British Banks Get Unprecedented Government Bailout (Update2)

Oct. 8 (Bloomberg) — Britain’s banks will get an unprecedented 50 billion-pound ($87 billion) government lifeline and emergency loans from the central bank after the freeze in credit markets threatened to bring down the financial system.

The government will offer to buy preference shares to help boost capital at Royal Bank of Scotland Group Plc, Barclays Plc and at least six other banks, the Treasury said in a statement today. The plan also guarantees about 250 billion pounds of loans and increases the amount the Bank of England makes available for banks to borrow to at least 200 billion pounds.

The emergency action failed to stem the stock market rout, with the U.K.’s benchmark FTSE 100 Index falling as much as 7.8 percent. Prime Minister Gordon Brown is following U.S. President George W. Bush, who approved a plan last week to spend $700 billion to prop up financial institutions with untested measures as equities plunged around the world.

“The global market has ceased to function,” Brown said today at a press conference in London. “The banking system must be sounder, and that is why we are putting the capital in.”

Brown’s government was forced to act as the economy tumbled toward a recession and shares of the country’s biggest banks lost more than half their value in a week. Edinburgh-based RBS, Britain’s third-largest bank by market value, had its credit rating cut by Standard & Poor’s for the first time in almost a decade on concern that its financial health was deteriorating.

While U.K. support for banks will help in the short term, “even these huge amounts will not avert the downward course of the U.K.,” said Sandy Chen, a London-based analyst at Panmure Gordon & Co., who has “sell” ratings on Barclays and RBS. “House prices will continue to fall, unemployment will continue to rise.”

Nationalizing Banks

The steps to partially nationalize the industry provide the “building blocks to allow banks to return to their basic function of providing cash and investment,” Chancellor of the Exchequer Alistair Darling said today.

Britain joins the U.S. and many European countries in rushing out bailout measures. Germany, Ireland and Greece have pledged to guarantee savers’ deposits. Iceland has taken over two of the nation’s three biggest banks, and Spain has agreed to spend as much as 50 billion euros ($68 billion) to buy bank assets.

The U.K. initiative comes after the government took control of Northern Rock Plc and Bradford & Bingley Plc earlier this year and arranged the takeover of Edinburgh-based HBOS Plc, the country’s biggest mortgage lender.

Weaker Banks

“The weaker banks were being dealt with by nationalization or acquisition, leaving a smaller number of stronger banks with greater market share,” said Fidelity International Ltd.’s Sanjeev Shah, who took over the $4 billion U.K. Special Situations Fund from Anthony Bolton at the start of the year. “Now the U.K. government is putting in place a formal plan to provide further capital injections to key U.K. banking entities.”

Darling and Brown are trying to prevent the financial- services industry, which accounts for about a fifth of London’s economy, from collapsing under the weight of the global credit crunch. Financial-service companies will cut 12,000 jobs before the end of the year, about 33 percent more than a year earlier, according to estimates last month from the Confederation of British Industry, the country’s biggest business lobby group.

The government said today it will make 25 billion pounds immediately available to banks in the form of preference shares and is ready to provide another 25 billion pounds. It doesn’t specify how much each bank will get. The amount available will vary, depending on their dividend payouts and executive pay policies. The plan requires the banks to lend to small businesses and home owners, the government said.

Budget Deficit

The rescue may break Brown’s pledge to keep debt below 40 percent of the country’s gross domestic product. The budget deficit climbed to the highest since 1993 in August, with debt amounting to 43 percent of GDP when the liabilities of Northern Rock are factored in. The Treasury probably will provide details later today on how it will fund the plan.

London-based HSBC, Europe’s biggest bank, said it doesn’t plan to receive capital from the U.K. because it has sufficient funding. Standard Chartered Plc, the London-based bank that makes most of its profit in Asia, and Abbey National, the U.K. unit of Spain’s Banco Santander SA, also said they won’t seek capital from the government.

Most British banks were lower, even after central bankers in the U.S. and Europe announced a coordinated cut in interest rates. Standard Chartered fell 10 percent to 1,187 pence at 2 p.m. in London, Barclays dropped 6.7 percent, and Lloyds TSB declined 5.6 percent. HBOS jumped 47 percent and RBS gained 19 percent after both banks suffered record declines yesterday.

Not for Shareholders

“The point of this is not to bail out shareholders in banks,” said Charles Mackinnon, chief investment officer at London-based Thurleigh Investment. “The point is not to pay executive bonuses. It’s to enable the economy to keep on going.”

The government should have specified how much capital goes to each bank, said Robert Talbut, who manages 31 billion pounds at Royal London Asset Management in London. “To say 25 billion pounds is available and it’s up to each bank how they will draw it down isn’t credible,” he said.

While RBS denied yesterday that it asked the government for help, the bank has been short of capital since it paid about 14 billion euros ($19 billion) last year for the investment banking and Asian units of Amsterdam-based ABN Amro Holding NV. The 12.3 billion pounds that RBS raised by selling shares at 200 pence apiece in June wasn’t enough, and shares now trade for about half as much.

RBS, Barclays, Lloyds TSB and three other U.K. banks need to repay as much as 54 billion pounds of debt by the end of March 2009 as borrowing costs reach record highs and banks are reluctant to lend to each other. The total, which includes bonds, convertible bonds and commercial paper, is triple the debt repaid in the same period a year ago.

`Significant Issues’

Barclays, which said it has no debt that counts as regulatory capital maturing before the end of March, praised today’s funding plan. It “addresses the most significant issues in the market, namely confidence in the strength of the banking system and the working of the money markets,” Barclays Chief Executive Officer John Varley said today in statement.

The government plan will address “unprecedented conditions in the financial system” and help RBS strengthen its position, RBS Chief Executive Officer Fred Goodwin said in a statement.

RBS, which bought NatWest bank for 24 billion pounds in 2000, is struggling with rising defaults and a slumping housing market in Britain and the U.S. The bank, which had 5.9 billion of writedowns and a net loss of 761 million pounds in the first half, will have about 1.1 billion pounds of writedowns later this year, threatening its ability to reach a target of raising Tier 1 equity capital to 6 percent by the end of 2008, analysts at JPMorgan Chase & Co. said Oct. 1.

Management Changes

RBS hasn’t discussed management changes as part of its participation in the U.K. funding plan, spokeswoman Carolyn McAdam said today. A report in London’s Daily Telegraph, which said the CEO and chairman of RBS would step down, was inaccurate, she said.

HBOS fell 41 percent yesterday to a new low as investors became skeptical of its government-arranged takeover by London- based Lloyds TSB, the U.K.’s biggest provider of checking accounts.

Lloyds TSB agreed Sept. 18 to buy HBOS in a stock swap valued at the time at 10.4 billion pounds. HBOS’s market value has since fallen to 5.1 billion pounds, even though Lloyds TSB’s takeover was still valued yesterday at more than 10 billion pounds.

Lloyds TSB “is working with HBOS management on all aspects of the transaction,” the London-based bank said today in a statement. The U.K. funding plan “is very much in the interests of shareholders and customers,” HBOS said in a separate statement.

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