Monday, October 13, 2008

The Beginning of the end?

The games begin for another week,we have much news to digest and its only noon.

First off the Uk has bail out 3 major banks to the tune of £37bn as, Europe-wide, governemnts use taxpayers money to boost confidence in the markets and take control of the banking sector.

In return for the British government's cash, which could make it the main shareholder in at least two of the banks, they will be forced to curtail the bonuses that many believe encouraged a risk-taking culture that precipitated the global financial crisis. They will also scrap dividends.

Finance Minister Alistair Darling said extreme times called for extreme measures and that he was prepared to make even more money available if necessary.

"It's necessary because we are going through quite extraordinary circumstances the world over, and I'm determined to do everything we can to stabilise our banking system and make it stronger," he said.

"And in return for it, of course, there will be restrictions on what happens in boardroom pay, and we're also getting guarantees in relation to increased lending to businesses, as well as to mortgages, too." The measures are being echoed across Europe.

Under the UK plan, Royal Bank of Scotland will boost its capital by 20 billion pounds, with the government taking 5 billion pounds in preference shares and a share issue of 15 billion pounds underwritten by the government.

HBOS and Lloyds TSB will also participate in the government scheme "upon successful merger," the Treasury said.

The UK Treasury laid out a series of conditions attached to the bailout, including a commitment by the banks to lend to homeowners and small businesses at 2007 levels, limits on executive pay, and government input on new board appointments.

Forcing the banks to lend may seem a nightmare waiting to happen, but if normal (as in pre-liar loan mortgages) credit screening is done correctly then there shouldn't be an issue. The problem I can foresee is that 'normal' credit screening for small business in an environment where times are very tough may make it difficult for the banks to comply.

Also, it must be a very interesting time in the banking sector right now, as an employee. Perhaps those who are mid level will be thankful that they are not going the way of Lehman employees but top level traders must be reveiwing their options.

If I were trading at a bank that had been beiled out right now, I would be very concerned about my package. Can you imagine a scenario where The Sun newspaper gets a hold of a story on Tim Trader making £1mn a year with a nice picture of him driing his Ferrari to work? You wouldn't have to look to far to find someone like that.

The banks in the middle of these bail outs consequently have a problem with staff retention. The reason that traders get paid so much is similar to the football world. If one club is prepared to pay a player more - off he pops, breaking his contract.

Top traders are not known for their loyalties and will be seeking to work for companies where their bonuses are not capped. Could be a good thing, as maybe some of these big banks will get back to being banks.

In other news that created the great headline 'Major Central Banks Offer Unlimited Dollars', central banks on Monday pledged to pour 'unlimited' amounts of dollars into the system to un-freeze credit markets.

"The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment," the Federal Reserve said in a statement.

"Funds will be provided at a fixed interest rate, set in advance of each operation," it added.

The sizes of the reciprocal currency arrangements (swap lines) between the Fed and the Bank of England, the European Central Bank and the Swiss National Bank will be increased to accommodate whatever quantity of U.S. dollar funding is demanded, the statement also said.

FTSE is up, Dow futures are up...happy days..

Source: HF Markets - Online Trading

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