Thread: A note of caution for those with deposits in US Banks

Oh dear - entire UK banking sector downgraded (except the fine fellows at Standard Chartered) and "at least 2 FTSE companies nearly fail to pay their dividend, but to UK banks' lack of funds"!

Interesting FT Alphaville today...:

http://ftalphaville.ft.com/blog/2008/04/15/12330/markets-live

General Bank of England bailout to keep the wolves at bay (won't be good for Sterling ):

http://www.reuters.com/article/marketsNews/idUSL169544420080416

BoE close to terms for mortgage intervention - FT

LONDON (Reuters) - The Bank of England is close to finalising the terms for an intervention in the mortgage market, the Financial Times reported, after leading bankers warned the government on Tuesday over the growing strain on small lenders.

Citing people familiar with the proposal -- which still needs government approval -- the paper said on Wednesday that the plan would see the Bank would swap UK mortgage-backed securities for government loans for a period of one to three years.

The newspaper said the Bank would not accept mortgages agreeed after the end of December 2007.

The Wall Street Journal meanwhile reported the UK government could be shifting to a more activist role in lending a hand to the sector worst hit by the credit crunch, and said it could ask the Bank of England to relax the terms of loans it makes to banks.

The newspaper said Prime Minister Gordon Brown, at the meeting with bankers on Tuesday, indicated he favoured widening the range of collateral the Bank would accept on a variety of loans.

This would be done on the condition that banks pass on the benefits to customers by easing mortgage terms and rates, the Wall Street Journal reported.

^Looks like the markets like it!

http://newsvote.bbc.co.uk/1/shared/fds/hi/business/market_data/currency/11/11678/intraday.stm

Sterling up across the board - should open up against THB after trading resumes after SK...

Shock Revalation That Banks 'LYING' Over Borrowings!!!

(Note for people who don't follow this stuff - LIBOR is the market that banks borrow from. Rates on LIBOR affect every bank rate used worldwide. If it is inaccurate, then the entire monetary system is innaccurate, from your savings rate, through credit cards to loans and mortgages. No-one has EVER suggested that banks have LIED about LIBOR borrowings before, not even in the Great Depression. This is BIG and could be the next phase in the credit crunch crisis if proved true...).

http://online.wsj.com/article/SB120831164167818299.html?mod=hpp_us_pageone

LIBOR FOG


Bankers Cast Doubt
On Key Rate Amid Crisis


LONDON -- One of the most important barometers of the world's financial health could be sending false signals.

In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.

Libor plays a crucial role in the global financial system. Calculated every morning in London from information supplied by banks all over the world, it's a measure of the average interest rate at which banks make short-term loans to one another. Libor provides a key indicator of their health, rising when banks are in trouble. Its influence extends far beyond banking: The interest rates on trillions of dollars in corporate debt, home mortgages and financial contracts reset according to Libor.

In recent months, the financial crisis sparked by subprime-mortgage problems has jolted banks and sent Libor sharply upward. The growing suspicions about Libor's veracity suggest that banks' troubles could be worse than they're willing to admit.

The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That's good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.

True Borrowing Costs

No specific evidence has emerged that banks have provided false information about borrowing rates, and it's possible that declines in lending volumes are making some Libor averages less reliable. But bankers and other market participants have quietly expressed concerns to the British Bankers' Association, which oversees Libor, about whether banks are reporting rates that reflect their true borrowing costs, according to a person familiar with the matter and to government documents. The BBA is now investigating to identify potential problems, the person says.

Questions about Libor were raised as far back as November, at a Bank of England meeting in which United Kingdom banks, the firms that process bank trades and central bank officials discussed the recent financial turmoil. According to minutes of the meeting, "several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress." In a recent report, two economists at the Bank for International Settlements, a sort of central bank for central bankers, also expressed concerns that banks might report inaccurate rate quotes.

Cont...

German Banks Buggered Then:

Germany is in shock as subprime gets worse

http://www.thisismoney.co.uk/investing-and-markets/article.html?in_article_id=440507&in_page_id=3&pos ition=moretopstories

Allan Hall in Berlin, Evening Standard
17 April 2008, 12:00pm
Reader comments (1)


Germany is mired so deep in the subprime crisis that its entire banking structure is under threat of collapse. As writedowns continue to mount and government guarantees wear thin, experts warn that losses could soon reach €30bn (£24bn) - and possibly more.

It is the long-suffering German taxpayer who will be handed the final bill, just at a time when German industry and employment as a whole is on the up.

'The subprime meltdown has caused the deepest financial crisis in Germany in decades,' wrote the influential news magazine Der Spiegel this week.

To a people with memories of another crash, that of 1929, helping to propel the Nazis to power and Germany to ruin, the spectre of a replay of those dark times is grim indeed. Throughout the crisis, banks and politicians have sought to downplay the scope of the losses, but the risks continued to mount.

Just weeks ago the governor of the state of Bavaria, G¸nther Beckstein, put on a brave face about the state-owned bank BayernLB. He talked about the 'unpleasant burdens' borne by the bank, which is half-owned by the state of Bavaria, and of the 'painful downside'.

Anyone who is active in the international capital market, Beckstein said, should expect 'to lose money sometimes'. The same day, the bank reported writedowns of nearly €2bn. Days earlier WestLB in North Rhine-Westphalia needed a government guarantee of €3bn to stay open.

Now BayernLB has exposed its true losses: €4.3bn. Beckstein had to go cap in hand to his own parliament to ask for a loan. Saxony-based Sachsen LB has subprime debts to the tune of €2.8bn while the government-owned industrial lender IKB Deutschland is in the subprime hole to the tune of €7.2bn.

Germany's Landesbanks were in trouble before the subprime earthquake hit: now they are in danger of imploding.

A cosy system of politicised banks putting profits before common sense led to their provincial bosses, in the words of Deutsche Bank chief Josef Ackermann, 'taking risks beyond their capacity and competence'.

The subprime crisis has revealed a wider truth about the Landesbanks: they're simply not very good. Originally founded to act as wholesale financiers alongside state-owned regional savings banks, when their state guarantee was abolished in 2005, under pressure from Brussels, they found it harder to obtain cheap new funding and had to scour for higher-yielding assets.

They plunged into the murky waters of collaterised debt obligations without bothering to check if they could see the bottom. Now they are drowning. Germany also has far too many banks, around 2200 in all, which has a depressing effect on the industry's profitability and has led to speculation that massive consolidation will have to come.

Germany's central bank and government have repeatedly called for calm over the credit spasms unleashed by the uproar. But as more and more losses mount up, and taxpayers are expected to help bail the banks out of the trouble they made for themselves, it is hard to see where or when the crisis will end - or what the final bill will be.

'Guarantees of certain amounts are being constructed like firewalls around the banks' bad portfolios. If one wall collapses, a new guarantor replaces the first guarantor. In almost all of these cases, the guarantors are publicly owned institutions,' said one commentator.

This week the gloom claimed its first political scalp. Premier of Saxony, Georg Milbradt, resigned after the financial mess blew a hole in the budget of his eastern German state.

His state's bank, Sachsen LB, had to be sold to another bank after accumulating enormous liabilities from investing in so-called structured-finance products linked to the dodgy US home mortgages. One bank has actually gone under. The small private Weserbank in Bremerhaven has had its services suspended by federal financial authorities in Germany.

Founded in 1912 as a small, private bank, the institution recently launched an effort to grow into an investment bank with a presence in Frankfurt, Germany's financial capital. It only had €120.4m on its balance sheets and that went when the first subprime bills began rolling in.

Where will it all end? They crystal balls are out but it is hard to say. The good news for ordinary Germans is that most of them are not homeowners. So they don't face the same kind of lending problems that are dogging the British mortgage market.

The great unknown is whether there is more bad news about subprime liabilities to come in Germany.

DZ Bank, the central bank for roughly 1100 co-operative banks which also links them to international capital markets, wrote down €1.36bn in February - but still has a portfolio of risky debt investments of €26bn, almost €3bn of which is in subprime mortgages.

'It is very difficult to make a prediction for the current year,' said chief executive Wolfgang Kirsch.

That is the view in many German banks. It seems no-one really knows how toxic their portfolios really are.

Royal Bank of Scotland (RBS) Runs Out Of Cash!

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/17/cnscot217.xml

...Asks for £12BN from shareholders to keep going....

Royal Bank of Scotland calls on investors for cash in rights issue



Royal Bank of Scotland is preparing to launch a rights issue of between £5bn and £12bn in a move that will raise questions about the future of the group's chief executive Sir Fred Goodwin.

The £37bn group has decided to tap shareholders for capital due to worsening sub-prime writedowns and its already fragile tier one capital position, which makes it the most leveraged of the European banks.

Goldman Sachs and Merrill Lynch are arranging the rights issue and RBS wants it to be fully underwritten.

News of the plan - which will send shockwaves through the City - comes as the City faced its blackest day in almost twenty years with investment banks revealing plans to axe more than 3,500 jobs in London.

Cont...

Originally Posted by bkkandrew

Goldman Sachs and Merrill Lynch are arranging the rights issue and RBS wants it to be fully underwritten.

Good luck on that then...

Originally Posted by bkkandrew

Shock Revalation That Banks 'LYING' Over Borrowings!!!

(Note for people who don't follow this stuff - LIBOR is the market that banks borrow from. Rates on LIBOR affect every bank rate used worldwide. If it is inaccurate, then the entire monetary system is innaccurate, from your savings rate, through credit cards to loans and mortgages. No-one has EVER suggested that banks have LIED about LIBOR borrowings before, not even in the Great Depression. This is BIG and could be the next phase in the credit crunch crisis if proved true...).

http://online.wsj.com/article/SB120831164167818299.html?mod=hpp_us_pageone

LIBOR FOG


Bankers Cast Doubt
On Key Rate Amid Crisis


LONDON -- One of the most important barometers of the world's financial health could be sending false signals.

In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.

Libor plays a crucial role in the global financial system. Calculated every morning in London from information supplied by banks all over the world, it's a measure of the average interest rate at which banks make short-term loans to one another. Libor provides a key indicator of their health, rising when banks are in trouble. Its influence extends far beyond banking: The interest rates on trillions of dollars in corporate debt, home mortgages and financial contracts reset according to Libor.

In recent months, the financial crisis sparked by subprime-mortgage problems has jolted banks and sent Libor sharply upward. The growing suspicions about Libor's veracity suggest that banks' troubles could be worse than they're willing to admit.

The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That's good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.

True Borrowing Costs

No specific evidence has emerged that banks have provided false information about borrowing rates, and it's possible that declines in lending volumes are making some Libor averages less reliable. But bankers and other market participants have quietly expressed concerns to the British Bankers' Association, which oversees Libor, about whether banks are reporting rates that reflect their true borrowing costs, according to a person familiar with the matter and to government documents. The BBA is now investigating to identify potential problems, the person says.

Questions about Libor were raised as far back as November, at a Bank of England meeting in which United Kingdom banks, the firms that process bank trades and central bank officials discussed the recent financial turmoil. According to minutes of the meeting, "several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress." In a recent report, two economists at the Bank for International Settlements, a sort of central bank for central bankers, also expressed concerns that banks might report inaccurate rate quotes.

Cont...

And up, up and away LIBOR goes...!

http://online.wsj.com/article/SB120846842484224287.html?mod=rss_whats_news_europ e

You need a sub to get the full story, but here is the free bit:

Libor Surges After Scrutiny Does, Too

LONDON -- The world's most widely used interest rate took its largest jump since the advent of the credit crisis in a sign that banks could be responding to increasing concerns that the rate doesn't reflect their actual borrowing costs.

Thursday's sudden jump in the dollar-denominated London interbank offered rate, or Libor, comes after a decision Wednesday by the British Bankers' Association to speed up an inquiry into the daily borrowing rates that banks provide to establish the Libor rate.

The move by the BBA, which oversees Libor, came amid concerns among bankers that their rivals were not reporting the ...

A rare piece of good news (well, less bad than expectations). Both Merrill and Citigroup have reported their quarterly reports. Not great- about another $10 bn in writedowns- but not as bad as the market feared. The shares of both companies rose on the results.

^ True. But Citi's CEO is a right tosser. He got Citi to back questionable hedge funds (but, hey, they are his friends' funds). Unbelievable he's still there, and now he's slashing jobs like they were deadwood. He's the one that should be sacked.

"Write-downs related to mortgages and turmoil in the credit markets reached more than $12 billion, and costs stemming from consumers' credit problems surpassed $3 billion, the bank said Friday. And in a conference call with analysts, Citigroup chief financial officer Gary Crittenden said the bank, seeking to cut costs, is eliminating about 9,000 additional jobs.

Citigroup has announced 13,200 job cuts since the credit crisis began slamming the banking industry last summer. The bank announced 4,200 cuts in January, and more work-force reductions are likely. 'We're very, very focused on efficiency," said chief executive Vikram Pandit during a conference call.' "
Citigroup reports $5.1 billion loss on hefty write-downs: Financial News - Yahoo! Finance

Maybe City's bounce a bit premature:

http://www.bloomberg.com/apps/news?pid=20601103&sid=aElaUvS1sxzw&refer=news

Citigroup May Need to Sell Assets to Bolster Capital (Update1)

By Bradley Keoun

April 19 (Bloomberg) -- Citigroup Inc. shareholders, cheered by a $5.1 billion first-quarter loss that wasn't as big as some analysts forecast, face growing concern that the bank may have to sell assets, reduce the dividend and attract outside investment to bolster capital.

Citigroup's so-called Tier 1 capital ratio -- a measure of its ability to withstand loan losses -- fell to 7.7 percent at the end of March, the New York-based bank said yesterday. Citigroup says it needs a 7.5 percent ratio to provide a margin of safety and preserve its credit ratings.

The bank's shares surged 4.5 percent yesterday after it reported $16 billion of asset writedowns during the quarter, less than some observers predicted. The writedowns burned through much of the $30 billion of capital Citigroup has raised since late last year, leaving it vulnerable to further charges and loan-loss provisions.

``We're in a recession, they have a huge consumer book, and there's huge double-digit-billion provisions that they're going to have to take in the next 18 months to two years,'' CreditSights Inc. analyst David Hendler said. ``They're undercapitalized for their risk.''

A weakening U.S. economy and rising consumer delinquencies have forced Chief Executive Officer Vikram Pandit and Chief Financial Officer Gary Crittenden to back away from assurances earlier this year that the bank didn't need to raise more capital. In January, Crittenden said Citigroup ``stress-tested'' its assumptions under ``multiple recessionary scenarios.''

`No Silver Bullets'

Asked yesterday if the bank might seek an additional infusion, Crittenden said, ``You can never say never.''

``This is a difficult business environment,'' Crittenden said on a conference call with analysts and investors. ``There are no easy solutions here, no silver bullets.''

Citigroup raised capital in December and January by selling stakes to investment funds controlled by foreign governments including Abu Dhabi, Korea and Kuwait. The infusion helped boost Citigroup's Tier 1 ratio to 8.8 percent by Jan. 22 from 7.1 percent at the end of the year.

The first-quarter loss was second in size in the bank's 196-year history only to the record $9.88 billion reported in the previous period. It wiped out so much capital that Citigroup may have to find outside investors or cut the dividend, Hendler said.

Citigroup in January slashed its dividend by 41 percent, the first reduction since the early 1990s.

Downgrades

Standard & Poor's said it is reviewing Citigroup's rating for a possible downgrade, noting that earnings may be further depressed by loss reserves on the bank's loan portfolio. Fitch Ratings lowered the company's rating one level to AA- from AA, with a negative outlook. Fitch cited deteriorating earnings in the consumer business and investment bank losses.

Pandit, who took over in December, inherited the subprime mortgages and bonds now being written down from his predecessor, Charles O. ``Chuck'' Prince.

Yesterday Pandit said he's selling assets and shedding units outside the retail banking, trading, investment-banking and transaction-processing businesses. He's cutting about 9,000 jobs over the next year, on top of 4,200 announced in January.

Cont...

People in UK keeping their saving under the matress triples to 11%

http://news.bbc.co.uk/2/hi/business/7367745.stm

Trust rises in 'mattress saving'



The number of people who think the best place for their savings is "under the mattress" has risen, a survey by Newcastle Building Society suggests.

About 11% of those surveyed thought their home was the best place for their savings, up from 4% a year earlier.

Since the Northern Rock crisis and broader credit crunch, consumers are more wary about investing in banks and building societies, the survey said.

Newcastle Building Society said the survey was a "stark sign of the times".

"With some attractive savings products available, you might think people are barmy to stash their cash at home," said Wendy Lee commercial director of Newcastle Building Society.

"Unfortunately, some savers now have an exaggerated view that investing their money with a building society or bank can be a risky business, which is not the case."

Under the Financial Services Compensation Scheme, savers get back the first £35,000 of their money should their bank or building society go out of business.

Only 57% believed the safest place for their money was in a bank or building society, compared to 74% a year earlier.

Now is Halifax, Bank of Scotland that have admitted running out of dosh...

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3822669.ece

HBOS board to consider rights issue


THE board of HBOS will meet tomorrow to decide whether to approve a multi-billion-pound rights issue to repair the bank’s balance sheet.

Lord Stevenson of Coddenham, chairman of the group that includes Halifax, Bank of Scotland, Clerical Medical and Birmingham Midshires, has called the discussions ahead of the bank’s annual shareholder meeting on Tuesday in Glasgow.

The board is being asked to consider raising between £2 billion and £4 billion from investors. It is still possible that the group, which has a market value of £18 billion, could attempt to ride out the credit crisis without raising additional funds.

HBOS has had one of the strongest capital ratios – a measure of a bank’s strength – in the sector. It is still stronger than Royal Bank of Scotland and Barclays, but its ratio remains much below its long-term average.

Andy Hornby, the HBOS chief executive, has also been down-beat about the immediate prospects of the UK economy.

As a result he may want to raise capital to have headroom should the outlook deteriorate. The move follows Royal Bank of Scotland’s £12 billion rights issue announced last week. One analyst said: “RBS was forced to raise money after a mistimed acquisition. With HBOS it’s more about what Hornby thinks about the economy.”

At the annual meeting Hornby is expected to admit the bank has taken a further writedown of up to £3 billion on assets whose value have been eroded by the credit crunch.

Cont...

Originally Posted by Butterfly

we will hit bottom when the Dow starts trading at 6,000 not 12,000.

Ended the week at 12,892. Going the wrong direction, eh Butterfly?

And to think I redeemed all my shares based on your prediction.

IMO you'd have to be crazy to buy into this rally.

^Agreed. Ask Joe Lewis...

Originally Posted by Texpat

Originally Posted by Butterfly

we will hit bottom when the Dow starts trading at 6,000 not 12,000.

Ended the week at 12,892. Going the wrong direction, eh Butterfly?

And to think I redeemed all my shares based on your prediction.

I hope you are joking, but basing your investment timing on the DOW is not very smart. First you have to understand that thee DOW30 is one of the worst index out there, it's very biased, that's why it never seems to go down, they remove losers from the Index and replace them with momentum stocks. I am sure if we had to go back 4 years and keep the same stocks in the DOW, the index would be around 8,000 now, not 12,000

For your information, NASDAQ index is still 50% down from 2000, and hasn't recovered yet, even after nearly 10 years. It will probably take 15 years to recover now.

Originally Posted by Butterfly

I hope you are joking, but basing your investment timing on the DOW is not very smart. First you have to understand that thee DOW30 is one of the worst index out there, it's very biased, that's why it never seems to go down, they remove losers from the Index and replace them with momentum stocks.

you should charge texpat for this sort of tutelage.

I'm not the one who suggested the DOW would bottom at 6K.

And thanks, but no thanks, if I require investment advice, I'll get it from professionals, not TD members.

Originally Posted by raycarey

you should charge texpat for this sort of tutelage.

I doubt it would make any good use of any of it or even understand the ramifications of it, he is better off being ripped off by his local brokers,

Originally Posted by Texpat

And thanks, but no thanks, if I require investment advice, I'll get it from professionals, not TD members.

hahaha, unfortunately "professionals" at your level would probably be a "sell-side" player, and that means you and your money being the product, not your investment objectives

How many more times can the shares be diluted until there is simply nothing left?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJIhs9sMeEQg&refer=home

Citigroup May Fall on Plan for $3 Billion Share Sale (Update1)

By Bradley Keoun



April 30 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, may fall in New York trading after offering $3 billion of stock to increase capital depleted by writedowns on subprime-related mortgages and bonds.

The shares will be sold in a public offering, New York-based Citigroup said in a statement.

Citigroup fell about 3.8 percent to $25.32 in extended trading yesterday after the stock sale was announced. It has declined 11 percent this year.

``We were hoping they wouldn't have to go the equity markets like this,'' said William Fitzpatrick, an analyst at Optique Capital Management in Racine, Wisconsin, which held more than 550,000 Citigroup shares at the end of last year.

``This was extremely disappointing.'' (My edit - you don't say!)

Citigroup already has raised more than $30 billion of capital since December, including the sale of equity to investment funds controlled by foreign governments in Abu Dhabi, Singapore and Kuwait. The company sold $6 billion of preferred shares, a bond-like security that isn't dilutive to common shareholders, last week after it reported a $5.1 billion first- quarter loss and cut 9,000 jobs.

Oppenheimer & Co.'s Meredith Whitney, who was one of the first analysts last year to predict the extent of Citigroup's losses, said the latest stock offering won't protect the company's finances against future losses.

``The fact that the company raised such a small amount of capital at this time confounds us,'' Whitney wrote. ``We believe Citi needs to raise an additional $10-$15 billion or sell several hundreds of billions worth of assets in order to truly shore up its capital position.''

Tier 1

The new equity, when combined with $6 billion of preferred stock, will raise Citigroup's so-called Tier 1 capital ratio to about 8.5 percent, the company said in yesterday's statement. The ratio, used to gauge a bank's ability to withstand loan losses, was 7.7 percent at the end of March. Regulators consider banks with a Tier 1 ratio of 6 percent ``well capitalized.''

Citigroup sets its Tier 1 target at 7.5 percent, to give itself a margin of error and help avoid a downgrade of debt ratings. When the company reported its first-quarter loss, Standard & Poor's said it was reviewing the bank's credit rating, currently AA-, for a possible downgrade. Rising consumer-loan delinquencies may force the bank to set aside higher reserves to cover bad debt, Standard & Poor's said.

`Capital Structure'

``We continue to optimize our capital structure,'' Chief Financial Officer Gary Crittenden said in yesterday's statement.

JPMorgan Chase & Co., the third-biggest U.S. bank by assets, and Merrill Lynch & Co., the third-largest securities firm, also have raised capital in recent weeks by selling preferred shares.

Chief Executive Officer Vikram Pandit and Crittenden said earlier this year that Citigroup might avoid the need to raise more capital. Crittenden said in January that the company had ``stress-tested'' assumptions under ``multiple recessionary scenarios.'' Then the bank posted its first-quarter loss and Crittenden was asked on an April 18 conference call with analysts if the bank might seek more capital. He said, ``You can never say never.''

Pandit said at the company's annual meeting last week in New York that ``2008 remains a challenging time for financial markets and, in general, for our entire industry.''

Citigroup has had more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year. The world's biggest banks have raised more than $170 billion in capital to replenish their coffers.

...Less than a month after they threatened to sue all of Fleet Street and said that they were 'One of the Strongest Financial Institutions in the World"

(I didn't believe it then and I don't now, but some have joined my opinion...)

http://www.guardian.co.uk/business/2008/apr/29/hbosbusiness.creditcrunch

HBOS drifts into perilous waters

This article appeared in the Guardian on Tuesday April 29 2008 on p25 of the Financial section. It was last updated at 00:04 on April 29 2008.

Have another look at HBOS's results for 2007, announced only two months ago.

Andy Hornby, the chief executive, described the balance sheet as "strong". The same adjective was applied to the flow of wholesale funding to the group. This, we were told, would provide "the necessary flexibility to operate in these challenging markets". As for write-downs, there was little to report - just £227m of fair-value adjustments that were "expected to reverse over time". The breezy confidence was expressed in the 18% increase in the dividend.

That is hard to square with what is expected to arrive today: £3bn of asset write-downs and a rights issue to raise £4bn. If HBOS shies away from the cash call at the eleventh hour, it is likely instead to signal disposals of non-banking businesses.

Either way, it is quite a turnaround. The write-downs should be deeply embarrassing. HBOS has minimal operations in the US yet, at last count, had £7bn of Alt-A mortgages, which are not sub-prime but are below investment grade, and £6.6bn of collateralised debt obligations. Exposures of that size require an explanation. The bank, in its hunt for ready pools of capital, seems to have travelled a long way from safety.

Hornby's critics, who say he is more a marketing man than a banker, will not be impressed. HBOS, it seems, was sucked into an arena it didn't understand.