RBS - creeping nationalisation by UK government

I am a little disappointed with myself for failing to see this opportunity earlier.

Furthermore RBS stock is down by about 50% since last Monday.

However despite all that:

(1) the company is being gradually nationalised by the UK government

and

(2) still has a market cap of about 11 billion GBP, or roughly 16 billion USD (at GBP/USD 1.46).

Further information to come.

Needless to say, I am short RBS, however I am interested in opinions of people who think I am crazy to short the stock, especially given the huge decline (1) today (2) in the past week (3) in the past year

 

Government increases stake in RBS after record loss

http://www.ft.com/cms/s/0/d2f5ce82-e5f8-11dd-8e4f-0000779fd2ac.html

some snippets:

Royal Bank of Scotland on Monday confirmed it expected to have suffered a loss last year of more than £20bn as the state-controlled lender unveiled further damage as a result of the credit crunch.

The loss, which could reach as much as £28bn, will be the biggest in British corporate loss in history, far exceeding the £15bn deficit reported by Vodafone, the mobile phone group, in 2006.

RBS said it had also agreed with the Treasury to replace the £5bn in preference shares held by the government since the October bailout with ordinary stock. This will increase government ownership to almost 70 per cent.

The government agreed to pay 31¾p for each ordinary share , a 8.5 per cent discount to Friday’s closing price of 34.7p.

Comment: stock already trading below 31 pence

In return for the restructuring, which will save the bank £600m a year in dividends, RBS had promised to raise its lending across its UK businesses by £6bn.

comment: UK govt directing RBS to lend. Therefore I infer there is a implicit guarantee of bad loans.

 

FYI, RBS at 28 pence, 39.46 billion shares outstanding

http://markets.ft.com/tearsheets/performance.asp?s=uk:RBS

is 11.049 billion GBP market cap

I shorted in the 26 pence range.

Target is 3 pence, or maybe lower

 

Just as a general comment, I was watching the Brown / Darling press conference on Bloomberg, and the way that the two gentlemen were talking, they were very keen on getting the banks to lend, even though the most prudent thing they can do in a recession is to be careful with lending.

This is not just RBS specific, but UK bank specific. I infer from this that UK banks really only have two choices:

(1) Go without government assistance, and hope for the best

(2) Get government assistance, but get forced to make bad loans, which leads to more losses, which leads to more equity dilution and eventual nationalisation

 

http://www.ft.com/cms/s/0/bd4aed0a-e60d-11dd-8e4f-0000779fd2ac.html?nclick_check=1

Treasury statement: Restructuring investment in RBS

With continuing instability in the global financial markets, expected to be demonstrated by a run of poor financial results from the industry, the Government is today taking action, building on the comprehensive set of measures it announced on 13 October, to adjust its commercial investments in the Royal Bank of Scotland Group plc (RBS) to stabilise further its position and ensure it has the tools to enhance its contribution to the long term strength of the economy.

The Government, in consultation with UK Financial Investments (UKFI), has today agreed to convert the Treasury’s preference share investment in RBS to ordinary shares, with the aim of: supporting stability in the financial system; ensuring continued protection for ordinary savers, depositors, businesses and borrowers; and maintaining a safeguard of the interests of the taxpayer. In summary, this action is intended to:

• make available additional core tier 1 capital to the bank to strengthen its resources, enable it to absorb expected losses and permit it to restructure its finances; and

• give the bank the opportunity to build its capital further so that it is able to maintain and increase its support for the real economy by facilitating £6bn more lending to industry and homeowners, over and above existing commitments.

The Treasury, Bank of England and Financial Services Authority have continued their detailed discussions with the institutions that participated in the recapitalisation scheme last year. These institutions committed in aggregate to strengthen their total tier 1 capital, either through their own actions or, where requested, through additional support from the Government by increasing or restructuring the preference and ordinary share capital.

The Government is not injecting new money into RBS.

As part of its agreement, the Government has agreed with RBS commitments including:

• the extension to large corporates of the existing agreement to maintain, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels or above; and

• increasing lending still further by £6bn in the next 12 months.

UKFI will continue to manage the Government’s shareholdings in the recapitalised institutions on a commercial arms-length basis and with the aim of realising value for the taxpayer. Consistent with the Government’s aim that it should not be a permanent investor in UK financial institutions, UKFI will develop and execute a strategy for disposing of the shareholdings in an orderly way.

The measures the Government is announcing today support stability in the wider financial system, and protect the interest of taxpayers, depositors and savers.

 

I wouldn't be too hard on yourself - everything is always easy and makes perfect sense after the fact.

As for the oft chanted mantra of the 'banks must lend'.

To whome and for what I say?

Generally those who need to borrow won't qualify (personal and corporate) and those that do qualify don't want to borrow.

I for example can easily get a loan, mortgage and any other form of credit. But why?

Better to wait at least 6 more months until there's some possible civil unrest.

 

Down another 50% today?

Are you buying at 3 pence?

 

I shorted in the 26 pence range.

My target price to cover the short position is 3 pence, or maybe lower.

 

Any economy and banking system with a 'Royal Family' is doomed in the long run.