British bank stocks plunge on nationalization fears
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Britain today unveiled a new bailout plan to bolster its loss-wracked banking system, but the markets’ reaction wasn’t encouraging.
Shares of the country’s major banks continued to plunge on fears the government is heading for nationalization of the industry, which conceivably would wipe out shareholders.
The British pound slumped, and yields on government bonds surged.
From Bloomberg News:
Prime Minister Gordon Brown’s government tightened its grip on Britain’s financial system, guaranteeing toxic assets and giving the Bank of England unprecedented power to buy securities. The Treasury authorized the central bank to buy 50 billion pounds ($73 billion) of assets and plans to raise its stake in Royal Bank of Scotland Group. It’s also backing hundreds of billions of pounds of securities hurt by market turmoil.
The government offered to raise its stake in Royal Bank of Scotland to 70% from 58%, after the company warned it may lose as much as $40 billion this year from worsening loan losses.
The bank’s shares plummeted 67% in London trading, the fifth straight decline. Among other British banking titans, Lloyds Banking Group tumbled 34% and Barclays dropped 10%.
‘The market is pricing in the risk of full nationalization for RBS,’ Sandy Chen, an analyst at Panmure Gordon & Co., told Bloomberg.
Traders pushed the British pound down to $1.45 from $1.47 on Friday. The yield on 10-year British government bonds jumped to 3.43% from 3.30%.
A key part of the new bailout plan will be a government insurance program to backstop troubled loans the banks have on their books. The banks will pay a fee for the program, but the government would be on the hook to absorb the majority of any loan losses.
President-elect Barack Obama’s administration also is expected to pursue new measures to relieve banks of rotten assets as the credit crunch persists. One idea is the creation of a government entity to buy up bad loans.
U.S. bank stocks also have been tumbling over the last two weeks on investor fears that nationalization is a real risk as the government commits more taxpayer funds to keep banks afloat.
-- Tom Petruno