大象传媒

Bank dividends

• Robert Peston
• 15 Oct 08, 12:46 PM

There may have been a bit of a misunderstanding between the banks and the Treasury about the nature of the prohibition on dividend payments pending repayment of the preference stock they are selling to the state.

Apparently, according to well-placed sources, a sensible interpretation of the complex documentation drawn up for the banks' capital-raising would say the following:

1) there is a strict ban on dividend payments for a year;

2) thereafter there would be discretion for the Treasury to permit dividend payments to start again at Royal Bank of Scotland and Lloyds (as enlarged by the planned takeover of HBOS), irrespective of whether all the prefs had been repaid.

So what would determine whether the Treasury gives permission for dividend payments to be resumed?

Well it would depend on whether the balance sheets of the banks had been strengthened by their having disposed of many of their riskier assets and on whether the ratio of their capital to risk-adjusted assets (what's known as their capital adequacy) is back at world-class levels.

As it happens, the prefs are expensive, paying a 12% coupon. So it might well be in the banks' interests to repay them before allocating whatever spare cash is available to the distribution of dvidends on the ordinary shares.

But what should reaasure shareholders in Lloyds and RBS in particular is that there is no blanket prohibition from the Treasury on the resumption of dvidend payments (well except for the coming year - which is sensible in a climate of capital scarcity; and it's relevant that Barclays is not paying a dividend for the second half of this year, even though it is not taking capital from the Treasury).

I expect ministers to confirm all this before too long.

Which would be highly significant: it would rescue the takeover of HBOS by Lloyds TSB from possible collapse (see my note on this from yesterday); and it would make the new shares being sold by Lloyds TSB and RBS much more attractive to private-sector investors, reducing the risk that most of them will be dumped on the taxpayer.

Some will doubtless see all this as a u-turn under pressure by the Treasury. But the banks will probably simply breathe a sigh of relief.

That said, the scale of the misunderstanding between them and the Treasury was quite something, in that on Monday morning the assorted official announcements of the capital injection by taxpayers all stipulated that dividends would be ceased till the prefs were repaid.

The negotiations were, of course, carried on all through Sunday night till the sun rose on Monday morning - so perhaps important nuances were lost as exhaustion gripped the ministers, officials and bankers.

• Permalink
• Comments (0)

Why hedge funds are crying

• Robert Peston
• 15 Oct 08, 08:18 AM

It may be a case of shutting the stable door after the thundering herd has bolted, but law and order is being brought to the wild wild west of global financial markets.

G Brown will, for example, in the coming days put on his Wyatt Earp costume, and will ask the financial gunslingers to hand over their weapons.

A huge and totemic encapsulation of the imminent arrival in town of a new breed of marshals and sheriffs is buried away in an article in today's Wall Street Journal.

It's an excerpt from an e-mail sent on April 12 2008 by Richard Fuld, the somewhat tarnished former chairman of Lehman, the investment bank whose collapse last month brought the global financial system to the brink of meltdown (the e-mail was uncovered by Congressional investigators who've been examining Lehman's demise).

In an message to Lehman's General Counsel, Thomas Russo, Fuld summarised a conversation he had over dinner with the US Treasury Secretary Henry Paulson.

According to Fuld, Mr Paulson said he wanted to "kill the bad HFnds + heavily regulate the rest."

Crikey.

No wonder "HFnds," or hedge funds as most of us know them, are a teeny bit anxious at the moment.

After years of stellar performance, many of them (but not all) have suffered serious losses in the past few months of extraordinarily volatile markets.

Their increasingly risk-averse backers are asking for their money back.

And the likes of Paulson - who you might think would be on their side, as a former chairman of Goldman Sachs - apparently wants to slaughter the cowboys among their ilk and put the rest in shackles.

Of course, we only have Fuld's word for this.

But my own conversations with politicians and regulators are indicative that the tide has turned massively against this trillion dollar industry.

The authorities on both sides of the Atlantic have belatedly noticed that hedge funds' speculation in unregulated markets - such as the mind-boggingly huge credit-default-swaps market - has exacerbated the instability in regulated markets, notably stock markets.

They've belatedly noticed that hedge funds have vast amounts of power to decide the fate of banks and other financial institutions of central importance to the functioning of the global financial system - and yet there's almost no formal system for holding them to account for the use of that power.

And the authorities have abandoned their staggeringly na茂ve view that hedge funds are the girl guides of the financial community (I kid you not), because of the near-truism that when hedge funds fall over, they tend to hurt mainly their well-heeled backers in a direct sense, rather than millions of ordinary savers or taxpayers (I say near-truism, because the notoriously precipitated a financial markets tsunami).

The point about hedge funds is not what happens when they make big booboos.

What matters is whether their activities make the financial system more or less adept at allocating capital in an efficient way, to the long-term benefit of our economies, and whether they enhance or undermine the robustness of the financial system.

As economic boom turns to bust, because of a systemic malfunctioning in the financial system, that's moot.

A few far-sighted hedge funds can argue that they were the good guys, that they shouted from the rooftops (through their profitable trading strategies) about what was going wrong before it went wrong (and more fool politicians and regulators for ignoring them).

But the industry as a whole hasn't even begun to address the central charges against it: namely, that it helped to stoke up the credit bubble by providing a market for toxic investments; and that it has brought disorder to the puncturing of that bubble, through the poisonous combination of deliberate strategies to destroy the credibility of weaker financial firms, and through massive automatic sales of assets in a falling market.

Proving that they've enhanced the general good, such that they protect themselves from being regulated into a dull and lifeless industry, may turn out to be somewhat more challenging than the trials of Hercules.

• Permalink
• Comments (0)