Saturday, 28 February 2009

Even vultures need reassuring in today's markets

There is an interesting article in the New York Magazine this weekend illustrating that even vulture investors, who are normally most cheerful when they have an opportunity to prey on those who have fallen on hard times, are getting just a teeny bit apocalyptic.

Here is just a short excerpt from the piece:

V: I heard this yesterday: The top five U.K. banks have $10 trillion of assets and their GDP is only $2.13 trillion. The whole country could fall into the ocean. The top five U.S. banks represent only about 60 percent of GDP by comparison. The other thing is a survey that I just read about in the Times. Over six in ten Americans think that someone in their household will lose their job in the next year. That means six in ten people won't buy anything other than basics. The economy comes to a full halt even worse than now.
NYM: That means the other four out of ten better be out there buying Gucci. You're not losing your job. Are you buying any Gucci? Taking vacations? Leasing a new Mercedes?
V: I'm still taking vacations and renting a summer house but I ain't buying anything. Credit-default swaps scare me too much. For the banks, their portfolios of second-lien loans is terrifying and nobody, including the government, wants to talk about it. The banks carry them at par and have hundreds of billions of dollars of them. We just bought some at 33 cents on the dollar in the market. If they turn out to be worth 33, every bank would collapse.

Reading this article caused me some concern for V - the vulture investor - and I thought it wise to provide him some reassurance during these difficult times.

The good news for him is that, despite his remark that UK banks have "assets" that are five times the nation's GDP, there's much less need to worry now on that score at least. Under the Asset Protection Scheme announced late last week the UK government will be insuring 90% of the losses incurred on the most risky assets. And the banks will be paying for this insurance too - well paying may not be exactly the best word - they are going to issue non voting shares to the government equal to around 2-4% of the amount insured. There that should teach them to be more careful next time.
The really neat thing is that even when the new shares are issued for converting the government's preferred to common and with the banks paying for the insurance in shares as well, and with RBS being owned up to 95% by Her Majesty's government on behalf of its citizens, the Chancellor has categorically assured the markets that contrary to what some rotten bad apples have suggested, the banks will not, in fact, be nationalized. After all of these reassurances from its government one can be sure that UK taxpayers will now be sleeping much more soundly at night - especially, if they are also following the advice that the vulture investor is currently giving to his colleagues, to keep gold bars and shotguns under their beds.

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