Silicon Valley Bank Fails After Run on Deposits

 Silicon Valley Bank Fails After Run on Deposits

The Federal Deposit Insurance Corporation took control of the bank’s assets on Friday. The failure raised concerns that other banks could face problems, too.

Silicon Valley Bank’s headquarters in Santa Clara, Calif., on Friday. Founded in 1983, Silicon Valley Bank was a big lender to tech start-ups.

By Emily Flitter and Rob Copeland

Emily Flitter and Rob Copeland cover Wall Street and finance.

March 10, 2023

Updated 9:42 p.m. ET

One of the most prominent lenders in the world of technology start-ups, struggling under the weight of ill-fated decisions and panicked customers, collapsed on Friday, forcing the federal government to step in.

The Federal Deposit Insurance Corporation said on Friday that it would take over Silicon Valley Bank, a 40-year-old institution based in Santa Clara, Calif. The bank’s failure is the second-largest in U.S. history, and the largest since the financial crisis of 2008.

The move put nearly $175 billion in customer deposits under the regulator’s control. While the swift downfall of the nation’s 16th largest bank evoked memories of the global financial panic of a decade and a half ago, it did not immediately touch off fears of widespread destruction in the financial industry or the global economy.

Silicon Valley Bank’s failure came two days after its emergency moves to handle withdrawal requests and a precipitous decline in the value of its investment holdings shocked Wall Street and depositors, sending its stock careening. The bank, which had $209 billion in assets at the end of 2022, had been working with financial advisers until Friday morning to find a buyer, a person with knowledge of the negotiations said.

While the woes facing Silicon Valley Bank are unique to it, a financial contagion appeared to spread through parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors that the banking system was resilient.

Investors dumped stocks of peers of Silicon Valley Bank, including First Republic, Signature Bank and Western Alliance, many of which cater to start-up clients and have similar investment portfolios.

Trading in shares of at least five banks was halted repeatedly throughout the day as their steep declines triggered stock exchange volatility limits.

By comparison, some of the nation’s largest banks appeared more insulated from the fallout. After a slump on Thursday, shares of JPMorgan, Wells Fargo and Citigroup all were generally flat on Friday.

That’s because the biggest banks operate in a vastly different world. Their capital requirements are more stringent and they also have far broader deposit bases than banks like Silicon Valley, which do not attract masses of retail customers. Regulators have also tried to keep the big banks from focusing too heavily in a single area of business, and they have largely stayed away from riskier assets like cryptocurrencies.

Greg Becker, the president and chief executive of Silicon Valley Bank, last year. The bank’s downward spiral accelerated this week.

“I don’t think that this is an issue for the big banks — that’s the good news, they’re diversified,” said Sheila Bair, former chair of the F.D.I.C. Ms. Bair added that since the largest banks were required to hold cash equivalents even against the safest forms of government debt, they should be expected to have plenty of liquidity.

On Friday, Ms. Yellen discussed the issues surrounding Silicon Valley Bank with banking regulators, according to a statement from the Treasury Department.

Representatives from the Federal Reserve and the F.D.I.C. also held a bipartisan briefing for members of Congress organized by Maxine Waters, a Democrat from California and the ranking member of the House Financial Services Committee, according to a person familiar with the matter.

Silicon Valley Bank’s downward spiral accelerated with incredible speed this week, but its troubles have been brewing for more than a year. Founded in 1983, the bank had long been a go-to lender for start-ups and their executives.

Though the bank advertised itself as a “partner for the innovation economy,” some decidedly old-fashioned decisions led to this moment.

Flush with cash from high-flying start-ups that had raised a lot of money from venture capitalists, Silicon Valley Bank did what all banks do: It kept a fraction of the deposits on hand and invested the rest with the hope of earning a return. In particular, the bank put a large share of customer deposits into long-dated Treasury bonds and mortgage bonds which promised modest, steady returns when interest rates were low.

That had worked well for years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. One year later, in 2021, it had $189.2 billion in its coffers as start-ups and technology companies enjoyed heady profits during the pandemic.

But it bought huge amounts of bonds just before the Federal Reserve began to raise interest rates a little more than a year ago, then failed to make provisions for the possibility that interest rates would rise very quickly. As rates rose, those holdings became less attractive because newer government bonds paid more in interest.

That might not have mattered so long as the bank’s clients didn’t ask for their money back. But because the gusher of start-up funding slowed at the same time as interest rates were rising, the bank’s clients began to withdraw more of their money.

To pay those redemption requests, Silicon Valley Bank sold off some of its investments. In its surprise disclosure on Wednesday, the bank admitted that it had lost nearly $2 billion when it was all but forced sell some of its holdings.

“It’s the classic Jimmy Stewart problem,” said Ms. Bair, referring to the actor who played a banker trying to stave off a bank run in the film “It’s a Wonderful Life.” “If everybody starts withdrawing money all at once, the bank has to start selling some of its assets to give money back to depositors.”

Those fears set off investor worries about some of the regional banks. Like Silicon Valley Bank, Signature Bank is also a lender that caters to the start-up community. It’s perhaps best known for its connections to former President Donald J. Trump and his family.

First Republic Bank, a San Francisco-based lender focused on wealth management and private banking services for high net worth clients in the tech industry, warned recently that its ability to earn profits is being hampered by rising interest rates. Its Phoenix-based peer in the wealth management industry, Western Alliance Bank, is facing similar pressures.

Separately, another bank, Silvergate, said on Wednesday that it was shutting down its operations and liquidating after suffering heavy losses from its exposure to the cryptocurrency industry.

A First Republic spokesman responded to a request for comment by sharing a filing the bank made to the Securities and Exchange Commission on Friday stating that its deposit base was “strong and very-well diversified” and that its “liquidity position remains very strong.”

A Western Alliance spokeswoman pointed to a news release by the bank on Friday describing the condition of its balance sheet. “Deposits remain strong,” the statement said. “Asset quality remains excellent.”

Representatives of Signature and Silicon Valley Bank had no comment. Representatives for the Federal Reserve and F.D.I.C. declined to comment.

Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.

In 2018, Mr. Trump signed a bill that lessened regulatory scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which reduced how frequently banks with assets between $100 billion and $250 billion had to submit to stress tests by the Fed.

At the end of 2016, Silicon Valley Bank’s asset size was $45 billion. It had jumped to more than $115 billion by the end of 2020.

Friday’s upheaval raised uncomfortable parallels to the 2008 financial crisis. Although it’s not uncommon for small banks to fail, the last time a bank of this magnitude unraveled was in 2008, when the F.D.I.C. took over Washington Mutual.

The F.D.I.C. rarely takes over banks when the markets are open, preferring to put a failing institution into receivership on a Friday after business has closed for the weekend. But the banking regulator put out a news release in the first few hours of trading on Friday, saying that it created a new bank, the National Bank of Santa Clara, to hold the deposits and other assets of the failed one.

The regulator said that the new entity would be operating by Monday and that checks issued by the old bank would continue to clear. While customers with deposits of up to $250,000 — the maximum covered by F.D.I.C. insurance — will be made whole, there’s no guarantee that depositors with larger amounts in their accounts will get all of their money back.

Those customers will be given certificates for their uninsured funds, meaning they would be among the first in line to be paid back with funds recovered while the F.D.I.C. holds Silicon Valley Bank in receivership — although they might not get all of their money back.

When the California bank IndyMac failed in July 2008, it, like Silicon Valley Bank, did not have an immediate buyer. The F.D.I.C. held IndyMac in receivership until March 2009, and large depositors eventually only received 50 percent of their uninsured funds back. When Washington Mutual was bought by JPMorgan Chase, account holders were made whole.

Emily Flitter covers finance. She is the author of “The White Wall: How Big Finance Bankrupts Black America.” @FlitterOnFraud

Rob Copeland covers Wall Street and banking. @realrobcopeland

https://www.nytimes.com/2023/03/10/business/silicon-valley-bank-stock.html

What is the real cost of 0.5pc Bank Rate?

What is the real cost of 0.5pc Bank Rate?
Three years on, savers are paying a heavy price to subsidise cheap borrowing.

Lending to small businesses fell by 5.1pc in August, against an overall decline in corporate credit of 3.4pc Photo: Rex Features

By Richard Evans

7:00AM GMT 25 Feb 2012

Savers have lost more than £5,000 since the Bank of England reduced interest rates to a historic low of 0.5pc three years ago – but borrowers have cashed in.

While few savers will be celebrating the anniversary of this decision next week, mortgage borrowers will be toasting a windfall of almost £40,000, which is what the average householder has saved in interest charges over this period.

The unprecedented cut in interest rates was designed to protect an enfeebled economy from outright collapse, but the effect on families up and down the country has been enormous. Research for The Telegraph shows the extent to which families have gained or lost out. Pensioners are among those who have suffered the most; many depend on the income they receive from savings, so they have seen their standard of living fall – a decline made worse by high levels of inflation. Conversely, it is younger people, who typically have larger mortgages and other debts, that have benefited from lower borrowing costs.

Here we look in detail at how the Bank of England's extreme measures have affected our fortunes.

Savers

The Bank started seriously cutting interest rates in response to the growing credit crisis in December 2007. In the three years before this, the rate paid to savers with instant access accounts averaged 3.15pc, according to Defaqto, the data analyst. But over the past three years the average rate has been just 0.94pc.

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As a result a saver with £20,000 in one of these accounts would have seen the interest they receive reduced by 70pc. In pounds and pence this means the interest has fallen from £1,950 to just £570 before tax – so they now get £1,380 less. For a basic-rate taxpayer, this means his income cut from £1,560 to £456, a fall of £1,104.

It's a similar story for cash Isas. The average rate on an instant access Isa in normal times was 4.85pc, Defaqto said, compared with only 1.52pc over the past three years. Assuming that savers had amassed £50,000 from successive years' Isa allowances, their income would have fallen from £7,635 to £2,315 – a fall of £5,320.

However, those who have shopped around and moved their savings regularly could have avoided much of this income loss. Over the past three years the average "best-buy" instant access account has paid 3.06pc, Defaqto found. As a result, anyone who switched from an average account to a best buy when the Bank cut rates to 0.5pc – switching again where necessary – would have seen their income fall by just £108 from £1,950 to £1,892 a year.

The average rate on a best-buy instant access Isa has been 3.12pc since March 2009. So a saver who took £50,000 out of an average product at that point and ensured it was always in a best-buy Isa thereafter would have seen their income fall by £2,805 from £7,635 to £4,830.

If you have left your savings in an account paying next to nothing, it's not too late to take action – in fact, economists don't expect Bank Rate to rise until late next year at the earliest. The best rate on the market for instant access accounts is currently 3.1pc on Santander's eSaver Issue 4, Defaqto said. Better rates are available if you tie up your money – such as 3.55pc for one year (from Aldermore), 3.85pc for two years (Vanquis Bank) and 4.2pc for four years (from BM Savings). Rates on equivalent Isas are often slightly lower.

David Black of Defaqto said: "There's a wide variation in the interest rates available even for the same sort of account – the rates paid by easy access accounts range from as little as 0.01pc up to 3.1pc. This shows how important it is to shop around for the best deal. If you've had an account for a while, the chances are you can get a better deal elsewhere."

Borrowers

Where savers have lost, mortgage borrowers gained. In the three years to December 2007 the average lifetime tracker mortgage charged Bank Rate plus 0.7pc, according to SPF Private Clients, the mortgage broker, so the rate that you actually paid at that time was 6.2pc. But since Bank Rate fell to 0.5pc the interest rate paid has been just 1.2pc.

As a result, monthly repayments on the average £250,000 lifetime tracker mortgage have fallen from £1,292 in the "normal" years to £250 now (on an interest-only basis). Total payments over three years have fallen from £46,512 to £9,000, saving the average borrower £37,512.

Two-year fixed-rate deals were also popular before the credit crisis. Someone who took out one of these loans two years before Bank Rate fell to 0.5pc would typically have paid an interest rate of 5.18pc, SPF said, taking a loan from Nationwide as an example. Monthly repayments at that rate would have been £1,079 (again interest-only).

After the introductory period on these mortgages has expired, the rate typically reverts to the lender's standard variable rate (SVR). A borrower who took out Nationwide's two-year fix in March 2007 might have expected to pay 7.5pc when the two years were up, as that was the SVR at the time. Instead, the SVR after Bank Rate fell to 0.5pc in March 2009 was just 2.5pc. This borrower's monthly payments would have fallen from £1,563 to £521, saving them £37,512 over the past three years.

But many home owners chose instead to maintain their payments when interest rates fell. This has the effect of paying off an extra slice of capital every month, cutting the overall interest bill and allowing the mortgage to be paid off in full sooner.

The average tracker mortgage customer with a £250,000 loan would have saved £1,978 in interest over the past three years if they had maintained payments at the level of December 2007, while their mortgage term would have been cut by almost 10 years.

Many people have both savings and a mortgage, of course. As we have seen, their savings will often have paid very little interest over the past three years. A better use for the money can be to reduce the mortgage balance.

If a home owner with a £250,000 mortgage on a typical lifetime tracker charging 3.56pc had used their savings to make a £20,000 lump payment on their home loan in March 2009, they would have saved £2,886 in interest so far and would be in line to shave two years and nine months off their mortgage term, according to HSBC. The figure for a £50,000 payment is £6,262.

Mark Harris of SPF said: "While interest rates are at record lows, not all borrowers are taking advantage. If you are on your lender's SVR and it's 3pc or more, you might want to consider remortgaging. There are some very cheap fixed rates at less than 4pc for five years, or two-year trackers starting at less than 2pc for those with enough equity in their property."

Peter Dockar, the head of mortgages at HSBC, said: "By paying down their mortgage now, borrowers are able to reduce the impact of higher monthly repayments if interest rates rise. It will also build up equity in their properties, giving them access to better deals if they need to remortgage in future."

http://www.telegraph.co.uk/finance/personalfinance/savings/9103019/What-is-the-real-cost-of-0.5pc-Bank-Rate.html

UK Bail-Out Plan

How the Bank of England made £62bn 'disappear'

By Edmund Conway

I’ve used my elementary Photoshop skills to add those blue lines that mark where the emergency loans for the banks began and ended. Look at the right hand graph – the assets side of the balance sheet – and in particular the purple bit that denotes “other assets”. That includes the currency swaps and, according to Simon Ward of Henderson (the City’s big expert on these complex central bank balance sheets), most likely the emergency loans as well. And, indeed, note how there is a pretty big bulge between October 08 and late January 09 – the precise period when the loans were being issued.

So the answer is that hiding this much money is actually pretty damn easy when there’s all manner of financial chaos going on. It is a finding that will definitely cheer the Bank of England, which rather likes the idea that it can step in and save a bank without anyone finding out and causing another Northern Rock. Not that RBS or HBOS ended up in a much better state in the end, but that’s another story.


http://blogs.telegraph.co.uk/finance/edmundconway/100002192/how-the-bank-of-england-made-62bn-disappear/?utm_source=tmg&utm_medium=TD_62&utm_campaign=finance2611am

UK Bank shares: Bargain or basket case?

Bank shares: Bargain or basket case?
As some of Britain's banks languish in the 90pc club, have the shares fallen far enough to be worth buying again?

By Richard Evans
Published: 3:26PM GMT 11 Mar 2009

Britain's banks have been a terrible investment. Many have joined the "90pc club" of companies whose share prices have fallen to a mere 10th of their former highs.

Shares in Royal Bank of Scotland, for example, had lost 94pc of their value at the time of writing, while Lloyds Banking Group was not far behind on 91pc. The figure for Barclays was 88pc. Even HSBC, which is seen as one of the strongest banks around, was trading 62pc below its peak at one stage, while Standard Chartered had lost 54pc of its value.


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Shareholders' gloom is deepened by the fact that they are unlikely to see any dividends for a while and that, in the case of Lloyds and RBS, the Government holds a controlling stake, potentially bringing political as well as commercial considerations into their decision-making.

Contrarian investors, who are used to buying at the point of maximum pessimism, may think it is time to buy the banks' shares. After all, they reason, all the bad news should be in the price, while the banks could prosper again when the economy eventually recovers. In five years' time, today's prices could look very cheap.

Others say the banks are bust in all but name and could be fully nationalised if the recent string of bail-outs fails to work.

So should investors be buying bank shares or steering clear? And should existing investors grit their teeth and hang on – or sell at a huge loss? We asked the experts for their views.

JONATHAN JACKSON, KILLIK & CO
The bottom line is that all banks are high risk at present given the lack of visibility over the economy or the level of possible write downs in the future. It depends on what type of investor you are.

We don't think RBS or Lloyds are likely to be nationalised but the state's stakes could rise further if the economy turns out worse than we think. If you buy shares in Lloyds you are effectively buying an option on it surviving for three to five years and benefiting from its huge market share. Given the lack of visibility, both share prices will be very volatile.

With HSBC, the falling shares price is a reflection of investor concern that the bank may need to come back for more capital and the presence of hedge fund short positions betting on that.

Standard Chartered should benefit from the trend of survival of the fittest; it should be able to mop up market share as weak players fall away. It operates in a part of the world – Asia – that should experience stronger growth in the long term. It is well placed, but short sellers are attracted by the fact that the share price has held up well, so there could be more volatility. In the long term it's a strong bank and is much less likely to go under.

Barclays is not in as bad shape as Lloyds or RBS and has less chance of being nationalised. The market believes that Barclays will have to join the government asset protection scheme. The risk is that it may have to come back for more money. So far, it hasn't turned to the Government for capital, preferring instead to use third party investors.

In the long term, the Lehmans deal should turn out well. We will have more visibility by the end of the month.

MARK HALL, RENSBURG SHEPPARDS
There is a credible case for believing that the equity in the UK banks should already be worthless, given the scale of government intervention that has been necessary to keep the banks afloat.

However, with the authorities seemingly intent on avoiding full nationalisation, at least for now, the case for and against the shares is not quite so clear cut. There are still very realistic scenarios under which the shares are worthless but the upside could also be very substantial for any survivors of the current recession.

The only certainty is that the shares should be held only as part of a well-diversified portfolio or by those with a very high risk tolerance. The stories of pensioners with their life savings in one or two bank shares are very distressing.

NIC CLARKE, CHARLES STANLEY
We have a great deal of sympathy for those Lloyds TSB investors who bought a low-risk bank and through its management launching an ill advised acquisition [of HBOS] have lost a great proportion of the company.

We believe that the threat of complete nationalisation has been reduced significantly through this deal [with the Government to insure toxic assets]. Lloyds says it can now weather the severest of economic downturns as its assets have been thoroughly stress-tested.

The group will be loss-making in 2009 and there is a chance that it will be loss-making in 2010, despite the synergies from HBOS coming through, unless the outlook for the UK economy improves. And of course if the group is making a loss it is unlikely to pay a dividend, whether it is blocked or not. But at least the announcement [of the government deal] should improve the group's credit ratings and takes it a step nearer to a time when the market is able to value the group on an earnings basis. Unfortunately, due to the fallout from the HBOS deal that is the best that investors can hope for and any sort of recovery will take time. Our recommendation remains hold.

Putting a value on RBS currently is really about trying to decide what the odds are that it will be nationalised or whether it remains a listed company in say three years' time when the economy has improved.

Chief executive Stephen Hester's comment that "to make any forecast is hazardous" and that credit losses will rise "probably sharply" underlines the level of risk that investors are exposed to owning the stock during a prolonged recession. On balance our recommendation remains hold.

On Barclays, one key question mark has been whether the group has been conservative enough writing down its wholesale assets. It has seemed odd that RBS's global markets/wholesale bank has performed so markedly worse than Barclays Capital. Moody's cut its long-term ratings on Barclays by two notches to Aa3 on February 2 due to the potential for "significant" further losses due to credit-related write downs and rising impairments.

It would be helpful to know more detail regarding the Government's asset protection scheme. If participation makes economic sense Barclays' risk weighted assets will be reduced, which will diminish markets concerns about its capital.

And of course whether the macroeconomic forecasts improve/deteriorate in a number of key countries (US, UK, Spain and South Africa) will have a huge bearing on stock performance. Our recommendation remains hold.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/4973811/Bank-shares-Bargain-or-basket-case.html

Bank shares: Bargain or basket case?

Bank shares: Bargain or basket case?
As some of Britain's banks languish in the 90pc club, have the shares fallen far enough to be worth buying again?

By Richard Evans
Last Updated: 6:20PM GMT 11 Mar 2009

RBS could be nationalised completely

Britain's banks have been a terrible investment. Many have joined the "90pc club" of companies whose share prices have fallen to a mere 10th of their former highs.

Shares in Royal Bank of Scotland, for example, had lost 94pc of their value at the time of writing, while Lloyds Banking Group was not far behind on 91pc. The figure for Barclays was 88pc. Even HSBC, which is seen as one of the strongest banks around, was trading 62pc below its peak at one stage, while Standard Chartered had lost 54pc of its value.


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Financial funds: 'The first good news could see a reversal'

Financial funds: 'The first good news could see a reversal'
Shareholders' gloom is deepened by the fact that they are unlikely to see any dividends for a while and that, in the case of Lloyds and RBS, the Government holds a controlling stake, potentially bringing political as well as commercial considerations into their decision-making.

Contrarian investors, who are used to buying at the point of maximum pessimism, may think it is time to buy the banks' shares. After all, they reason, all the bad news should be in the price, while the banks could prosper again when the economy eventually recovers. In five years' time, today's prices could look very cheap.

Others say the banks are bust in all but name and could be fully nationalised if the recent string of bail-outs fails to work.

So should investors be buying bank shares or steering clear? And should existing investors grit their teeth and hang on – or sell at a huge loss? We asked the experts for their views.

JONATHAN JACKSON, KILLIK & CO
The bottom line is that all banks are high risk at present given the lack of visibility over the economy or the level of possible write downs in the future. It depends on what type of investor you are.

We don't think RBS or Lloyds are likely to be nationalised but the state's stakes could rise further if the economy turns out worse than we think. If you buy shares in Lloyds you are effectively buying an option on it surviving for three to five years and benefiting from its huge market share. Given the lack of visibility, both share prices will be very volatile.

With HSBC, the falling shares price is a reflection of investor concern that the bank may need to come back for more capital and the presence of hedge fund short positions betting on that.

Standard Chartered should benefit from the trend of survival of the fittest; it should be able to mop up market share as weak players fall away. It operates in a part of the world – Asia – that should experience stronger growth in the long term. It is well placed, but short sellers are attracted by the fact that the share price has held up well, so there could be more volatility. In the long term it's a strong bank and is much less likely to go under.

Barclays is not in as bad shape as Lloyds or RBS and has less chance of being nationalised. The market believes that Barclays will have to join the government asset protection scheme. The risk is that it may have to come back for more money. So far, it hasn't turned to the Government for capital, preferring instead to use third party investors.

In the long term, the Lehmans deal should turn out well. We will have more visibility by the end of the month.

MARK HALL, RENSBURG SHEPPARDS
There is a credible case for believing that the equity in the UK banks should already be worthless, given the scale of government intervention that has been necessary to keep the banks afloat.

However, with the authorities seemingly intent on avoiding full nationalisation, at least for now, the case for and against the shares is not quite so clear cut. There are still very realistic scenarios under which the shares are worthless but the upside could also be very substantial for any survivors of the current recession.

The only certainty is that the shares should be held only as part of a well-diversified portfolio or by those with a very high risk tolerance. The stories of pensioners with their life savings in one or two bank shares are very distressing.

NIC CLARKE, CHARLES STANLEY
We have a great deal of sympathy for those Lloyds TSB investors who bought a low-risk bank and through its management launching an ill advised acquisition [of HBOS] have lost a great proportion of the company.

We believe that the threat of complete nationalisation has been reduced significantly through this deal [with the Government to insure toxic assets]. Lloyds says it can now weather the severest of economic downturns as its assets have been thoroughly stress-tested.

The group will be loss-making in 2009 and there is a chance that it will be loss-making in 2010, despite the synergies from HBOS coming through, unless the outlook for the UK economy improves. And of course if the group is making a loss it is unlikely to pay a dividend, whether it is blocked or not. But at least the announcement [of the government deal] should improve the group's credit ratings and takes it a step nearer to a time when the market is able to value the group on an earnings basis. Unfortunately, due to the fallout from the HBOS deal that is the best that investors can hope for and any sort of recovery will take time. Our recommendation remains hold.

Putting a value on RBS currently is really about trying to decide what the odds are that it will be nationalised or whether it remains a listed company in say three years' time when the economy has improved.

Chief executive Stephen Hester's comment that "to make any forecast is hazardous" and that credit losses will rise "probably sharply" underlines the level of risk that investors are exposed to owning the stock during a prolonged recession. On balance our recommendation remains hold.

On Barclays, one key question mark has been whether the group has been conservative enough writing down its wholesale assets. It has seemed odd that RBS's global markets/wholesale bank has performed so markedly worse than Barclays Capital. Moody's cut its long-term ratings on Barclays by two notches to Aa3 on February 2 due to the potential for "significant" further losses due to credit-related write downs and rising impairments.

It would be helpful to know more detail regarding the Government's asset protection scheme. If participation makes economic sense Barclays' risk weighted assets will be reduced, which will diminish markets concerns about its capital.

And of course whether the macroeconomic forecasts improve/deteriorate in a number of key countries (US, UK, Spain and South Africa) will have a huge bearing on stock performance. Our recommendation remains hold.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/4973811/Bank-shares-Bargain-or-basket-case.html

FTSE loses billions of pounds within hours

FTSE loses billions of pounds within hours
Billions of pounds have been wiped off the value of Britain's leading companies after losses at HSBC and AIG drove share prices to a six-year low.

By Graham Ruddick and Myra Butterworth
Last Updated: 5:37PM GMT 02 Mar 2009

HSBC Hldgs
The FTSE 100 index of top UK shares dropped after HSBC confirmed a £12.5 billion rights issue.

It fell by 5.3 per cent and below the 3,700 mark for the first time since April 2003, losing investors £47.7 billion.

The sharp decline took the FTSE 100 below the lows experienced last October as UK banks teetered on the edge of collapse and were bailed out by the Government.

It came as analysts expressed concerns about the state of the UK economy, saying the financial crisis could spill over into other industries.

Investors were spooked by HSBC's rights issue after the UK's biggest bank asked for extra cash from shareholders to boost its balance sheet.

The request was made despite HSBC being one of the British banks least affected by the credit crisis.

HSBC's share issue is the biggest ever in Britain, surpassing the £12 billion request by Royal Bank of Scotland last year before it was forced into state support.

HSBC said the rights issue should help its 'ability to deal with the impact of an uncertain economic environment and to respond to unforeseen events'.

The move sent shares in HSBC down almost 19 per cent and also pulled Standard Chartered, which like HSBC conducts a significant amount of business in Asia, down by a similar amount.

Other UK banks also saw their share price tumble, including Royal Bank of Scotland (which closed down 2.6 per cent), Lloyds Banking Group (down 15 per cent) and Barclays (down 6 per cent).

At the same time, one of the world's largest insurers AIG - which was first saved from collapse in September with a package that grew to $150 billion last year - has had to ask for help again after failing to sell enough assets to repay the US.

Simon Denham, managing director of spread-betting company Capital Spreads, said: "The slowly falling indices are dragging ever more of the total economy into the mire and there is a very real possibility of the problem accelerating into an absolute disaster as opposed to a problem mainly constrained to the financial sector at the moment."

The FTSE 100 has not closed below 3,700 since the outbreak of war in Iraq at the end of March 2003. It was at 3,625.83 at the close of play.

David Buik of BGC Partners pointed out that the FTSE 100 is now lower than when Tony Blair won the 1997 general election. "What a waste of a decade that was," he said.

http://www.telegraph.co.uk/finance/newsbysector/epic/hsba/4928648/FTSE-losses-billions-of-pounds-within-hours.html

Can Britain's banks afford to be rescued?

Can Britain's banks afford to be rescued?
Government plans to address the toxic assets on lenders balance sheets is going to lead to punitive costs, writes Katherine Griffiths.

Last Updated: 7:29PM GMT 17 Feb 2009

Rumours circulated at the weekend that politicians were fed up of the flow of bad news coming from banks. The chancellor, Alistair Darling, was said to be considering nationalising those in the worst state, in a bid to take control of the dire situation.

If Mr Darling was thinking of pressing the nationalisation button, the temptation passed. While it cannot be ruled out that Royal Bank of Scotland and Lloyds Banking Group might end up in public ownership, the Government again seems determined to stick to its course and to keep at least part of those banks in the private sector.

The rationale is that the banks will recover more quickly if they are still run as commercial operations, even if over the next few years the Government, as a major stakeholder, will make demands over issues including lending levels, repossessions, and bonuses.

Yet it is becoming clear that trying to preserve partial privatisation of the banks will be very difficult. Banking sources have said that Treasury officials and their advisers have become increasingly worried about how to balance dealing with the enormity of UK banks' losses with the need to strike a decent deal for the taxpayer.

At the heart of the action plan is the insurance scheme the Government will offer to banks so that they can cap their losses from toxic assets. However, due to the pace and scale of deterioration of assets, there is an view that the Government will also have to launch a separate bad bank for the most noxious investments.

Neil Dwane, chief investment officer for Europe at RCM, part of insurer Allianz, said: "History shows that almost every banking crisis has had a good bank/bad bank as part of the solution, such as Japan and Sweden in the 1990s, or the Savings & Loans crisis in the USA. This solution works because the toxic assets are placed in a vehicle, underwritten by the state, which can cope with the toxicity over time."

The Treasury left the door open for a bad bank when it announced its latest rescue package for the banks last month, but there has been reluctance among ministers to embrace the idea because it would mean crystalising huge losses and putting them onto the public balance sheet.

However, analysts believe the Government must take the hit. Mr Dwane said the Government should "produce full and clear results for all banks, highlighting the toxic assets".

If a bad bank is launched, it is likely to sit alongside the insurance plan, which has been branded the asset protection scheme. But in a further complication, the Treasury and its advisers at Credit Suisse and Citibank have realised that the scale of the banks' problems mean that it will be very difficult to make the insurance scheme work while keeping part of the banks in the private sector.

Many believe RBS, which has a balance sheet of £2,000bn, may have to put as much as £200bn of toxic assets into the insurance scheme. If the Government follows the US example and charges 4pc for providing insurance to cover losses on these assets after a first loss to the bank, RBS would have to pay a fee of £8bn to the Government.

RBS would be unable to pay the fee in cash without destroying its capital ratio, and so would have to issue some form of capital instruments as payment. However, the bank is in a difficult position because if the capital instruments carry a 10pc coupon - compared to the 12pc the Government charged for injecting equity in the form of preference shares in October - RBS is still looking at a swingeing £800m annual payment.

Alternatively, RBS could pay the Government for the insurance using a different instrument, such as a warrant. While this might not carry a hefty annual fee, the major drawback is that warrants convert into ordinary equity. As RBS is already 70pc owned by the Government, issuing new stock to the state which would further dilute private shareholders could cause its battered share price to plunge to a new low.

Stephen Hester, chief executive of RBS, has said the bank is the "guinea pig" in thrashing out the details of the asset protection scheme with the Government. But Lloyds - which is 43pc state owned - will also have to make heavy use of the insurance scheme.

This will leave Barclays in difficult situation. The bank, which has avoided taking Government money, said last month it was likely to use the insurance scheme. The bank said it would pay in cash, as to pay in certain types of capital instruments would trigger an anti-dilution clause with the Middle Eastern investors who came on board last year. If this clause is triggered, it could give the Middle Eastern group majority ownership of Barclays.

Barclays must now decide whether it can afford to pay in cash. If it cannot, it may have to stay out of the scheme, which could put it at a disadvantage to rivals.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4681836/Can-Britains-banks-afford-to-be-rescued.html

Let banks fail, says Nobel economist Joseph Stiglitz

Let banks fail, says Nobel economist Joseph Stiglitz
The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice, according to Joseph Stiglitz, the Nobel Prize-winning economist.

By Ambrose Evans-Pritchard in Davos
Last Updated: 8:29AM GMT 02 Feb 2009
Comments 40 Comment on this article

Let banks fail, says Nobel economist Joseph Stiglitz
Professor Stiglitz, the former chair of the White House Council of Economic Advisers, told The Daily Telegraph that Britain should let the banks default on their vast foreign operations and start afresh with new set of healthy banks.
"The UK has been hit hard because the banks took on enormously large liabilities in foreign currencies. Should the British taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite?" he said.
"There is an argument for letting the banks go bust. It may cause turmoil but it will be a cheaper way to deal with this in the end. The British Parliament never offered a blanket guarantee for all liabilities and derivative positions of these banks," he said.
Mr Stiglitz said the Government should underwrite all deposits to protect the UK's domestic credit system and safeguard money markets that lubricate lending. It should use the skeletons of the old banks to build a healthier structure.
"The new banks will be more credible once they no longer have these liabilities on their back."
Mr Stiglitz said the City of London would survive the shock of such a default because it would uphold the principle of free market responsibility. "Counter-parties entered into voluntary agreements with the banks and they must accept the consequences," he said.
Such a drastic course of action would be fraught with difficulties and risks, however. It would leave healthy banks in an untenable position since they would have to compete for funds in the markets with state-run entities.
Mr Stiglitz's radical proposal is a "Chapter 11" scheme for households to allow them to bring their debts under control without having to go into bankruptcy. "Families matter just as much as firms. The US government can borrow at 1pc so why can't it lend directly to poor people for mortgages at 4pc. ," he said.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4424418/Let-banks-fail-says-Nobel-economist-Joseph-Stiglitz.html

UK banking system so close to collapse

For short and sharp, read long and slow when talking of the R-word

Mervyn King, Governor of the Bank of England, certainly wasn’t pulling his punches in Leeds last night. In a blunt speech Mr King uttered the “R-word”, warning that “it now seems likely that the UK economy is entering a recession”.

By Richard FletcherLast Updated: 8:40AM BST 22 Oct 2008

If that wasn’t bad enough, the Governor provided a rare insight into the worst-case scenarios that the BoE has grappled with in recent weeks. “Not since the beginning of the First World War has our banking system been so close to collapse,” he said.
The speech topped a day of gloomy economic news that included a dire industrial trends survey from the CBI which showed that even if the financial markets are returning to normal, the downturn in the real economy has a lot further to run. Meanwhile, Capital Economics predicted house prices could drop by 35pc, which, if correct, would be the biggest fall ever recorded.
It seems our only hope is that this is a short, sharp recession.
Unfortunately, I even have bad news on that front: the Governor ruled out a “quickie” recession last night, warning that it would be “long, slow haul” before the economy returns to normal.

Arcadia’s debt beats Debenhams’ £1bn
The Bank of England Governor may be gloomy but Sir Philip Green laid on a Champagne breakfast for 125 loyal lieutenants yesterday at the Arcadia headquarters just off Oxford Street. As his senior team tucked into eggs Benedict and bacon (or yoghurt and orange juice for the more health-conscious) Sir Philip unveiled Arcadia’s full-year results and presented a jeroboam of Champagne to the heads of the fashion group’s brands.
Given the carnage on the high street, the billionaire retailer can be rightly proud of the results announced by Arcadia yesterday: a 0.6pc fall in sales and 6.1pc fall in operating profit.
A sterling performance by Topshop finally laid to rest the suggestion that it was former brand director Jane Shepherdson who drove its phenomenal success. Meanwhile, Yasmin Yusuf’s success in reviving Miss Selfridge may leave beleaguered M&S shareholders asking why they didn’t hold on to their former creative director of womenswear.
A short stroll down Oxford Street at Debenhams’ headquarters, Rob Templeman, the department store chain’s chief executive, was taking the red pen to its dividend – which he slashed from 6.3p a share to 3p a share.
Both Debenhams and Arcadia are stealing market share from a battered M&S. Like Arcadia, Debenhams’ 0.9pc fall in like-for-like sales is a (relatively) good performance in the current market.
But no matter how impressive Templeman’s performance, the market has become obsessed by the level of debt in the Debenhams business. With almost identical sales, Sir Philip is servicing £695m of debt at Arcadia, while at Debenhams Templeman is having to juggle just shy of £1bn (a hangover from the leveraged buy-out of the retailer by a private equity group in late 2003).
Yesterday, Templeman laid out his plans to reduce the burden: cutting costs, reining back capital expenditure and asking shareholders to take what is left of the dividend in shares rather than cash.
Templeman has a record of delivering: but slashing the group’s debt will take years, not months. And all the time Sir Philip is busy plotting – eyeing up retail brands including those owned by troubled Icelandic investor Baugur. Not only do his two businesses – Arcadia and Bhs – have relatively conservative borrowings, we can safely assume that Sir Philip still has a large chunk of the £1.2bn dividend he paid himself in 2005.
Its may only be a short stroll down Oxford Street from Arcadia to Debenhams but the two retailers are worlds apart in an environment where cash is king.

Evolution bags a banking bargain

Sir Philip is not the only entrepreneur who has been rummaging around the wreckage that is now Iceland.
Alex Snow, chief executive of Evolution, appears to have bagged a bargain by buying Singer & Friedlander Investment Management from the administrator to failed Icelandic bank Kaupthing.
Evolution has paid just a “few million pounds” for the business, which manages £1.5bn on behalf of 4,000 private clients. In better times, the fund management arm would have sold for closer to £30m (valued on the basis of 3pc of funds under management).
If Evolution’s investment management business – Williams de Broë – can retain the Singer & Friedlander clients, the funds under management will grow by 50pc on the back of the deal.
Until the onset of the credit crunch, Snow had been under pressure from activist shareholders to return the pile of cash the group was sitting on – pressure he largely resisted. Having done so, he is now putting his £150m war chest to good use.
richard.fletcher@telegraph.co.uk

http://www.telegraph.co.uk/finance/comment/richardfletcher/3237854/For-short-and-sharp-read-long-and-slow-when-talking-of-the-R-word.html

Comment:
There are opportunities in this dire economic times.

UK Banks bailout

Banks bailout: Bonds tumble as Government admits no cap on taxpayer risk
Bank shares plunged and Government bonds tumbled after Gordon Brown announced plans to insure lenders for losses on bad loans which could amount to billions of pounds.

By James Kirkup Last Updated: 2:07PM GMT 19 Jan 2009

Billions of pounds of our money is to be poured into Britain's ailing banks. Gordon Brown says desperate measures are needed.

The Prime Minister announced a scheme to allow banks to exchange cash or shares for a Government guarantee on their "toxic" debts, transferring any losses they suffer from the banks to the taxpayer.
But the Government has conceded that it can't estimate how much taxpayers' money will be on the line in the latest bank assistance package.
UK bond prices fell sharply as the financial markets digested the prospect of further Government borrowing. Bank stocks also tumbled with shares of Royal Bank of Scotland losing more than half their value. Lloyds, Barclays and HSBC also fell.
Ministers say the new package, which comes only three months after another £500 billion bailout, is vital to restore bank lending and help companies get credit and stay in business.
At a press conference in Downing Street to announce the package Mr Brown said that "people are right to be angry" about what he called irresponsible lending by banks.
Mr Brown also reacted angrily to suggestions that he was handing a "blank cheque" to the banks by offering to protect them against the consequences of that lending.
He said: "You are completely misunderstanding this to suggest this is a blank cheque. Quite the opposite. It is for the Treasury to decide, after an analysis, what the insurance will be."
But he admitted that ministers have not yet set any upper limit on the value of loans they support or the level of risk taxpayers will bear.
As part of the rescue package, the taxpayer has taken an even bigger stake in Royal Bank of Scotland, which has today announced losses of over £20 billion – the biggest loss in British corporate history.
The Government is also offering to increase its stake in Lloyds Banking Group. The state could even take shares in Barclays and HSBC in exchange for insuring their loans in its new Asset Protection Scheme.
HSBC said that it had not sought capital support from the UK Government "and cannot envisage circumstances where such action would be necessary".
It is the second rescue package in three months, which is aimed at getting the banks to lend to businesses and homeowners.
If it fails, banking experts say the only option left for Mr Brown will be full nationalisation of the banking system.
In a statement to the City, the Treasury said the Asset Protection Scheme scheme is expected to operate for "not less than 5 years."
"To increase confidence and capacity to lend, and in turn to support the recovery of the economy the Government is today announcing its intention to offer protection on those assets most affected by the current economic conditions," the Treasury statement said.
In the first instance it will be open to the major British banks, but the Treasury said it was possible that insurance will ultimately be extended to the British subsidiaries of foreign banks.
The Government also announced:
A plan to make government bonds available to banks to support £100  million of loans for some home owners and small businesses, as recommended by Sir James Crosby, former HBOS chief executive;
An extension until the end of this year of the Government's £250  billion Credit Guarantee Scheme to support lending between banks;
An expansion of the Bank of England's £200 billion Special Liquidity Scheme. The Bank will now accept consumers' car loans in exchange for Government bonds, a move intended to support the failing motor industry;
Northern Rock, the state-owned bank, will be told to offer more home loans, reversing previous instructions for it to get rid of mortgage customers by charging punitive rates of interest.
Despite £500 billion having been pledged for a rescue package in October, the banks are not lending at the levels ministers and business groups say are needed for the economy to function normally. As a result, the country is mired in a recession which experts are forecasting could be the worst for generations.
The Chancellor, Alistair Darling, also suggested that the bailout would be accompanied by new measures to control the banks' behaviour
He said: "It's quite clear in the world we're living in just now we do need to look again at the way we supervise and regulate these banks."
George Osborne, the Tory shadow chancellor, said the Government had no choice but to help the banks again because the October package had "failed."
He said: "I don't like the idea but it's a question of what options there are."
Mr Osborne added that strict scrutiny must be applied to bank assets to protect taxpayers' interests. "We need to know exactly what the Government is proposing to insure. We need a full audit, an independent audit," he said.
The centrepiece of today's package is to provide Government guarantees against losses that the banks might incur on loans that have now turned sour amid collapsing house prices and a shrinking global economy.
The banks will pay a "significant" fee to the Government for each loan they insure.
They will be able to pay that fee in either cash or shares. That could open the way to the state holding stakes in all of Britain's four biggest banks for the first time.
Shares in Barclays fell by more than 20 per cent on Friday amid City speculation that the bank is exposed to huge losses. It tried to calm that speculation by pre-announcing significant profits, but its shares are likely to come under fresh pressure.
In the October package, ministers offered Barclays billions of pounds in new capital, but – unlike RBS and Lloyds – Barclays rejected the offer and chose to raise new funds from Gulf investors.
Treasury sources said the proposal to insure Barclays's loans in exchange for shares would effectively repeat that offer. Some believe that the bank will find it almost impossible to reject state help this time.
Despite raising the prospect of increased government holdings in the banks, ministers insist that outright nationalisation remains a last resort.
The loan insurance scheme is being proposed as an alternative to the creation of a state-controlled "bad bank" to house the toxic assets.
Officials say the insurance plan avoids some of the complexity and delay involved in valuing and buying the assets from the banks.
But it means the Government cannot know exactly what losses it would incur if the loans it insures go bad.
As well as paying substantial fees in cash and shares for the loan insurance, banks will also have to sign "contractual agreements" with the Treasury about their future lending, committing them to increase lending and focus new credit on British customers ahead of foreign borrowers.
Separately, the Government could increase its stake in RBS and the Lloyds Banking Group, potentially making the taxpayer the majority shareholder in Lloyds.
In October, some of the state's holding in RBS and Lloyds was taken in the form of preference shares, holdings that committed them to paying hundreds of millions of pounds to the taxpayer before they did anything else.
The banks say those obligations have shackled them and forced them to divert money that could otherwise have been used to lend.
In exchange for reducing what it takes from the preference shares, the Government wants more normal shares, effectively diluting the value of private investors' holdings and increasing state influence over RBS and Lloyds.
RBS has accepted the deal, taking the state's ownership to 70 per cent.
Lloyds is more reluctant to accept the offer, which could see the Government share exceed 50 per cent.