RBS: Sir Fred Slips

Vernon Hill submits: Word of RBS's (RBS) surprise £12 billion capital raise isn't just a disappointing piece of news for shareholders; it caps a series of decisions by management over the past twelve months that can only be described as disastrous. Roughly this time last year, when its stock was trading at 700 pence, RBS and its bidding partners first considered putting together a bid for ABN Amro. In October, the consortium finally closed on £47 billion deal; the price was £10 billion above the next highest bid, and worked out to 20 times earnings. RBS's portion of the deal was £10 billion in cash. By this time, RBS's stock was down to 550p. The deal pushed down RBS's capital ratio to 4.25%, well below the 5.50% average for U.K. banks, and just 25 basis points above the minimum that causes regulatory bells to go off. Sir Fred Goodwin said that, no, the company need not raise capital to pay for the deal. It would rebuild its capital via retained earnings instead.

Then in December (with RBS by now trading in the low 400s) Sir Fred told investors again that the company would not raise new capital. Its subprime-related writedown would only be £1 billion, far lower than the hits that companies like Citigroup and Merrill Lynch took last quarter. He also noted that the company's operating results were running "well ahead of market consensus."

In February, Sir Fred raised RBS's dividend, and again reiterated the company didn't need to raise capital (“Not us! No way! Not now!”)

Discouraging Signs from Citi's Pandit

Tom Brown submits:

Did you see that Vik Pandit, talking up Citigroup to Business Week, told the magazine that "you couldn't design a better footprint or get a better set of assets if you had to build a bank from scratch. This is clearly the right model." Really? Pandit's take on reality is materially different from mine.

Here's a bank that's so rife with unneeded costs that it's embarking on its second cost-cutting program in less than a year, has such a shortage of proven managers that Pandit is having to import a new team more or less wholesale from Citi competitors, and that's endured more pain from the subprime meltdown than just about any firm on Wall Street. What are the advantages of size and product breadth again?

Will U.S. Markets Crash Now - Or Later?

Every time I’ve written about the imminent disaster that awaits U.S. stock markets, and subsequently global markets, the response has been overwhelmingly negative. In 2007, when I warned of steep declines in U.S. markets that were on the way in 2008, I was called everything from unpatriotic, to un-American, to even unholy. When steep declines indeed hit the markets to begin 2008 and gold soared to $850, (fulfilling my September 2007 prediction of $850 gold by January 1, 2008), the name-callers merely disappeared.

It’s not that I revel in markets struggling and the still very real possibility of it shedding great value. In fact, I’d be ecstatic if the U.S. markets looked healthy and an imminent rise to a 16,000 Dow was realistic, with an upward surge taking all global markets along for the ride. Good money can be made in great markets or terrible markets so it doesn’t really matter either way. It’s amazing that people think I have an agenda for wanting markets to crash, oddly connecting my market sentiments to arguments about patriotism or religion. It’s just that I feel obliged to report what I see, because so few nuggets of reality trickle through the mainstream information filters and reach larger audiences.

What Is the ECB Smoking?

As the Greatest Financial Crisis Since the Depression rolls on, complete with continued carnage at the front end of most major yield curves, the divergent views of prominent central banks is coming increasingly into focus. While Fed policy remains extremely easy (as measured by real rates) and the Bank of Canada cut rates yesterday, seemingly not a day goes by without a hawkish comment from an ECB member. Given the apparently universally held view that a) the European banking system is buggered, b) that stuff like Spanish property is in free-fall and requires attention, c) weak sisters like Italy are being crippled by the strength of the euro, and d) as a result, European growth is headed for a massive slowdown, a constant refrain that Macro Man hears from colleagues and counterparties is "what is the ECB smoking?"
Macro Man did a bit of digging to find out. We should recall that the ECB's mandate is to ensure price stability, with the primary definition of this defined as CPI inflation close to, but not exceeding, 2%. Regular readers of this space, or indeed observers of financial markets, will know that the ECB has not achieved this goal in a long time, as demonstrated by the chart below. Now obviously, headline inflation (the object of the 2% target) is being higher by energy prices, and frankly there's not a lot the ECB can do about that in the short term. That having been said, we should recall that the ECB dialed down the rhetoric late last year on the expectation that inflation was experiencing a temporary "hump". Nothing that we've seen so far this year, least of all $119/bbl oil prices, suggests that we're about to coast down the downside of that hump.

More worrying, from the ECB's perspective, is the potential for second-round effects- namely, rising wages that then fed through into broader price rises. In fairness, macroeconomic data on wages has been pretty muted this far. Worryingly, however, core CPI has risen steadily over the past couple of years, and now rests at the ECB's 2% target for headline! If that isn't evidence of incipient second-round effects, Macro Man isn't sure what is.So will second-order effects intensify? One place to look is labour markets to get a gauge of tightness. And there, the message is that European labour markets are very tight indeed. In Germany, the "anchor" or "daddy" of the Eurozone, has seen its unemployment rate fall to the lowest level since immediately after unification.
And what of serial moaners France, who can almost always find something to complain about- be it the level of interest rates or the level of the euro? As one of Macro Man's colleagues observed this morning, the chart below looks like a classic head-and-shoulders formation: a bearish pattern suggesting that the line should head lower. In point of fact, it's a graph of France's unemployment rate, which is at 25 year lows. That bears repeating: French unemployment is at 25 year lows! You can just imagine the memo that Trichet and co. composing a memo to the French Finance Minister. "Dear Mme. Lagarde: Shut the f*** up!"
But enough of the core: what of the periphery? The market is replete with stories of collapsing prices for Spanish coastal properties, which inevitably drag the economy down with it. How valid are these fears? As far as Macro Man can see, not nearly enough to alter the ECB's calculus. Spain's own house price index , recently updated for Q1, has yet to show a quarterly decline this decade. Sure, the price of some coastal properties is falling.....but its hard to see the ECB (whose own Frankfurt homes haven't budged in value over the last few years) having much sympathy for British owners of vacation homes, who in any event are benefiting from the currency move!

Subscribe with an RSS reader Older News Archive Add news to your web site