the "humungous misplaced bet on a carry trade", writes the FT's Gillian Tett. And in a repeat of the ignorance that brought down Barings bank 13 years ago, those in senior management appear to be ignorant of the risks being taken in their business. Private equity chief Jon Moulton of Apax said as much in City meetings he had attended in a TV programme recently. And Gillian Tett finds a red-faced contact 'fessing up to having been asleep at the wheel:

"Earlier this week, I asked a senior executive of one of the world's most troubled investment banks when he had first grasped the meaning of the phrase "super-senior." Sheepishly, he admitted that the moment was last August."

"Super-senior" being the AAA-rated CDO slices that were supposed to be very low risk but proved anything but in a crisis. For the full story click on the link.

Meanwhile the £50bn being made available to the banks by the Bank of England swap plan may work as medicine for inter-bank lending. Libor continues to edge down, now 5.88%, but will not be sufficient to solve a complex problem reports Reuters. As we know, the days of EZ credit are gone for good, and those historically cheap mortgage deals available a few years ago are not coming back any time soon. Former Monetary Policy Committee member Charles Goodhart sees the initiative stopping the crisis getting worse but its chances of getting the mortgage market going again are "slim".

Over on the oil patch, crude keeps heading uphill, now touching $118 following more militant attacks in Nigeria. A few thoughts from Bill Bonner on the subject of high oil prices:

*** '"It doesn't look like the party is over just yet," says colleague Chris Mayer. "Since January 2001, you can explain the move in the price of oil largely as a function of the increasing money supply. As the amount of money grows, the price of oil rises. In fact, almost 87% of the move in the price of oil can be explained by the increase in money supply...."

"As we've been saying - and we aren't the first - inflation is a monetary phenomenon. It was inflation that pushed the price or rice to another record high...and sent gold back up over $930. "

"But what does this imply about the price of oil going forward?"

"Given that we are still in the midst of a credit crisis of sort, is seems unlikely the Fed will tighten money in any way at all," Chris continues. "That leaves a clear path for the price of oil and commodities to continue to rally in nominal terms..."

"Chris goes on to point out that oil is no longer merely a US story. The rest of the world is uses more and more of it too. As a nation gets richer...its people use more and more oil...until it reaches a peak ...and then oil consumption levels off. That's why people in Britain drive Skodas instead of Chevrolets. They have reached a level of energy maturity...in which per capital consumption tends to stagnate below 20 barrels per person per year. U.S. energy consumption has leveled off at 25 barrels per person. Hong Kong, South Korea and Japan all have leveled off at about 15 barrels per person."

"But China and India - the world's two largest countries - "are only beginning to consume oil at any meaningful level," Chris notes. They've got a long way to go - with huge jumps in the quantity of oil used - before they get anywhere near the levels of the developed world. "

"The price of oil has room to run yet," Chris concludes, "in part because of the growth in money supply and in part because of pressing international demand. Second, even if we already saw oil production peak, history says that prices won't retreat by much over the next several years. And finally, the capital spending boom by the big oil companies is just getting started, which is great news for investors in oil field services companies."

And some thoughts on the subject of peaking Russian oil, admitted recently by Lukoil executive Leonid Fedun from US colleague Byron King:

"Most of the Western Siberia oil fields were discovered in the 1950s, 1960s and 1970s. Those fields are now in terminal, irreversible decline even with all the able assistance of the likes of Schlumberger and Baker Hughes. So maybe there was another reason that Putin stepped down as President? There are no coincidences, comrade. Old Russian saying goes, 'Quit while you are ahead.'

"The genius behind much of USSR oil production was Nikolai Baibakov, who just died on March 31 at age 97. His post-WWII leadership of the Soviet oil industry led to discoveries that fuelled the USSR, and later Russian Federation."

And continuing on the broader subject of commodities generally and the "growing bubble" (Soros) in their rising prices. The RGE Monitor notes that investors have rushed into real assets as safe haven assets, insulated from inflationary pressures. Commodity exchange traded funds are only four years old and have grown assets from under $5bn in 2005 to nearly $33bn today. Similarly futures trading in commodities has exploded. From 6.2m contracts in 2002 to 15.2m in 2007.

Recent trading reports indicate less investors buying long (profit from a rising price) and more selling short (profit from a falling price). Mmm... it looks like the smart money is getting more wary. If commodity prices start to fall it could be given momentum by a rush of investors closing out short positions. A pull back has got to come sometime and will likely coincide with a rise in the dollar.

*** Japan has a well-publicised population problem. They're getting older and not reproducing themselves in sufficient quantities. A 66m working population today will shrink by a third to 42m by 2050. Those working in 2050 will have to work harder for longer, a report warns. And this is in a country legendary for its industriousness. One in 10 already put in 60 plus hours a week and some are reported to have literally worked themselves to death.

On the other side of the Sea of Japan, it's been more a problem of keeping the numbers down. China with 1.3bn accounts for some 20% of the world's population and has had a one-child policy since 1979. Many of their punters will now know the value of stocks can fall as well as rise following the stock market collapse. China's main stock market index, the Shanghai Composite is trading at half its level of six months ago. Prior to the fall, it had risen sixfold in the past two years.

*** Food rationing comes to the rich nations too, according to a report from the New York Sun...

"Many parts of America, long considered the bread basket of the world, are considering the unthinkable: food rationing."

Buyers are being limited on their purchases of flour, rice and cooking oil, it says, amid some reports of hoarding. Plus US consumers are seeing petrol prices near $4/gallon which has been spurred by a slowdown at the refiners, according to MarketWatch

*** Chancellor Alistair Darling is meeting with mortgage lenders today to appeal to them to help out squeezed customers. And their numbers are mounting. Around 6.8m Brits are in debt to their gas or electricity supplier, and lender Bradford & Bingley says mortgage arrears have continued to rise through the first quarter of this year.

*** Looking for an investment that's going to stick around for the long-term? Well how about these venerable old ladies of the investment trust industry? They've clocked up an impressive 1,264 years between them, says the latest issue of the Zurich Club Communiqué.

The oldest is the Foreign & Colonial Investment Trust which recently celebrated its 140th birthday. And these are the top 10 surviving grand dames:

In comparison, the average lifespan of a hedge fund appears to be somewhere between three to seven years. But then fashion never did have a long shelf life.

Regards,

Rob Mackrill
The Daily Reckoning