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  1. Wealth
January 26, 2009

Boom and bust burst back

By Spear's

Brown Boomed that he had Banished the Boom & Bust cycle, just as the Boom turned to Bust.

Brown, as in Gordon, Boomed that he had Banished the Boom & Bust cycle, just as the Boom turned to Bust! And left the economy… well, as we all now know, well and truly Bankrupt.

In early 2007 Spears Wealth Management Survey asked an important question: ‘Have the Central Bankers Lost Control?’ Answer: they had. And now, the High Street Banks have followed the Bank of England down the plughole of the Governor’s ‘high moral risk’ territory.

And who’s paying for all this greed and nonsense: Brown? The Bankers? The Businessmen? The Bureau-Regulators? No! It’s the Busted British Bulldog, also known as the Great British Public, or Taxpayer, or You and Me… left paying for the Banker’s Big Bank-Raid on their own Banks – a £40,000 Bill for each of us, by the latest estimate. Frankly, the 1990s ‘Disgusted of Tunbridge Wells’ saw nothing like it!

The editor apologises in advance for the over-use of the higher case Capitals, but it’s a generation’s lost Capital that we are talking about here, especially the savers and pensioners, and it’s very serious and it’s only just beginning. WMS warned this downturn would be much longer and deeper than people expected, while the authorities pondered whether there would be a recession at all!

In this truly appalling crisis, bad news follows so fast on the heel of bad news, that there’s a danger that the culprits will avoid scrutiny: take the case of the bankers and their duty of care to their shareholders, the people who are the owners of the businesses that they work for.

Starting with RBS, who asked their shareholders for a massive £12 billion in the UK’s largest ever Rights Issue in April 2008: the shares were priced at 200p, but just nine months and two government bail-outs later, the government owns 70% of the bank and the shares stand at a miserable 12p, a loss of 94%.

Christine Graham, MSP, said: “If you are misleading people into thinking this is a stable investment, when at that stage the state of the bank’s stock must be known, if you are doing that, it’s a criminal offence.” Quite right! Lothian and Borders Police are considering her claim of criminality.

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The aptly named Tavish Scott, leader of the Scottish Liberal Democrats and acting on behalf of all Ravished Scots, has called on the Serious Fraud Office to investigate, as the new-broom Chairman rapidly clears out Sir Fred Goodwin’s former boardroom, lock, stock and a dozen smoking barrels. Scandal, lawsuits and custodial sentences are in the air…

Now, take a close look at Barclays, whose shares have declined by 67% in the first three working weeks of 2009. Its CEO, John Varley, says everything is hunky-dory, but the market doesn’t believe him. Why should it?

This is the CEO who raised £5.3 billion from Abu Dhabi and Qatari investors in October 2008 without even offering the same deal to his existing investors. It’s inconceivable that any public company can raise expensive money, as this was, without a Rights Offer to its new and existing shareholders.

What Varley effectively said to his existing shareholders was: “Get lost, I’ve found someone better than you lot!” Then as Barclay’s shares crashed from 153p to 66p on 22 January, it emerged that the new Gulf investors had Mandatory Convertible Notes, that convert at any price below 153p that Barclays raises any new money at before 30 June 2009.

These terms, and some additional warrants, would give the Gulf Investors 67% of Barclays at the current price of 66p – already down to 51.5p on 26 January, whereupon they mercifully rose back to 80p. This stunning deal for the Gulf Investors was put together by the stunning former model and restaurateur Amanda Staveley: she may be blond, but dizzy she ain’t, as she out-positions the whole board of the UK’s fourth largest lender.

Varley will be saving on steam bath treatments up to 1 July, that’s for certain; but if Barclays needs money before then, he’ll be out with a bevy of writs, not pouting blondes, flying after him. And he wonders why the markets don’t believe him?

Next, take a look at HBOS, the Horrible Banking Outfit of Scotland, which has just been propped up, again, with another £59 billion from the Bank of England’s Special Liquidity Scheme (SLS), whereby AAA-rated mortgages can be bundled up and exchanged for government bonds so as to release liquidity.

(RBS helped itself to another £39 billion from this pot, along with Lloyds and Nationwide at £25 billion each and with Abbey bringing up the rear with £23 billion, with other stragglers picking up what was left of this £200 billion largesse; this compares to the rest of the EU’s €750 billion issuance, or about three times more but for an economic area with a population six times bigger.)

Then LloydsTSB, the best run and conservatively managed bank in Britain, that needed no government support, ends up having to accept £1.9 billion of bail-out money because the FSA stupidly tightened the capital ratios in the middle of a lending crisis, up from 6% to 10%, before realising their error, and promptly easing the ratios significantly back down to a temporary and dangerously low Tier 1 Capital of 4%.

During these shenanigans, the board of LloydsTSB agrees to buy the bankrupt HBOS, no doubt under pressure from HMG and with huge government support, as HMG takes 43% of the new combination, renamed Lloyds Banking Group. All the old shareholders received was a massive loss of value and a name change.

When the chairman, ‘Sir Victor Blank Cheque’, was interviewed by on Sky TV he failed to come up with any credible rationale for this highly toxic, lop-sided, daft combination, other than he believed it was in shareholders’ long term interests, an admission if ever there was one that their short and medium term interest have been cast aside.

Watch out for Gordon Brown’s departing Honours List, if Lloyds Banking Group still exists… Sir Victor’s previous recovery success was a company that used to be called Woolworths.

It’s incredible that the nation entrusts its wealth to this bunch of prototypical escapees who can always read the lines that are written for them by their PR Departments.

Professor Ken Rogoff of Harvard and formerly the IMF sees it as dire: “It is hard to imagine that the UK’s banking crisis will not morph into full nationalisation. The banking sector is not stable. The hole is too deep for the taxpayer to cover. These are the stakes.” As with nationalisation, shareholder value would be wiped out.

Professor Nouriel Roubini of NYU thinks the UK is following the US banks: “The US banking system is effectively insolvent because it starts with a capital of $1,400 billion and its losses may reach $3.6 trillion. This is a systemic banking crisis.”

Varley of Barclays, still determined as ever to be the only one in step, said the opposite: “Risk isn’t generic and risk management isn’t generic.” The trouble is that either the two professors or Varley will be nearer the mark, but they can’t both be.

When Churchill wisely advised that “The art of success is to keep moving serenely and swiftly along from one crisis to the next…” he surely wasn’t thinking, however, of the nation’s banking system, or was he that prophetic?

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