Shareholders seem happy to back the begging banks

Jun 10 2008 By Nevill Boyd Maunsell

There is not a lot of money around.  That, it is said, is why the housing market has seized solid.

There are next to no mortgages about and those that are come on silly terms, like requiring a minimum £30,000 deposit for a first-timer.

The Bank of England has flagged up a tantalising £100 billion it is prepared to lend to banks who feel they could use a bit of “liquidity” – what non-bankers call ready cash.

It is prepared to take existing mortgages as security, too. There is no lack of those on the banks’ balance sheets, perfectly good ones lent to solvent home-buyers more than a couple of years ago, say, so amply covered by anything realistically likely to happen to the value of the house.

Only a trickle, though, is finding its way back to the housing market. Citigroup, itself a champion fund-raiser since last August, says cash-hungry corporations round the world are drawing down facilities of £3,000 billion – that is not a misprint, £3,000 billion. The banks granted these facilities in palmy times in return for fat fees, never imagining they would ever have to stump up real money.

Even so, astonishing sums are still popping up here and there. The Royal Bank of Scotland got 95 per cent of its £12 billion from its own shareholders. Was this battered Scottish bank really the best investment these institutions could find for £11.4 billion? Were their fund managers suddenly stricken with brain-lock?

One suggestion is that the Financial Services Authority applied the stealth it notoriously lacked when Northern Rock was heading for the wall.
A wise regulator may well have gone round pointing to the consequences for British banking generally if the Royal Bank’s issue was left with the underwriters. It would have done the share price no good either.

The strange affair of Bradford & Bingley has the look of old-fashioned arm-twisting, too. Big shareholders spluttered briefly when they found themselves diluted by an American hedge fund that was handed 23 per cent of their company at a price which has given it a 30 per cent paper profit in barely a month. But that was it.

Then the Royal Bank, which you might have thought was watching its pennies just now, figured on the list of sub-underwriters. Another curious investment.

So did HBOS. We shall see shortly how its gets on with its £4 billion fund-raising. That is not £12 billion, but still serious money.

A complication here is that two million private individuals, mostly former or present Halifax customers, have shares.

They received “free” shares when the building society turned itself into a company and may feel that HBOS was supposed to be a source of dividends and a feel-good share price, not a call on their savings. Many will opt to sell their rights for what they can get and have done with it.

So it is doubly important that the institutions send in their cheques without a quibble.

No doubt they will. How odd that £4 billion should be available for a bank whose most notable asset is the biggest mortgage book of all, while the cash for new mortgages has all-but vanished.