Why the RBS and Lloyds Capital raisings are seriously bonkers
Monday, 9 November 2009 | 
John A Morrison
This is actually patently obvious to anyone who considers it for more than a moment, it does need to be written down, articulated, specified through layers of abstraction as a constantly twittering software engineer in my timeline is currently obsessing about.
Its not complex, its simple, basic even; it's the rules of trading, the basics of exchange. You do not buy an obvious 'pig in a poke' no matter how little the government is trying to sell it to you for!
I wont bore you with a 19th century econo-agricultural explanation of the metaphor. I am no Corporate Finance Guru, I never was the whiz kid in a Porsche because of silkily advising on mergers and acquisitions but I know the basics.
When investing in an offered security do some basic due diligence, ask the basic questions, primary of which is 'Do you know that the entity in which you are buying stock is a stable legal entity over the time period you are intending to hold the security' (titre in French)?
Sine the initial 'test the offer' announcements from both RBS and Lloyds, (HMT in all but name) preparing the market for the whateveritistoday billions for which it is tapping the UK equity market, the outlook going forward for the legal entities offering stock has changed dimensionally, orthogonally; you are not buying LBG or RBS as described pre-EC announcement in accepting this paper offer, you are buying an option over several UK retail banks, the odd American bank and a potentially monstrous UK HeadQuartered Investment Bank!
Which of these properties in these basket (case) offerings your chips land on depends upon your active management of that paper for at least three (/UPDATE: 13?/ 3MMXi) years forward.
It is hubristic and hypocritical to participate in this offer and criticize the casino-mentality for getting us here, at the same time.
This paper is the biggest roulette chip I have come across, in several years.
I remember describing 'Political Risk', as something to do with world famine zones, I suppose now in terms of banking services, that's right where we are.
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Comments
Dear Lloyds: nobody wants to buy your bank
[Something for the weekend]
Neil Hume, FT-Alphaville
.... I hope this doesn't sound too "after the fact" / 'pompous' / "I told you so"; but some of us had kinda worked this out a while ago ... it wasn't exactly rocket science ...
Lloyds Impaired from alphaville
this is just laser guided precision from alphaville
LBG in the news this WEEK
Do You want the Good News or the bad news first?
Good News OK -
Long and very Positive profile of Philip Grant in SoS (Scotland on Sunday) [3 pages online]
a view of the latest branch sale transaction STATUS
<its worth your time keeping up2date with this caravan>
HUGH Osmond, chairman of Sun Capital, has been knocked back
The Scotsman
Battle for the 600 Lloyds Branches
asymptotix
A ‘Death Warrant’ for British Banks?
A very bad weekend in the Scottish Press for BOTH RBS & LBG
Police dossier says former HBOS directors failed to act on fraud allegations
Lloyds pulls plug on HBOS property firm
RBS reveals details of 300 staff with 'high risk duties' in transparency move
How to sell a Bank - what's it worth?
BACK OF A FAG PACKET
Lloyds Banking Group is coming under increasing pressure to break up its business following its recent bail-out by HMG.
It is viewed as having an unhealthy dominance in the market, creating a huge systemic risk to the UK economy (being 'too big to fail'). The topic seems to be consuming the UK Banking sector right now - I recently heard from one senior Banking executive that the break up of Lloyds and its consequences is the only subject up for discussion - nothing else matters!
But if you were to break up Lloyds (or RBS), how would you value them? What are they worth and how 'risky' are they? More specifically, how do you calculate their RWA (Risk Weighted Asset Value)?Technology has to date been the constraint. The processing of massive, complex data sets with low latency has proved problematic. Is it not time for technology to step up to the plate and provide the answer?
Lloyds is, in fact, in a truly horrible position; Ian Fraser
Naked Capitalism
SKY NEWS Exclusive: RBS / Perella Weinberg DEAL
The taxpayer-backed bank, which reports its annual results for 2010 tomorrow, is in advanced talks about the sale of a €300m SPANSH loan portfolio to a real estate fund managed by Perella Weinberg Partners.
SKY NEWS
Lloyds Banking Group - The Problems of Large Numbers
On 19 Nov, updated 2 Dec, 2008; in Edinburgh Robert McDowell of Banking on Economics prepared this report on the LBG takeover of HBOS, at the time he said;
Both LTSB and HBoS have been over-sold by any standard measure notwithstanding credit crunch and economic downturn. HBoS is double the size of LTSB, yet the share prices dictated at the time the takeover was agreed that LTSB was worth twice HBoS? Less than a month later (2 Dec.) HBoS is valued at 70% of LTSB. Clearly the stock market valuations are a poor guide.
HBoS is worth (on fundamentals) several times current market valuation. Toxic assets, size or quality of mortgage book, construction and property exposure, or other consumer and corporate lending do not justify the HBoS share price or its price relative to LTSB. In NPV terms neither bank should be priced below respective capital reserves. HBoS at that minimum should be 7 times its current valuation and LTSB should 70% higher, making HBoS worth 217% that of LTSB!
Stock markets have driven many banks' capitalizations below book value, but there is no
proportionate consistent logic why some banks fell more than others. Timing and management of new capital raising and short-selling (stock-lending, CFDs and 'puts') have hit some banks' share prices more than others. LTSB and HBoS boards (ostensibly supported by Government) claim that the takeover of HBoS by LTSB is "in the interests of all stakeholders and of financial stability in the UK". There is no evidence for either claim, and no good reason, not even expediency, for the takeover not to be referred to the UK Competition Commission (and/or its Brussels counterpart).
The quality and mix of assets, funding and funding ratios do not show dramatic weaknesses. The business performance of HBoS by mid 2008 is the superior of the two banks. HBoS's and LTSB's Tier 1 and Core Tier 1 ratios adequate and the same, but HBoS's total capital ratio is better by 90bp, a significant margin. HBoS's capital is over double that of LTSB. LTSB's reserve capital ratio, possibly £2+bn too low (amount needed and missing to cover insurance assets).
Media opinion that LTSB was better capitalized, and the excessive exposure of HBoS to mortgage assets are wholly exaggerated! (see also Appendix 3) HBoS's share value fell relative to other banks in June/July 2008 due to the bungling of its rights issue, when underwriters were left holding most of the issue, took a hedged loss, and one of them,
Morgan Stanley, nakedly shorted HBoS shares (using £125m of borrowed HBoS stock!). The PR media handling of the rights issue, timing, underwriters, and assurances (sales prospectus etc.) to shareholders were major mistakes! This is what the bank and its stockholders are now being made to pay far too much for.
HBoS takeover by LTSB is a dirct cost to over 2 million small private shareholders (less to institutional investors who hold stock in both banks) and to UK domestic banking competition and to both banks because of the inevitable losses of trying to combine two banks of different cultures, via new integrated systems at considerable cost (£2-3bn) when business volume is falling and employee numbers severely cut.
Read the Full Report
My document of CURRENT focus in the world of Lloyds
(Lloyds Interims, Nov 2010)
http://www.lloydsbankinggroup.com/media/pdfs/investors/2010/2010_LBG_Interim_Results.pdf
The governing standard of which is IAS34 (Interim Accounting)
IAS34 References
http://www.iasplus.com/standard/ias34.htm
https://pwcinform.pwc.com/inform2/show?action=informContentPrint&id=0915084403183474
Therefore for Lloyds the 2009 annuals are the comparative basis
http://www.lloydsbankinggroup.com/media/pdfs/investors/2009/2009_LBG_R&A.pdf
But the 2009 annuals are prepared on an interim (IAS34) and 'Combined Business' basis
IAS34 entails that note 56 governs the accounts not only in '09 but also the interims in '10; and thus only the rules of IAS34 govern both sets of accounts; it remains to be seen what is yet to be reported by the Group. It's also worth noting that note 56 means that all material accounting presentation is in note 54 (in '09)!
FOR COMPARISON
http://www.ubs.com/1/ShowMedia/investors/releases?contentId=187896&name=4q10_report_web.pdf
http://www.db.com/en/media/Deutsche_Bank_Annual_Press_Release_2011_-_Presentation.pdf
OUT OF INTEREST
http://www.lloydsbankinggroup.com/media/pdfs/investors/2010/DBRS_LBG_17Nov10.pdf
http://www.bankofengland.co.uk/publications/externalmpcpapers/extmpcpaper0031.pdf
CONCLUSION (=redacted)
FSA: Fair value accounting contributed to RBS failure
FAIR VALUE ACCOUNTING was partly to blame for RBS's failure in 2008, the Financial Services Authority has concluded.
Read more: http://www.accountancyage.com/aa/news/2131690/fsa-fair-value-accounting-contributed-rbs-failure#ixzz1ke81hrIe
Accountancy Age - Finance, business and accountancy news, features and resources. Claim your free subscription today.
Financial Instruments: Replacement of IAS 39
This is not a tentative decision for endless debate.
Lloyds Banking Group 1 H 10 / FY09
analysis by Robert McDowell
Royal Bank of Scotland facing threat of UK class action
Quod Erat Dictum!
The Scotsman
Our Stock Price is Valued as an Option
EUROMONEY INTERVIEW MAY 2009
"Forget the value of the equity in the business. Our stock price is valued as an option. Until we're further down the road, that will remain the case"
John Hourican, RBS
Carol Sergeant
on asymptotix
FD Tim Tookey and retail chief Helen Weir heading out the EXIT
Lloyds feeling a £500m Irish hangover
The Daily Mail (click the pic)
(which Niall Ferguson despises with a vegance)
How many times are we going to be mugged?
UNSOLICITED COMMENT FROM A NIKI TURNER IN THE UK
It isn't just bonkers to give these monster banks more money, it is also criminal. In the case of Lloyds Banking Group, they have confirmed on the one hand that their toxic albatross HBOS is being investigated by the FSA for possible misrepresentation or concealment of facts over its last rights issues and on the other hand they're asking investors for more money. It is logical that if and when the FSA take enforcement action against HBOS (which they will have to unless they want to be complicit in the various HBOS frauds they are investigating), it will effect the Lloyds share price. The Government are well aware of this fact and are still planning to give Lloyds more billions of tax payers money even although they know the share price will plummet in the near future. Hello, we've already been mugged - you don't need to supply the cricket bat Gordon, so they can hit us harder. If this is to be considered to be good business practise, then surely, everyone who has a loan or overdraft they can't afford to pay (possibly because the consequences of the masters of the universe has left many people jobless) should be able to nip down to their local Lloyds, explain they've run out of money and ask the bank to give them some more? Goose, gander comes to mind - but somehow it doesn't work like that. Nikki Turner UK
An unsolicited Comment
Thanx Nikki, rounds off the analysis with a bump
J∂ΩΩ