Countries In Trouble.. Capitualtion Surely?

Yesterday was just one of those days. An 800 point intraday fall on the Dow with a 300 point recovery in the afternoon session is the type of market that traders dream of, stockbrokers lose hair over and governments hate.

With a couple of trading days like we have had the market and investors are beginning to wonder whether we have reached the point of capitulation, basically the point where people say 'to hell with it' and dump everything. Scarily it doesn't look that way.

Having spoken with a number of friends who are traders and brokers very few are reporting that clients are calling up to dump stock. One stockbroker said "It's bizarre really, even though the market has plummeted we have been getting more calls from clients who want to average down than we have from clients wanting to dump."

This lack of total capitulation is being attributed in some respects to the Internet and financial TV shows. One broker said "I was around in 87 and the scariest thing was that we just did not know what was going on. In today's market, clients are watching the same information as we are and because of this they are less likely to panic".

A broker at a small company specialist said "The media have caused some of my clients to lose lots of cash. The tabloid press should be ashamed. I suppose we should be used to them sensationalising everything but they have to take some responsibility for retail clients getting shafted. Some companies with sound balance sheets a great product and little exposure on a macro scale are being killed when there is no need for it, when the dust settles the regulators should look at these so-called experts and bring them to book."

This particular broker saves his most venomous comments for the financial bulletin boards, "You have people on these bulletin boards spouting absolute lies, plain cold lies. How can a broker be fined or have his livelihood taken away if he misleads a client but an anonymous numpty on an Internet site can say whatever he wants, market manipulation in affect, and nothing happens, double standards in the name of free speech. It makes me sick"

It seems that much of the criticism of the media, regulators and government from those inside the industry, stems from the belief that a clear concise plan is not in place. This may be on the way in the UK at least after the Chancellor met with senior officials from the UK's top banks.

The chief executives of Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS last night met the chancellor, Alistair Darling, and other senior members of the Tripartite Authorities.

The banks are understood to have told Mr Darling that they broadly back a plan for the Government to take equity stakes in return for capital injections.

Analysts yesterday predicted the Government might need to pump between £30bn and £50bn into the banks.

Sources said last night they expect a plan of action to be hammered out over the next couple of days. The cash injection would be in the form of preference shares, and it is possible the Government would hand over some cash now while also saying there would be a pot of cash available if banks need money several months down the line.

“There is a realisation that some of the more radical options have to be put on the table,” a senior banking source said.

While unenthusiastic about part nationalisation, the banks hope that if the Government helps to bolster their capital it might provide a much-needed boost of confidence to investors.

The worry for the industry and now, believe it or not, actual nation states, is that the governmental money coming into the banks will be followed by massive regulatory changes.

Iceland agreed yesterday to guarantee it banks in a similar move to Ireland, part of the reason for this is that if the Icelandic banks are to benefit from selling toxic assets under the US bail-out plan they had to make this move and they fear that US oversight may be the consequence.

There was even talk of Iceland becoming bankrupt. The trigger for the panic over Iceland's solvency came Monday, when the government pumped €600 million ($827 million) into Glitnir Bank hf, the country's third-biggest bank by market capitalization, taking a 75% stake.

Meant to reassure financial markets, the bailout instead heightened concerns that Iceland might have to prop up its other banks too, but that it lacks the resources to do so.

Iceland has a population of just 300,000 and a gross domestic product in 2007 of around $20 billion -- less now that the currency has fallen so sharply. Its major banks have foreign-currency liabilities totaling $120 billion.

"If the Icelandic government is forced to bail out those banks, its debt could go up to astronomical levels as a share of GDP," says Ben May, an economist at London consultancy Capital Economics.

That concern has pushed up the cost of buying insurance on debt issued by Iceland's government to a level that normally indicates a borrower is in severe distress. On Friday, traders said it cost $1.5 million up front plus $500,000 a year to insure $10 million of Icelandic debt against default. That is up from $271,000 a year with no up-front fee a month ago, according to Markit Group, a credit-information firm.

"There is skepticism that Iceland's finances could cope with a systemic banking failure," said Gavan Nolan, a credit analyst at Markit.

When there is potential for a country to go bust, you have to admit, capitulation cannot be far off, if it has not already reached that point this week.

Source: Online Trading - HF Markets

HBOS - Another One Bites The Dust

HBOS walks warily down the street,
With its price pulled way down low
Aint no sound but the sound of its balance sheet,
Short Traders ready to go
Are you ready, are you ready for this
Are you hanging on the edge of your seat?
Out of the doorway Lloyds Bank rips
To the sound of the beat

Another one bites the dust
Another one bites the dust
And another one gone, and another one gone
Another one bites the dust
Hey, I’m gonna get you too
Another one bites the dust

(With apologies to Queen!)

I wake up on another morning where another bank is gone. Britain's Lloyds TSB sealed a 12.2 billion pound ($21.7 billion) deal to buy HBOS to create a dominant mortgage and savings bank, encouraged by the government amid fears turmoil in financial markets would claim another UK victim.

Lloyds will offer 0.83 of its shares for each HBOS share, valuing them at 232 pence based on Wednesday's closing price of 279.75p, a 58 percent premium over HBOS's last price of 147.1p.

HBOS shares were up 25 percent at 184p while Lloyds shares dipped 3 percent to 268p, trimming the value of the deal to 222p per HBOS share.

The bank said it expects the deal to boost annual earnings by over 1 billion pounds a year by 2011 through cost savings and boost its earnings per share by over 20 percent a year. Lloyds CEO Eric Daniels will remain as chief executive of the enlarged group and Victor Blank will stay as chairman.

The UK government said it intends to smooth regulatory approval of the takeover -- despite the enlarged group having a 28 percent share of mortgages -- to ensure the stability of the UK financial system.

Alistair Darling, UK finance minister, said he fully supported and welcomed the deal. But Daniels denied it was a government-brokered rescue of its rival, and said the banks have been in talks for several weeks.

"There shouldn't be any impression this is a shotgun marriage or a forced marriage, this is something that's been looked at for a good long while.

"Our most recent set of conversations have taken place over the last several weeks," Eric Daniels, chief executive, told reporters on a conference call.

All I know is someone is making a fortune

Lloyds said the combination will strengthen its ability to serve UK customers in current difficult markets.

It follows a plunge in HBOS's share price in the last six days amid fears about its funding position.

What interests us is what will come out about this deal when the short positions in the bank over the past weeks are analysed. The one thing we know for sure here is that someone has made a killing on the short side.

This will no doubt bring up the debate on short selling once again and I would suspect we will get some politician, who doesn't really understand the markets, calling anyone who was short 'Satan'.

The US SEC have recently made a call on short sellers by stiffening the rules. The SEC adopted two regulations forcing traders and brokers to close out short sales on all stocks, amid concern investors are driving down prices by flooding markets with sell orders. A third rule makes it a securities fraud when sellers deceive brokers about delivering borrowed shares to buyers.

I am not so sure about having everyone close short positions, shorting is a legitimate market tool and is creating, perhaps a false market, but the naked short rule is a good one.

Naked shorts are where people have not borrowed the shares in the market to cover their short positions. Basically if you have a brokerage account and you sell short on a 10 day settlement, for example, without shares on your account, then you will have to 'cover' your position in the market. Imagine now that thousands of traders did this on HBOS (I am not saying they did).

There could be a position (and it has been well documented in high profile cases in the US) where there are more shares being shorted than actually exist in the market. The price, therefore, is only going one way.. down the pan. But if a huge volume of the shares are naked, then it is a false price.

If you do this now in the US it is securities fraud. Personally, I think this is the most sensible thing a regulator has done for years, it almost make up for getting rid of the 'up-tick' rule that probably would have stopped a lot of this shenanigans.

My fear, however, is that Mr. Alastair Darling is now under pressure to do something about short selling in the UK. And with all due respect to Mr Darling, he has not got a great record when it comes to making decisions under pressure (non-dom tax and capital gains tax to name two).

I do sympathise, however, because it is a tough call to know what to do. The government recently stopped short selling around rights issues, and we suspect this will now be extended. A knee-jerk reaction would be to stop short selling on bank shares, however, to create a protective shell around banks on that basis may be a mistake, it depends on the view point you take.

The FSA have said that short selling is a 'legitimate tool', which I agree with, however I would like to see naked shorting stopped, it disturbs the natural order.

When the dust settle on all this I would suspect that there will be some hedge fund managers cashing in their chips and moving to somewhere they can keep a low profile, because the recriminations will be huge.

John Paulson making a 500%+ on one of his fund shorting the sub-prime market was received with applause for his heroics. The average guy in the street did not understand how this was done but had no particular problem with it. Any hedge fund manager who starts telling of the billions they have made shorting bank shares will not get the same reception. The perception will be that taxpayers are the ones who have bailed out the greedy hedge funds, and that would almost certainly put an end to the party.

I would suggest that the billions being made from shorting banks be kept very quiet indeed or you may find that the government and regulators start using the words like 'fraud', market abuse', 'market manipulation' and the Kryptonite words for hedgies 'windfall' and 'tax'.

Source: HF Markets Online Trading

NetBank Fails - ING to the rescue

I missed this one..........

It was reported in the FT on Friday night that ING Direct, a subsidiary of the Dutch financial group, is taking over the customers and insured deposits of NetBank, an online lender with $2.5bn (£1.2bn) in assets. Apparently the bank was shut down on Friday by the US government following losses on sub prime mortgages and other loans.

It is a significant situation and marks the largest US bank failure the savings and loans crisis of the early 90's. It is a stark reminder that the sub prime mortgage market is not a story that is dead and buried yet.

ING will be taking on $1.5bn in deposits insured by the Federal Deposit Insurance Corporation and said it had paid about $15m to acquire the deposits. ING will also acquire $724m in assets from NetBank, which filed for bankruptcy protection.

Arkadi Kuhlmann, ING Direct chief executive, said in an interview that ING stepped in partly to insure continued consumer confidence in companies such as his and NetBank that conduct all their banking business online and do not operate branches.

“This is all about confidence in the market,” he said. “Since we are the largest direct bank we were very pleased to assist and help out and hopefully take on these customers who will continue to do business on the Internet.”

ING Direct’s announcement came just an hour after the Office of Thrift Supervision, which oversees US lenders, said it would close NetBank following loan losses.

In addition to the losses, OTS said Georgia-based NetBank failed to improve what the regulator said were weak underwriting standards, poor documentation, a lack of proper controls and failed business strategies.

NetBank’s losses came largely due to early default on loans that it had sold, OTS said.

“While the institution continued to operate in excess of minimum capital standards, the actions taken to address these problems were unsuccessful and it became clear that high operating expenses combined with continuing losses were jeopardizing the institution’s viability,” the OTS said. It added that the closure came after NetBank’s previous attempts to sell itself failed.

Many small mortgage lenders have been forced out of business in the wake of the mortgage crisis and Countrywide Financial, the largest US home lender, appeared close to failure over the summer. Countrywide was aided by a $2bn equity investment from Bank of America and a fresh $12bn in financing from its lenders.

The FDIC said NetBank had approximately $109m in1,500 deposit accounts that exceeded the federal deposit insurance limit. These customers will have access to their insured deposits but will become creditors for the their uninsured funds.

NetBank’s website was shut down on Friday but was to reopen Sunday evening.