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Monday, March 2, 2009

It all's happening so fast!

Last week was a horrendous week for the banking industry in Europe and in the USofA and, believe it or not, the Caribbean. There is also some spill over into this week, but, as always, these issues are continually developing. But, while we had bad news on at least two fronts, we also had some "OK" news on one front. Read on...

First, the bad news. The Royal Bank of Scotland (RBS) went to the UK government for 25bn pounds of additional cash into the bank as well as insure up to 325 bn pounds of its existing portfolio. Allot of this comes as a shock to many, who felt that, yes, Sir Goodwin made a bad mistake at the wrong time in acquiring ABN-AMRO, but, it was minimal and his departure, was due to his overall megalomaniac style of acquisition, rather than overtly risky asset management throughout his tenure.

Some may say that this over-purchasing of financial after financial of Goodwin, was overall overt bad management. But, acquisition of good companies in good times, which Goodwin did many times over, is never a bad thing--while he sacrificed dividends on a few occasions, he paid out substantial dividends too, during his tenure.

This government intervention, however, maybe just additional security for RBS. The details are astounding, as Prof. Buiter at the LSE in an FT blog pointed out, though.

The tax payer, will not get their value for money in the first instance because, they will be repaid in B-shares and with being paid with B-shares, the interest will only be 2% of the total insured loan of 325 bn pounds (about 6 bn or so). Which, when adjusted to inflation, will result in a net zero return to investment after the loan is repaid.

All of this, amidst losses of over 9 bn pounds of RBS reported over the last month. The government owns 70% of RBS as of today and may raise the stake to 75%--but no more says officials.

What is done is done and the government, is not about to let the Queen's bank go belly-up!

HSBC on the other hand, has reported that it will be closing some of its operations as well as scaling back ventures in America. Also, they will be issuing a rights share of over 3bn USD. Raising cash in the short term, to buffer itself against possible steepening of the global financial and economic downturn. This is prudent. Although it is a bell weather for bad things to come, it is better to go to the market, rather than to the government.

The third issue--and this hits closer to home--is the ongoing CLICO debacle that started in Trinidad and Tobago and wound its way around the other CLICO subsidiaries around the Caribbean and Latin America.

The CLICO outpost in the Bahamas is in liquidation. The government had just announced that due to this liquidation, as a result of the parent company in Trinidad calling in some of its resources to pay off investors, among other things, will make sure that policy holders will be secured through another insurer as to not incur the losses of capital and money of policy holders, in the midst of this liquidation.

The CLICO branches in Belize, Cayman's and in Barbados, have already wound down and have a net customer bas of about 200--if that.

What should have happened, if it has not already happened, is that government, should insure all policy holders and then sell them to another insurer--if not buy the polices outright and re-sell them to another insurer, at face value.

There may be transaction costs and losses, but, to have policy holders lose their money out right--which in the Bahamas is about 20 thousand plus policy holders, is something no one wants on their hands.

Also, now, more breaking news is that AIG, the giant American insurer, is back to the American government for more bail-out money. The Federal reserve announced the basic terms of the package today and will release more data, as timely as it can.

But, from the outset, it appears as if a direct cash injection of 30bn, now, is a good enough amount to base your sights on.

Bad news and some not so bad news, but, it could be worse all around!
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