It was too good to be true…

After the bail out, new problems emerge – wouldn’t you know it. It was too good to be true. First the Peston version.

“ Treasury may have to abandon its stipulation that no dividends can be paid to shareholders in RBS, HBOS and Lloyds until these banks have repaid preference shares which they are selling to the state… The prohibition on dividend payments has spooked our big investing institutions.
It’s wreaking havoc in particular on Lloyds TSB’s share price, because its takeover of HBOS would give it a vast burden of preference shares to pay off”.

So much “havoc” in fact that “it may be several years before Lloyds TSB, in the process of taking over HBOS, can return to paying dividends, which represent the life-blood of the small investment community.” So, say opponents, “the hastily-arranged merger deal should now be reconsidered.”

Nor will the banks “be able to comply with the government’s preliminary demand to keep lending at 2007 levels ” if borrowers are waiting to see how much further house prices will fall .”
“The government quite clearly hadn’t thought through their comment,”
`Wasn’t that the problem we got ourselves into in the first place. Should people be offered that amount of money again?”

Part- nationalisation is surely not easy option, it’s probably the worst, like Churchill’s view of democracy, apart from all the others. I would guess though that after a lot of shuffling around, the situation will stabilise and the RBS-Hbos merger will stick. Can I ask a naive question: would it be so terrible if the banks, faced with a stagnant housing market, paid off a lot of debt, as Northern Rock are doing, before stimulating that market again – nice and slowly? The Rock amazingly had reduced its debt from £26.9 billion in December to £11.5 billion by the end of last month. But to answer the question, the Rock is now warning that falling house prices reduce the value of its assets and therefore its ability to pay back the debt. It’s a mind-numbing chicken and egg situation for banks loaded with housing debt – and that means Hbos as well as Northern Rock.

Meanwhile we’re told here that “The new scheme will be a big earner for the Treasury: 150 bp on an expected £250 billion take-up equates to £3.75 billion per annum. The Special Liquidity Scheme is likely to generate a further £1.5 billion (based on an assumed average 75 bp fee on take-up of £200 billion), suggesting a total payment from banks to the Treasury / Bank of England of about £5.25 billion per annum.”

If you’re with me so far, here’s another question. I make it that this “big earner” on the £37 billions borrowed will take at least seven years to pay off at that rate. Very fast maybe for huge debts but does that mean part-nationalisation is set to last at least that long?

Banking fiends and opinionated (but non-bluffing) business students, please elucidate.

By the way, I’m now convinced that letting Lehman’s go to the wall was a huge mistake.

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