Share prices and nationalisation – the vicious circle

Today we are back to playing the absurd media/government/Lib Dem game of threatening nationalisation if a bank share price goes down too far, only to see the share price go down because investors fear nationalisation.

Why can’t they all understand that a falling bank share price is no crisis unless they make it one. If the bank does not want to raise new share capital from the market any time soon, it can live with a low share price. If a bank has something to prove because it has just lost a lot of money it might have to live with a low share price until it can publish some figures showing it is back making profits. So what?

It doesn’t help to have instant pundits opining that if the price falls too far the company needs to be nationalised, and it does not help to have Ministers refusing to rule out nationalisation. Where are they planning to get all the money from to nationalise another bank? And why do they think a falling share price matters? If the bank has cash and capital, as they tell us the main regulated banks have, there is no problem. Leave the private sector ones alone.


  1. Brian Tomkinson
    February 16, 2009

    One reason for this continuing folly is that Vince Cable has been anointed by the media as the fountain of all wisdom and knowledge on such questions. Consequently, a dangerous myth has now been created that he foresaw all these problems and has the answers. I don’t know about you but I am sick of hearing him on TV and radio.

  2. Waramess
    February 16, 2009

    You’re absolutely right but only if you know for sure that Lloyds will not be looking for a rights issue any day soon.

    If you are not absolutely sure I would not go betting any money on it.

    Lloyds managment have greedily swallowed the contents of the poison chalice and should now be left to suffer the consequences.

    GB will look a complete moron in any event.

  3. Stephen Southworth
    February 16, 2009

    Mr Cable is popular with the media because he comes across as a relatively ‘normal’ politician who can speak to the nation ‘at their level’. If he was called Peregrine rather than Vince, he wouldn’t get a look in. Is it any wonder that blogs are quickly becoming the place to obtain detailed and competent analysis as opposed to TV, radio and newspapers?

  4. alan jutson
    February 16, 2009

    Think Barclays nailed your point to the mast last week.

    They said in effect.
    We are Ok, we know our losses, we can manage, and here are the figures to prove it.
    Its share price went up.
    Do not know for how long, but it made the point we are solvent and are trading profitably, so no cause for any panic.

    Only time will tell if they are correct.

  5. Sam Armstrong
    February 16, 2009

    It is quite obvious that a Labour government and its allies in the left-wing dominated mainstream media will use any excuse upon which they can get their filthy paws to promote their childish, studenty revolution. Bound hopelessly to the 1970’s, myopic in their refusal to accept that state socialism does not work, they are trying to sow desperation and hopelessness in the heart of the UK capitalist. This is more proof, if it were needed, that the Tories just must get back to the core vote and begin a clearing out of these dangerous ideologues before the security and sovereignty of this beleaguered nation is even more threatened.

  6. Donitz
    February 16, 2009

    Interestingly, the Lloyds share price hit the 35p region several weeks ago and at the time there was hardly any media coverage.

    Last Friday we are at 60p and you would think the world was about to collapse.

    Incidentally, at the time of the 35p price, I lost my nerve and sold at quite a substantial loss for fear of nationalisation.

  7. Jason
    February 16, 2009

    HI JR,

    Your great site is going from strength to strength…congrats….regarding banks share prices….there needs to be a clear strategy laid out based on facts, statistics and scenarios. At this stage in the day to view HBOS losses as such a ‘surprise’ is ridiculous – the fact is the market doubts whether the govt is on top of the situation. They are not. Whilst swings in share prices are par for the course….wild swings in policy (or lack of coherent, consistent policy) are not what is required. Right now the govt and the public should have an accurate picture of the financial position of the banks they own. As is happening in the US they should already have made a stress-test to see various outcomes under differing levels of asset prices (eg home price falls of 30%, 40%, 50%, 60%, 70% and corporate default rates of 15%, 25%, 35%, 45%). This is precisely what I remember the bank of england asking banks last year to do…stress their portfolios to ‘destruction’. I find it incredibly hard to believe so far along in this crisis we really still have no proper picture – especially as we are now majority holders. It is scandalous and needs to be rectified immediately.

    The reason why I think that this is not being done is because most banks will be insolvent under bad but quite realistic scenarios – eg corporate default rates at 35% and house price falls of 50% – ergo most banks will have to be nationalised. This is why banks are being punished in the market. In the US as well, the debate is raging and even in todays telegraph Professor Roubini states categorically that the banks will have to be nationalised and that Geithner ‘gets it’ but of course the political problems of such a move are large to negotiate. We are already advanced on such a route but in the US they have some idea of what is required monetarily and because they are a large country can raise it. The UK on the other hand is a small country, and doesn’t know what is the level of required money, and will likely have trouble raising it. As I have written here before the right people must take the correct hits – talking about bank shareholders is only a smokescreen. The real stakeholders are the bondholders….who benefit the most from nationalisation at the cost to the taxpayer. What are the dynamics regarding these stakeholders – what will be the haircut given to bondholders in the event of nationalisation – what is the incentive to bondholders of a credit event – especially if they have CDS insurance – what are the current prices of these bonds? Why does the UK taxpayer need to bailout domestic or foreign bondholders (who lent the money on their own volition and at their own risk (caveat emptor etc))- potentially bankrupting her good self in the process? A look at current (correct) Debt/Equity ratios should clarify who the powerbrokers are….they most certainly are not the shareholders….and are the govt indeed in bed with these people for another purpose – whilst the taxpayer picks up the tab – blissfully unaware of the real crime being perpetuated. I would be grateful for any answers you might have. Thanks in advance.

  8. Acorn
    February 16, 2009

    While the US has too many small banks, the UK has too many big banks. You have to ask, who allowed them to get so big. Where was the FSA when all this mega merger stuff was happening???

    If you don’t have Bloomberg, have a look at this video; Wilbur Ross on banks etc.

  9. mike stallard
    February 16, 2009

    I asked an Australian family yesterday which Australian Banks were failing. They gave me a strange look. “Banks here are completely safe, why do you ask?” they said. So much for the global crisis…..

    The left wing blogs do not really seem to be aware of the crisis at the moment. Jo(h)n Cruddas speaks of building 100,000 more homes (out of what?) in the Independent. Angela Merkel suggests, on the quiet, that Mr Brown should be the new regulator for a pepped up IMF. Apparently the government will be at least L100 billion in debt…..For some reason, the government is quite unpopular at the moment……..

    Nationalising the banks – not mentioned.

  10. Julian Boulter
    February 16, 2009

    John – read your blog daily, agree 100% with you on all topics. I know this is probably the wrong article to apply this comment but I have just returned from a Parish Council meeting about the impact of an additional 270 houses in our village (Blears overruled all previous planning refusals) and realise another of the key reasons for NuLab’s love affair with the housing bubble. It is another way of extracting taxes. The developers on this particular site in a medium sized Hampshire village have to cough up 900,000 for transport infrastructure – so that of course inflates house prices further and effectively raises more taxes for road building / improvement instead of using the existing taxbase. I have not seen anyone make this particular point but as I assume it is common practice, it seems another key reason behind keeping the housing bubble inflated.

  11. Steve Tierney
    February 17, 2009

    The government must NOT nationalise any more banks. It just must NOT. People think the banks are in trouble now, just wait until later in the year when the recession begins to force mortgage defaults and loan defaults at higher and higher levels.

    The banks must sink and swim on their own. If we take them over the enormous liabilities will drag the whole country down with them. It’ll make the current financial disaster look like a minor mishap.

  12. TomTom
    February 17, 2009

    Surely the BBC should consider privatisation as a means to raise funds to nationalise banks ? It is time that its smugness and apparent glee in news reports on the economic situation were reflected in its corporate bailout of guaranteed taxpayer funds.

    Lloyds has been deceived by HBOS management but can no doubt be ruthless in cutting – even in Scotland – to rectify the huge writedowns incurred which are still less than Vodafone took over Mannesmann. Admittedly it is Basle II that is causing the banks headaches more than share prices and so much of the problem seems to be in absurd theoretical regulations which hamper trading in tough times – whether pension fund accounting or capital ratios

    February 17, 2009

    The Prime Minister is the polar opposite to Harry Truman: there ought to be a sign on his desk that reads “The buck starts here.”
    An era has ended but the PM does not know it. And while the rest of us look ahead to the post-Brown world, the increasingly isolated Prime Minister sits in No 10 and broods angrily over whom to invite to dinner.
    Matthew d’Ancona is Editor of ‘The Spectator’

  14. Derek
    February 17, 2009

    It’s beginning to seem like the government has some sort of agenda to become the leading financial services provider in the country. Do they actually want to nationalise all these banks?

    The incumbent government is a busted flush, the reason they’re getting away with this inexplicable ‘Brown bounce’, when he was on the ropes mid-last year, is that they’re getting away with the global argument on job losses. They’re getting away with the money frittering on banks and vat cuts because the day of reckoning for these debts is in the future. By which time those responsible will have long since jumped on a gravy train to Brussels and the realisation will dawn just how hard we’ll have to all work to pay for these mistakes.

    The global argument is absurd. If you go out and get blindingly drunk, the fact all your friends did also is no excuse.

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