Tuesday, 19 May 2009

UK banks on the catwalk for sovereign wealth funds

Last week I wrote about the Enigmatic Market Hypothesis which essentially could be summed up in the simple phrase that when Wall Street (or the City in London) wants to hold a sale they put their prices up.

Improved sentiment and stock prices in the banking sector, not surprising given the host of rescue measures provided by most governments - including public sector guarantees against losses (in the case of the UK) and changes to the way that banks have to mark assets (in the case of the US)- is producing the desired effect as bombed out banking stocks are at last showing encouraging signs of those illustrious "green shoots" (I'm talking about the stocks and not the underlying financial health of these banks)

The UK government, which over the last several months had to more or less nationalize several banks - most notably RBS and Lloyds TSB - is anxious to start "distributing" (unloading) some of the assets that they have been "warehousing" during the recent difficulties. The cosmetically refurbished and (slightly) less fragile looking properties are about to be paraded on the capital markets' "catwalk" and clearly there is a hope that they might catch the eye of sovereign wealth funds who are still wallowing in liquidity.

According to this report the body empowered to oversee the public sector's holding s in the banks - UK Financial Investments (UKFI) - is reportedly already talking to sovereign wealth funds and other potential investors about selling stakes. The article claims that:

UKFI, which manages the taxpayer’s 43 per cent stake in Lloyds banking group and its 70 per cent stake in Royal Bank of Scotland, is reportedly sounding out potential investors so that it can begin offloading its stakes within a year.

It is not thought likely that the organisation could sell its investments entirely within a year, but rather it would look at a gradual exit phased over some time.

It strikes me that the timing seems a little too anxious and that if the UK government had great confidence in the value of its holdings - as its budget forecasts indicate an economy growing at 3% plus in about 18 months time - why wouldn't they be a little more patient and wait for the stocks of RBS and LloydsTSB to improve even further.

It could just be a coincidence that Gordon Brown- suffering from historically poor opinion poll ratings - is hoping to show that the government rescue was well conceived and that the fact that private sector players are "showing interest" in buying positions from the government vindicates his economic policy. He has not proven to be great at market timing in the past however as he sold most of the UK's holdings of gold about ten years ago when the price of the metal was below $300 an ounce.

One also has to suspect that the sovereign wealth funds may be quite keen to know whether the underlying guarantees against losses incurred by the partly nationalized banks from their holdings of "legacy assets" will remain in full force and effect should they desire to participate in the ownership of these re-habilitating banks. Somehow I suspect that that issue will be at the top of the agenda for any of the smarter managers of the sovereign wealth funds.

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