RSS

Contact us

Thursday 4 December 2008

Hand over your cash: how banks are mugging investors

Neil Collins says the rights issues recently announced by RBS, Bradford & Bingley and HBOS are a sign of desperation — and their terms are an insult to loyal shareholders

It’s time to name names. At RBS, chairman Sir Tom McKillop is relatively new, the audit committee chairman is a (Scottish) accountant you’ve never heard of, and the board is dominated by the Scottish mafia. No one has the authority or gumption to challenge Sir Fred Goodwin, the chief executive. So powerful is he that it often looks as though the idea of succession planning has never crossed the directors’ minds.

At HBOS, the chairman is the immensely experienced and well-connected Lord Stevenson. Like McKillop, he’s not a banker, but then neither is chief executive Andy Hornby. He came from Asda a couple of years ago. Perhaps Hornby is smarter than the rest of us and can understand the eye-poppingly complex derivatives of US debt which have brought HBOS to this pass. The evidence is not compelling. Perhaps he thought, like most of us, that Halifax was a mortgage bank, taking money from depositors and lending it to homeowners.

Now it, too, is slashing the dividend. Are the directors sorry, or even embarrassed? Not so you’d notice: ‘Year to date,’ said Cheerful Andy as he socked the shareholders for £4 billion, ‘the trading performance of the group has been satisfactory.’ He then drivelled on interminably about ‘a step change in our capital strength and target ratios... to consolidate our competitive position in our core markets’, for all the world as if this was just a bit of routine financial housekeeping.

Well, sorry is the hardest word — except perhaps ‘resign’ — and the banks had found a novel way of rubbing shareholders’ noses in it instead. A conventional rights issue is priced close to the prevailing market price, at a discount of less than 20 per cent, and the dividend is maintained on the enlarged capital. The issue is underwritten by a bank (or several) before the bank in turn tries to arrange for it to be sub-underwritten among long-term institutional shareholders. This mechanism means the bankers must earn their fees, since the sub-underwriters will ask the hard questions before they agree. In other words, the reasons for the issue and the financial logic will be thoroughly explored. Then, if the shareholders don’t like it, the shares are left with the underwriters, but the existing shareholders are not diluted too badly.

More articles from: Neil Collins | this section

Print this article  |  Email to a friend  |  Permalink  |   Comments (1)

Post this entry to:   del.icio.us | Digg | Newsvine | NowPublic | Reddit

Advertisement

Spectator Business | Apollo Magazine

Corporate | Advertising | Privacy | Terms

Spectator, 22 Old Queen Street, London, SW1H 9HP

All Articles and Content Copyright ©2008 by The Spectator | All Rights Reserved