Friday, 17 October 2008

Negative market effects of bank proposals show themselves

The fundamental flaws in the proposed bank bailout plan have already been discussed in terms of economic theory on this blog. But these effects, only four days after the announcement of the plan, are showing themselves on markets.
The government agreed to purchase shares in Royal Bank of Scotland (RBS) at 65.5p, in Lloyds TSB at 173.3p, and in HBOS at 113.6p. By buying shares in private banks the government necessarily artificially inflates their share price above that which the market would set by itself and simultaneously exposes the taxpayer to the risk of loss – up to £37 billion of losses in terms of the sums the government has agreed to put into such share purchases.
As Socialist Economic Bulletin pointed out: ‘What is the consequence of assuming this risk? The “taxpayer” is not an abstract entity. The “taxpayer”... consists not only of individuals but of profitable, that is viable, companies. Therefore the risk the government has taken has been put onto the shoulders of individuals and viable companies, instead of being concentrated on RBS, HBOS, and Lloyds TSB shareholders. This is... unjustified and damaging to other viable companies and to individuals.’
The risk of loss for taxpayers could be seen clearly by the end of trading yesterday. RBS shares stood at 65.0p – 0.8 per cent below the government price, Lloyds TSB at 150.0p or 13.4 per cent below the government price, and HBOS at 84.1p – 26.0 per cent below. This would represent a loss of several billion for the taxpayer.
Second, however, the indirect and direct negative effect on other companies could be seen.
An indirect one is that any such loss for taxpayers would in part be paid for by taxation from viable companies. A direct one was the effect on their share prices.
Overall on 16 October the market was severely down. The FTSE closed down 5.4 per cent. The fall was widespread. It affected energy companies – BP down 4.0 per cent, Shell down 7.2 per cent – mining companies – BHP Billiton down 13.1 per cent, but it extended beyond these - BT for example was down 3.1 per cent and Marks and Spencer down 5.4 per cent.
The fall struck the financial sector particularly severely. Insurance company Legal and General was down 10.9 per cent, Aviva was down 12.9 per cent. HSBC bank, by far the strongest of the major banks operating in Britain due to its Asian roots, was down 4.0 per cent, Barclays Bank down 11.0 per cent, Standard Chartered bank down by 12.9 per cent.
But there was one small knot of companies that stood out against the trend. HBOS was down only 1.6 per cent, Lloyds TSB only down 0.1 per cent and RBS closed at exactly the same level as the previous day. These were, of course, the three banks that the government had promised to buy shares in. In other words the share prices of these banks were being relatively protected against falls while other, more viable, banks were hit - resources were channelled away from viable companies and towards the least viable.

No comments: