Brought to their knees in £31.5bn rescue deal - but Wall Street enjoys record bounce

Published on Monday 13 October 2008 22:17

SCOTLAND'S once-great banking industry was left denuded and humbled yesterday, after being forced to accept the biggest financial rescue package in British history.

The sombre attitude was in stark contrast to the scenes of near jubilation on Wall Street as traders saw the Dow Jones industrials record its biggest-ever one-day points gain as it soared 936 points, or 11.08 per cent.

However, in Scotland the unprecedented 31.5 billion government emergency refinancing deal now means RBS and HBOS have been stripped of their independence, at least in the short term. The banks will now have to answer to the government – which is about to take massive shareholdings in both institutions. Treasury appointees will sit on the boards, and the banks have been banned from awarding director bonuses for two years. The banks have also been told to adopt a new approach to mortgage lending, and both have accepted the loss of senior boardroom figures.

Sir George Mathewson, the former chairman of RBS, said: "I am confident the banks will pick up eventually, but we are looking at a dire economic situation just now. This is the direst and worst day for a long time. It is difficult to take a view from within the darkness."

And financial analyst Alastair Cumming, investment manager at Barclays Wealth in Glasgow, said jobs could go south as a result of the deal. He added: "If the decision-making goes south, it will damage the quality of Edinburgh's authority (as a financial market]."

The London stock market reacted extremely positively to the bank bail-out, rising 8 per cent and wiping out the losses suffered in last Friday's falls. The major European bourses were even more buoyant after yesterday's deal.

However, it was Wall Street that experienced the biggest bounce, with the Dow Jones industrials recording its largest-ever one-day points gain as it rocketed an unprecedented 936 points, or 11.08 per cent – its biggest one-day percentage gain since 15 March, 1933.

John Lynch, the chief market analyst for Evergreen Investments in Charlotte, North Carolina, said the rally was encouraging, but admitted doubts that it signalled the worst had passed.

He added: "I'm not doing any backflips yet. We still have many challenges up ahead."

Bank shares, however, did not follow that trend. HBOS closed down 27.5 per cent, Lloyds TSB was 14.5 per cent lower and RBS down 8.4 per cent – falls almost certainly linked to the deal which means that the banks will not be paying dividends to their shareholders.

Barclays said it was not turning to the government for emergency funding, announcing, instead, plans to raise more than 6.5 billion from investors to help shore up its balance sheet.

The high-street bank also said it would not pay a final dividend for 2008, saving the group 2 billion.

John Varley, Barclays' chief executive, warned that rival banks in need of government capital injections would be "constrained in their strategic and operational flexibility". Barclays' shares rose 5 per cent yesterday.

HSBC, the UK's other major banking group, has already announced separate capital-raising measures to bolster its UK operation. Its shares improved by 6 per cent yesterday.

The Prime Minister's message was clear when he outlined the rescue package yesterday – there was to be an end to the days of overblown City salaries.

There will be no boardroom bonuses in the current year and future rewards will be tied to performance, with bonuses next year paid in shares, not in cash. Nor will they pay out any dividends until the government's interest in preference shares has been fully repaid.

"Our action is driven by our values," Gordon Brown said. "For this government, and I believe the whole country, the guiding idea is fair reward for hard work, effort and enterprise, not incentives for irresponsibility or excessive risk-taking for which the rest of us have paid."

Bryan Johnston, the director of Bell Lawrie and a financial analyst, said: "As far as the culture of these banks is concerned, there may be a different view on risk, there may a drive to get back to mainstream banking. I do not expect a great rash of redundancies."

But the Conservative leader, David Cameron, said the package was "painful and expensive" and represented "the day that the bills came in for a decade of too much borrowing".

Under the plan, 5 billion will be injected into RBS by the Treasury, with a 15 billion share issue by the bank also guaranteed by the government.

Lloyds TSB and its proposed new partner, HBOS, will receive up to 17 billion of emergency funding, while the price Lloyds TSB is paying for its rival is also being lowered.

Yesterday, the takeover of HBOS by Lloyds was still on, despite criticism from some Scottish politicians who argued the part-nationalisation of HBOS took away the need for any merger.

As expected, the RBS chief executive, Sir Fred Goodwin – is being replaced by Stephen Hester, the chief executive of British Land. The chairman, Sir Tom McKillop, will retire from the board next April. HBOS chief executive Andy Hornby and chairman Dennis Stevenson are also to step aside.

Alistair Darling, the Chancellor, said the men had waived their contractual entitlements, worth an estimated 2 million for Sir Fred and nearly 1 million for Mr Hornby.

Treasury controls extend to the board

FROM Treasury appointments at board meetings to direction on lending strategy, Britain's banks are expected to give up a great deal of independence by accepting a bail-out from the government.

The government will be able to decide on up to three non-executive directors at RBS and two at the group formed from the merger of Lloyds TSB and Halifax Bank of Scotland. The directors are a stiffer requirement than banking sources had privately expected.

RBS insisted yesterday that the new board members would be chosen in consultation with the government, rather than being direct appointments. However, it appears the Treasury could simply veto candidates until it gets its way.

Alistair Darling, the Chancellor, said the controls were "arms length" and the government would not be taking an active role in decision making. But experts warned the control of the state would extend to banking strategy.

Hamish Rutherford