Darling rescues banks

Oct 8 2008 The Journal

A COMPREHENSIVE rescue package for the UK’s embattled banks will be unveiled by the Government today in a bid to shore up the financial system.

Chancellor Alistair Darling will announce details of the proposals, reported to involve up to £50bn of taxpayers’ money, before the stock market opens.

It will be followed by a meeting of Prime Minister Gordon Brown’s new National Economic Council, a Downing Street press conference and a statement by the Chancellor to the House of Commons.

Mr Darling confirmed he would make a statement following talks last night at Downing Street with Bank of England Governor Mervyn King and Financial Services Authority chairman Lord Turner.

“The Bank of England has been putting substantial sums into the market today and it is ready to do more when that is needed,” he said in a brief holding statement.

“We have been working closely with the Governor of the Bank of England, the Financial Services Authority and financial institutions to put banks on a longer term sound footing.

“I intend to make a statement before the markets open tomorrow morning and I will be making a further statement to the House of Commons later in the day.”

The announcement followed another torrid day in the markets which saw bank shares take a pummelling.

It is expected that the plan will include a cash injection for the banks to bolster their depleted balance sheets. In return, the taxpayer will own a stake in the banks.

The details were finalised at last night’s talks in No 10 where Mr Darling, Mr King, and Lord Turner were joined for part of the meeting by the Prime Minister.

The Government came under intense pressure to act after the Royal Bank of Scotland became the latest institution to be heavily hit by the financial turmoil.

Lloyds TSB, HBOS, and Barclays also saw their share prices tumble.

Both Mr Darling and No 10 had been anxious to not be rushed into an announcement before the rescue plan had been fully finalised. But the reaction of the markets appeared to have left them little choice but to bring forward the statement.

Officials are thought to have been working for some weeks on a plan for the Government to inject new capital into the banks by taking shares in them – effectively a part-nationalisation.

The Bank of England spent the day pumping billions of pounds into money markets in a bid to oil the jammed-up wheels of the financial system.

There were mixed reactions to the plan in the City.

Richard Hunter, head of equities at Hargreaves Lansdown, said markets would pore over the details before making their verdict. “I think the main thing is that it has got to be co-ordinated and it needs to be thorough,” he said. “What we have had so far is a sort of piecemeal approach.”

John Cridland, deputy director-general of the CBI, said: “The Chancellor’s much anticipated announcement of capitalisation will herald the first essential step on the road to financial recovery.”

The proposal will be examined by the European Commission to ensure it is not in breach of EU state aid rules.

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£10bn is wiped off bank's shares

ROYAL Bank of Scotland shares plunged nearly 40% to a 15-year low yesterday as speculation mounted over the taxpayer-funded rescue of Britain’s banks.

RBS shares hit their lowest point since 1993 and eventually closed more than 39% lower – wiping around £10bn off the value of the business.

Halifax Bank of Scotland – being bought by Lloyds TSB in a rescue takeover – tumbled 41% while Barclays slid 9% as investors bailed out in the uncertainty.

The falls came in another day of turmoil for bank shares. The banks’ woes hampered a fightback by the FTSE 100 Index after Monday’s 7.8% slump – the biggest since Black Monday in October 1987. The Footsie finished up just 16 points at 4605.2. But banks grabbed the spotlight as investors feared shareholdings could be diluted by large Government stakes. RBS was also hit when ratings agency Standard & Poor’s downgraded the firm’s investment status.

London’s leading shares started yesterday’s trading with some solid gains but the Footsie lost its momentum amid the concerns over banks. The Footsie was kept in the black by rate cut hopes and recovering commodity prices lifting miners.

Meanwhile, the misery worsened on Wall Street yesterday, with stocks piling on the losses late in the session and bringing the two-day decline in the Dow Jones industrials to more than 875 points amid escalating worries about credit markets and the financial sector.

The Dow lost more than 500 points and all the major indexes slid more than 5%.

Steps by the Federal Reserve to reinvigorate the dormant credit markets weren’t enough to calm nervous investors.

“The calls I’m getting - every money manager I deal with, and every client I talk to – are just very emotional,” said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. “This is a very, very emotional time, and most of them are taking steps to shore up their defences, reducing exposure to stocks just to defend their portfolios.”

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'Everything' being done to ease region through turmoil

NORTH East Minister Nick Brown last night promised “everything” was being done to get the region through economic turmoil as a massive bail-out of UK banks was finalised.

The Journal understands part of the package being announced today will include “recapitalisation” of ailing banks, which could involve an injection of taxpayers’ money in return for a stake in the companies.

The deal – which could reach £50bn - may also include access to a stand-by facility for banks to ensure they have sufficient funds for day-to-day operations because financial institutions are unwilling to lend to one another because of uncertainty over bad debt.

Mr Brown, who was last week promoted to Chief Whip, said: “The North East economy is not immune from international trends but we have very specific strengths in the region.

“And I am determined we do not return to the era of mass unemployment that is so recent in so many people’s memories.”

Newcastle Central MP Jim Cousins, who sits on the influential Commons Treasury committee, said it was vital the Government ensured there was public money left over to help ordinary people facing tough times.

Hugh Morgan Williams, chairman of the Washington-based Canford group and a senior member of the CBI, warned there would questions about what the payback for taxpayers and banks would be.

The bail-out was being finalised last night at a meeting attended by Gordon Brown, the Chancellor, the Governor of the Bank of England Mervyn King and the boss of the FSA Lord Turner.

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Anxious wait ahead for internet savers

AROUND 300,000 UK savers with Icelandic internet bank Icesave last night faced an anxious wait to find out what will happen to their money.

City watchdog the Financial Services Authority warned earlier yesterday it expected the Icelandic authorities “to put the group’s parent company Landsbanki into insolvency proceedings”.

Such a move would trigger payouts to savers from the UK’s and Iceland’s depositor protection schemes.

But people are likely to face a long wait before they get their hands on their cash and those with more than £50,000 could potentially lose out.

Icesave customers first learned there was something amiss when the group stopped withdrawals from internet accounts after Landsbanki was placed into receivership. A statement on Icesave’s website said: “We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts.”

Landsbanki’s other UK business Heritable Bank also stopped allowing consumers to make withdrawals.

Iceland’s government’s yesterday introduced sweeping new powers amid warnings that the entire country could go bankrupt.

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Bauger 'not threatened'

ONE of Iceland’s biggest investment companies owns many of Britain best known high street names.

Baugur maintains its business is not threatened by the problems afflicting the banks in its home country where it recently unloaded its remaining assets. Its investments are now concentrated primarily in the United Kingdom, although it has a stake in some Swedish and US companies. The firm said: “What is happening in Iceland will not flow into the UK high street as some people have tried to speculate and will not lead to a forced sale of assets.”

Companies the firm has a share in include House of Fraser, Debenhams, Woolworths, Iceland, Moss Bros and French Connection.

Last week Don McCarthy, House of Fraser chairman, said Iceland’s economic crisis had “no impact on the strength of its business, its operations or its trading performance“. He said Baugur’s role was that of a supportive shareholder, and there was no daily trading relationship between the groups.

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