Self fulfilling prophecies it seems are now the stuff of the financial markets.
Bank X is in trouble, so the rumour goes, and the share price tanks as the shorts make hay.
The fall is so sharp, to the point where nothing will save the bank and a capital injection is out from anyone bar a Government.
So, one happens, short of nationalisation, to stabilise the situation.
And a few weeks later, the situation repeats itself.
And that sums up the situation in the US where Citigroup and the US Government are now in talks about a deal that will provide more support from shareholders, especially the Government, but stop short of nationalisation.
News of the talks halted a sharp slump on Asian sharemarkets (Is that why the leak happened).
Europe saw markets steady briefly, then fall to new lows.
In America news of the Citi talks saw a similar situation, and the markets fell sharply in later trading to end down on Friday’s depressed close.
It’s yet another case of financial groups not understanding that the US Government will one day demand that it had total control in exchange for stabilising and saving the institution with yet more tax payer cash.
It should be doing it now to get the situation resolved once and for all and end the silly market games that are destabilising the rest of the exchanges and confidence in the banks.
The Financial Times reported last week that there were proposals whereby shareholders in troubled banks would convert their preference shares into ordinary shares and pump millions more into the banks.
(And yesterday’s market rebound was because the Wall Street Journal reported a similar story yesterday. But it had more detail of what Citi wants).
The plan would see the conversion aimed at limiting the Government’s stake to around 40%, but providing billions of dollars of taxpayers money to the bank: Citigroup management haven’t stopped to ask whether this deal is fair, equitable and of benefit to the taxpayer.
It will be to the bank and its managers and shareholders, even if the price of Citi shares fell to less than $US2 on Friday.
The rose back above $US2. but its clear that if a new capital injection is to come, it will be done with the share price at February 9 levels of $US3.95. That means taxpayers get stiffed.
But even at that price, Citi’s fresh capital will be $US14 billion at best from the government. If other shareholders contribute, well and good, but that can’t be depended upon.
According to the Journal Citi wants to limit the Government stake to 25%: how that can be possible is hard to see unless other shareholders convert as well, a very optimistic belief from a tarnished bank.
Citi management doesn’t understand that if the Government controls 40% or thereabouts of the bank, has effective control (instead of 7.5% as now). Even at 25%, the Government would be able to throw its weight around.
The Brown Government in Britain did this with the Royal Bank of Scotland, which reports its latest results (and plans to sell tens of billions of dollars in assets this week).
Citi’s CEO circulated a memo yesterday arguing the virtues of a privately owned bank. If these talks are successful and the conversion happens, then that will be a crock of rubbish.
It is by no means certain that the Government will agree.
It is supposed to release more details of its bailout package and stress testing of the 14 major US banks to see if they can withstand a sharp contraction in the economy and markets.
Citi obviously knows it can’t, and is trying to subvert that by getting in early and attempting to get a deal in place before any stress testing is sorted out.
That means Citi management knows it would fail a stress test and that its financial position is so weak that the Government might be tempted to take a controlling interest simply to stop the rot..
Citi has received $US45 billion in US government aid and has guarantees on losses on toxic assets for hundreds of billions of dollars. Citi shares fell 22% on Friday.
Meanwhile in Britain there are signs the Brown Government will release a new banking policy this week.
The London Daily Telegraph reported yesterday that Prime Minister Gordon Brown will unveil a series of key measures that will see the Government insure the ‘toxic assets’ of major lenders and pump around £14 billion into the mortgage market through Northern Rock.
"The Government has drawn up a new rescue package that will start today with an announcement that Northern Rock, which was nationalised last year, will increase mortgage lending by up to £14 billion over the next two years.
"Ministers will this week also pave the way for “quantitative easing” – the so-called printing money option – with £150 billion being spent on buying bonds and gilts from banks.
"On Thursday, the Treasury is expected to announce plans to form a “toxic bank”, using taxpayers’ money to insure £500 billion of bad debt."
