When I did my first round up of this in April 2008, I guesstimated the losses from reckless UK residential lending at between £28 billion and £50 billion.
HBOS has written off about £6 billion of residential mortgages so far (£3 billion last year, £3 billion this year) and house prices will fall at least another twenty per cent, so let's double that to £12 billion. HBOS also has around one-fifth of the UK mortgage market, but was at the more reckless end, so £50 billion looks 'about right'. At the time I made my guesstimate, nobody realised that there would be a government bail out. I'll give myself a bonus point because the amount they stuck in of £37 billion is pretty much in the middle of my range.
Just for fun, I reworked the table from my earlier post, if you divide their market capitalisation (as at April 2008) by their gross assets (as at December 2007), and then sort the rows in descending order of the result in column C, this ties in pretty well with how much their share price has fallen over the last twelve months (Standard Chartered is a blip). The 'Tier 1' capital ratios as at April 2008 (see earlier post) of these banks all looked pretty much the same, so in future we can dispense with 'Tier 1' ratios as being a complete fiction, somehow or other, the stock market knew perfectly well a year ago which banks were most likely to survive.
Anyways... the point of all this is that there are people who say that "banks are too big to fail"*.
Take it from me, they are not, the losses might well be a lot more than £50 billion, because then there's corporate lending, in which HBOS seemed to have excelled - at picking lousy risks - and also an unknown amount that UK banks invested in sub-prime crap from the USA and so on. So maybe the total losses will be £100 billion (around 7% of UK GDP, £1,500 billion). As at present, the balance sheet total of UK banks is around £6,000 billion, a ridiculously large figure because there is so much double counting involved. If you net off all the inter-bank stuff and assets/liabilities that are matched economically but not legally**, then their balance sheet total is more in the order of £1,500 billion.
So, without going into legal niceties, shareholders will be wiped out and up to 7% of their creditors (i.e. longer-term bondholders) will have to be paid in shares instead of cash, or will have to wait a bit longer for their money than they expected, or might not get much of it back. Such is capitalism, risk and reward and all that.
That's that fixed, next.
* Interestingly, people trot this out, whether they support the bail out or not, merely because they can't see an alternative. I wouldn't be surprised if the banks exaggerate their own balance sheet totals to make themselves seem more powerful and important than they really are. This is a bit like EUphiles and EUsceptics being broadly agreed that the EU is getting more and more powerful. It's not - it passed it's high water mark with the Irish 'No' and now they are flailing around trying to make it look like they are all-powerful, but they aren't. Of course we still need to keep kicking the EU until it's been snuffed out, but there's no panic any more, a more pressing issue right now is kicking the banks while they are down.
** For example, the bank has sold foreign currency forward to Company A and hedged its bets by buying the same currency forward from Banks B, C and D. Really, these two net off - unless Banks B, C and D welch on the deal and the spot rate has gone against them, the net asset or liability on these two position will always be a small profit. And accountants are very fussy about not netting stuff off, it went out of fashion a decade ago.
So What Will Be Done About The Officer?
1 hour ago
10 comments:
Talkling of debt-for equity swaps, did you notice that Russian chap in charge of Chelsea football club did one last week?
banks are too big to fail. if they went bust the confidence in the UK would go with it. The currency would collapse and the Uk could also default on its debts.
There is more to market sthan black and white numbers.
Perhaps this is slightly off topic.
It occurs to me that when a business changes ownership (or management), then frequently the new owners use the first few months to announce bad news - they declare losses or write down the value of the assets.
Any losses in the first few months reflect on the previous owners not the new ones. There is therefore an incentive to overstate the losses in order that future profits look better. The future profits of course reflect on the new owners.
Now, of course, I'm not saying that the banks haven't made any losses but it does occur that now there is a window of opportunity for banks to get cheap or free money from the state. That window will close in due course. It is therefore in their interest to maximise their reported loss now regardless of the true situation.
If I ran Lloyds and had just taken over HBOS, I think I would be very keen to show that HBOS was actually in much worse shape than I had been led to believe.
Anon, that is completely on-topic and fits in with the overall hysteria that banks are whipping up.
Shouldn't be anon, it should be TDK. Dunno what went wrong.
I wonder what the auditors are going to say. They've really kept their heads down for the past year or so. Mind you, so would I if I'd certified that banks' accounts showed a "true and fair view" of their financial position. Yes yes, I know that auditors are "watchdogs not bloodhounds" but even watchdogs bark occasionally.
If the banks were 'allowed' to go bust - as they bloody well deserve to be - then I for one (had I the odd few quid down the back of the sofa) would be very interested in buying up their high street operations. There's money there and the branches still effectively run quasi narrow banking. There are also, rather surprisingly, still quite a few genuine bankers who know how to run local branches who would be only too pleased to be localised (as it were) and taken out from under the thrall of the intermnational corporatists and freed from forever flogging insurance.
I bet I'm not alone.
Nice article!
Thanks for posting.
Very interesting.
Mark Wadsworth: You're right when you say - "I wouldn't be surprised if the banks exaggerate their own balance sheet totals to make themselves seem more powerful and important than they really are."
The banks HAVE inflated their balance sheets by use of an accountancy standard IAS39. It is the mis-use and misapplication of this accountantcy standard that the banks consolidate the assets and liabilities of the SPV securitsation companies onto their Group Accounts even though those SPV securisation companies are wholly independent foreign owned (tax haven) companies and are NOT legal subsidiaries or legal undertakings of the bank. Thus when the banks cry for the tax payer to capitalise the banks, the tax payer is also capitising the independent foreign SPV securitisation companies that are consolidated onto the banks balance sheets.
Anon, good point. The status of these SPVs is woefully unclear, some are totally separate, legally and commercially, there are cases where the sponsoring bank is liable for some losses but shares no upside, and infinite shades of grey in between.
But what I was driving at was the general rule that you cannot net off assets and liabilities, even when they relate to two sides of the same transaction, and in 99% of cases, a loss on one side would be matched by a gain on the other (the only residual risk being counter party risk).
This is why the total assets/liablities of UK banks appear to be five times as much as total UK-based lending/deposits. If all UK banks were consolidated into one mega-bank and inter-bank transactions netted off, total assets would turn out to be a fraction of the figure that you get from a crude addition of each individual balance sheet.
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