Only 8.3 percent of HBOS investors took up the offer of £4 billion new shares. Barclays did a little better, managing to offload around 19 percent of their £4.5 billion
The HBOS underwriters must be sweating. On Friday, the market capitalization of HBOS was about £10 billion. With the new £4 billion of shares, the underwriters now own something like 27 percent of the bank. If the price continues to collapse, the underwriters will be looking at huge losses.
Today's rights issue failure illustrates the collapse of confidence in UK banking. The banks have only themselves to blame. They pumped up the housing bubble, and like a ravenous dog, those overinflated house prices are coming back to maul them.
There is a deeper problem. Today's pathetic attempts to raise additional bank capital have almost certainly closed off rights issues as a mechanism to shore up bank balance sheets. As the housing crash accelerates and arrears begin to rise, banks will begin to accumulate losses. At the moment, UK banks have insufficient capital to absorb these losses. Deferring dividends might help a little, but in the end, some weaker banks could drift towards insolvency.
The banks look like they have exhausted market solutions for resolving their lack of capital. Sovereign wealth funds won't touch them; rights issues are infeasible; this leaves only one other source of capital; the taxpayer.
Agreed. I've been saying for a few weeks now that the capital window is closed. This nails it shut.
ReplyDeleteNick
Alice, I agree with everything you write - especially the inescapable consequences of a housing market dropping like a stone.
ReplyDeleteI'm surprised that most predictions being put into the public domain presently of the likely drop in the housing market are so benign.
If one looks at the shape of the up and down movement in Real House Prices (your piece of 15 June) around the 1989 peak, and physically magnifies that shape and superimposes it over the 2007 peak, the real drop looks close to 60% this time, not through until maybe 2015-2017.
So current talk of 25% or 30% is out because it is only working in nominal prices, and giving the public a false hope. Such benign predictions are only prolonging the agony of the present crisis.
I'm sure plenty of smart money knows this and it is in part this that is causing the utter fear surrounding bank stocks.
I think someone should write for one of the major newspapers (Sunday Times?) on the likely real drop based on the assumption of a repetition in the shape of the real house prices graph - and the assumption of a 4% inflation long-term in the RPI which you made - because the sooner this is understood by the wider public, the sooner we will get some real solutions to the plight of the big lenders.
If that solution is nationalisation of a HBOS and Barclays, so be it.
Blessings,
B. in C.
Curiously, however, the share price remains relatively high ~270p...
ReplyDeleteIf only 10% of the rights issue was taken up, shouldn't we have expected more of a fall in the share price? HBOS is clearly not worth anything like the rights issue price, is it?
asteve,
ReplyDeleteThere is horrendous market manipulation at the moment in addition to the usual delusional bulls. Last week's SEC/Fed/Treasury short squeeze seems to have been purely to goose stock prices just long enough for the banks to perform emergency capital raising.
HBOS is having a Wile E Coyote moment.
Nick
Have you evidence you can share for that assertion, Nick?
ReplyDeleteThe taxpayer bailout draws closer.
ReplyDeleteB. in C. dare we hope for a 40 percent crash?
ReplyDeleteThe biggest bubbles of the past 30 years: gold in the 70s, Nikkei in the 80s, Nasdaq in the 90s, all had drops of at least 50% before stabilising and then regaining up to 1/3 of the drop (and then falling back again for a period of low activity for some 5-10 years). Given that the UK property bubble is (was) at least as big as the aforementioned, I think we can assume that a 50%+ decline is not out of the question.
ReplyDeleteAlice,
ReplyDeleteMore fantastic stuff. Keep going your blog is great !
I think we end in deflation myself but superb work. All of the sites linking to established news articles are in no way as informative as you.
Great.
Of course.
ReplyDeleteThe tax-payer.
We've got plenty of money.
asteve
ReplyDeletehttp://globaleconomicanalysis.blogspot.com/2008/07/panic-by-fed-anatomy-of-short-squeeze.html
Nick
How long before HBOS goes the way of NRK?
ReplyDeleteVery long, rambling posts without paragraphs remind me of when schizophrenics talk.
ReplyDeleteNick
"Very long, rambling posts without paragraphs remind me of when schizophrenics talk."
ReplyDeleteI wouldn't know, never having heard schizophrenics talk. But, strip out the verbosity, the unfocused rambling and the anger, would you argue that the writer doesn't have a point?
The underwriters played dirty by shorting their own stock.
ReplyDeleteSeems to have worked for now.
I can't see HBOS having the issues you imply with the £4 billion to cover losses on mortgages.
it is not as if every mortgage is going to crash for all eternity. Most people are paying off over 25 years. A few very tough years approach and banks will make no monoey or even consistent losses. Ho hum for them.
Not the end of the world for everyone - although you there will be plenty who suffer.
A point that was foretold by Hillaire Belloc in his book "The Servile State" - written before the First World War and looking eerily prescient.
ReplyDeleteCWS - just look at Alice's graphs of 15 June - or even the one on the front of the housepricecrash.co.uk site, which shows less.
ReplyDeleteThe way up each bubble takes about as long as the way down, and the new trough only represents a mild gain over the previous. So if one jots a repetition of the shape assuming the same modest long-term real gain, the real price drop coould easily be say 57%.
Then one has to make an RPI inflation prediction to come to a nominal figures, maybe over 30% over say nine years (the government is letting the RPI ride to erase the debt). I'm incline to think about 30% in nominal terms and nearer 60% in real terms, but if inflation is more benign in a semi-collapsed economy, then yes, nearly 40% is clearly possible even in nominal terms.
At the moment, every month you rent you save some money! Beware of the bull traps and false dawns on the way to the bottom. Just keep looking at the real prices graph, and when it looks like the bottom, after a period of pretty slow end-decline as at the end of the last bubbles, we will be there. In the south, you will have to anticipate the bottom a little and go early, as the national figures will be dominated by the sag for peripheral parts of the country while the turn has happened in London and the south east.
Here endeth the lesson...
B. in C.
I wonder why people rush for to call the bottom in housing. The bottom lasts for well over a year. You are competing with the average nubbin in the street who is at least 6 months behind the trend. This isn't currency trading. No need to rush.
ReplyDeleteNick
Nick - good point - and the wait will be for quite a few years yet. B. in C.
ReplyDeleteNick, it is helpful to try to estimate the bottom - because, for some of us, aspects of our lives are on hold.
ReplyDeleteIf I thought the bottom would come in 6 months, my life-plan would be different to that if I expected 18 months or 2 years or more.
In fact, it is more complicated than that... it likely won't be most cost effective for me to buy at nominal bottom - because my savings are earning less than the equivalent mortgage rate and I'm paying substantial rent... not to mention that I'd rather live somewhere I can be happy for as much of my life as possible. I'm not getting younger.
asteve: I watched the last boom go down, with the assist of a real house prices graph, buying a house in the southeast in '93 - I caught the SE bottom I think, though nationally the bottom came in Jan 96. I know what you mean by 'life.. on hold'...
ReplyDeleteEven in '93 many sellers were expecting still to get close to '96 nominal prices, so there was little top quality property on the market and I had to find someone serious about selling.
The only other way to judge the bottom was to establish rental value and use the old rule of thumb that one wants a ten per cent return - half to cover inflation and half to cover maintenance costs.
I really do think, from that experience, that the bottom may not come for eight, nine or ten years after the 2007 peak, if not longer, i.e. 2015-2017.
This is the voice of painful experience...
B. in C.
When it comes to my long-term fianancial well being, I note that it is not the real price of houses that will dictate the optimal purchase for me, but the nominal price.
ReplyDeleteI think that nominal price will correct far faster than the real price - thereafter, of course, I need to establish motivated sellers for the type of property I want to own... (a spacious 3/4 bed detached in a semi-rural location without excessive grounds - but not on an estate, or a main road - in the South with OK road-based communications.) I am not interested in a property that has been "renovated" - I'm looking only to buy a shell... it will be unique and my home - I've no desire to suffer someone else's sub-par tastes. ;)
I expect that the optimum time to try and buy is when the specific market that interests me hits bottom. The properties that interest me most are "in need of updating" or "would benefit from refurbishment" - though I realise I could gut a place that has already been renovated if the price is right. Since 2004, the properties I've liked the look of have been snapped up, I presume, by "developers" intent on a cosmetic makeover and a return to the market for 50% more than the excessive price they paid. When that market dies, I expect to see interesting properties on offer. I'm looking for location and something with decent sized rooms and structurally sound.
I don't think that 2009 is inconceivable.
Asteve - well, on your side is the reality that we have never had a banking crisis of these dimensions and building bubble of these utterly absurd dimensions. so I hope you are right. I took the option of finding a job which included accommodation and saving like crazy.
ReplyDeleteThe advantage of buying at the real bottom rather than taking a nominal view was how my salary dwarfed the eventual mortgage I took, which meant it was easy to pay off completely in a few years. That way one really does pay a lot less, as one saves a huge amount on interest payments.
And after that one can save again, and look for the next bottom to move up, if necessary - accumulating real wealth rather than the notional value in a property.
Blessings,
B. in C.
B in C
ReplyDeleteI'm so glad England isn't full of people like you. I don't mean that in a bad way. I just wouldn't like to have to compete with people with that level of foresight. I much prefer being a wolf among sheep.
Nick