Barack Obama may have had a good day today as he became the 44th president of the United States.
For banks it was Crash Day.
Today was the worst day in modern history for bank stocks — with none equaling the evisceration of State Street Corp. State Street lost $9.3 billion of market capitalization today alone as its stock fell nearly 60% to $14.89 per share. As part of its quarterly earnings release, State Street announced that it had $1 billion of newly discovered credit exposures. Mainly, State Street provides banking services to Wall Street firms. (Click here for a transcript of State Street’s earnings call today.)
The Financial Select Sector SPDR, an ETF that tracks financial stocks in the S&P 500, fell almost 17%, matching its record one day percentage drop on Dec. 1, 2008, MarketWatch.com reported. The KBW Bank Index plummeted more than 19% today.
JPMorgan Chase, Wells Fargo & Co., Citigroup, and Bank of America all saw stock declines of more than 20% today. The Dow Jones Industrial Average fell more than 4% today — regardless of the Obama inauguration.
The financial unrest in the UK was running in parallel to the US, but yesterday was “a little local difficulty”. First let me explain what happened yesterday.
What happened yesterday was a plunge in share values as
a) short selling was allowed again on the LSE
b) the remaining shareholders realised that the Her Majesty’s Government (HMG) is set on a course of restoring bank lending which will inevitably lead to a further dilution of the publics shareholding in the banks.
c) Royal Bank of Scotland announced its losses
d) We enter the UK bank reporting season … so nerves are jittery
It is dawning on the shareholders that although the capital injection by HMG has restored confidence in the capital adequacy of the UK banks – the political ambition is to restore domestic lending which means that the overseas bank lending on the London interbank market has to be replaced. HMG is currently pursuing a policy of guaranteeing various forms of lending which means from a capital adequacy perspective the weighting of the assets improves and in effect the banks can lend more off a smaller capital base. The guarantees of UK corporate lending also make the banks less likely to suffer from further erosion of their capital base from UK corporate collapses. The trouble with this strategy is it is the UK banks exposure to overseas toxic assets that is the problem and it is signalling to the market to expect a further erosion of equity shares as banks convert HMGs preference shares into ordinary shares and possible future injections of equity in order to achieve political objectives.
The run on sterling is mainly a result of falling inflation leading to expectations of further rate cuts. There was also a forecast of a fall in output over the next 18 months in the Eurozone which is the UK’s biggest export market.
There is also a weakness in the underlying confidence in HMGs ability to service the huge commitments they are taking on in the name of the tax payer when as much as 20% of the UK economy is in the financial services sector. Basically HMG’s accounts look awful now that they incorporate half a dozen banks. More importantly, if this is a prolonged recession then the Governments ability to sustain its levels of borrowing are in doubt. North Sea Oil is running out… and we no longer figure very highly on America’s radar.
Getting back to the question about whether the UK is running ahead or behind the US. It is hard to tell. The US was originally proposing a “Toxic asset bank” until the UK unveiled its plans to simply re-capitalise its banks along the model set up by the Swedes in the 1990s. At that point the US went “ah that makes more sense”, but since then we have diverged. Obama has obviously not gone into detail, but seems to favour infrastructure spending to stimulate the economy. Mr Brown has favoured tax cuts. Mr Brown has also favoured intervention in the banking system to replace the overseas interbank deposits that funded 40% of bank balance sheets to re-stimulate lending in the UK, but there is also talk about toxic asset sale and leaseback scheme. Plus ca change, plus c’est la meme chose.
On a wry observation about the headline: Mr Obama is good news in a lot of ways for a lot of people, but a president with a real global sense of perspective is not going to put much store by the “special relationship” – I expect to see a lot of realignments over the coming years between the US, the UK and Europe.