Tuesday, November 3, 2009

RBS and Lloyds Receive Yet More UK Government Funding

It's hard enough keeping track of the latest nuances of the US banks' various government bailouts, paybacks, comp battles etc. Who has time to keep an eye on the UK? But today's headlines from across the pond are fairly ominous and worth mentioning. RBS and Lloyds will receive a total of $51 billion in a second bailout from UK taxpayers. RBS is set to receive 25.5 billion pounds bringing the government's ownership stake up to 84% from 70%. Lloyds is opting to do most of its new capital raising from money managers, accepting roughly a quarter of the 21 billion from the government, allowing the mortgage lender to avoid near-nationalization. However, both banks have agreed not to pay cash bonuses to any employees earning more than 39,000 pounds this year. That is quite a concession. In fact, the scrooges at the UK Treasury make the US Pay Czar look like the tooth fairy. Mark my words, nobody from AIG is going be lured away by 39,000 pounds in cash and the balance of comp in RBS or Lloyds stock.

In any event, bailouts of this size from two of the UK's largest banks foreshadow worse to come for some of our problem banks. They're in the same business, just in different countries. RBS has essentially been nationalized, and Lloyd's is struggling to avoid the same ultimate fate. Think of RBS as the Citibank of the UK and Lloyds as the Bank of America. Both Bank of America and Lloyds/HBOS pursued disastrous value destroying mergers when it appeared that the worst would be over. Right before things got much worse. I am absolutely shocked that financial stocks in the US are taking this news in stride today. But it's not the first time that the recent bullishness of this market has surprised me.

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