Busch: Holes in the UK Bailout Plan

After the UK took controlling interest in their 3 largest banks, the management of those companies is coming under scrutiny. The battle between public taxpayers and private shareholders interest has surfaced over whether the banks can continue to pay dividends. Under the current agreement, Lloyds, Royal Bank of Scotlandand Halifax Bank of Scotlandwill have to suspend dividends to shareholders while the UK Government holds their preference shares.

( Busch talks about Obama's economic plan with Jared Bernstein in the video)

According to the UK's Independent,..."rising hostility among Lloyds shareholders that threatens to jeopardize the bank's takeover of HBOS, a deal the Government desperately wants to go through" and "the dividend issue has caused huge consternation among investors in Lloyds, many of which are income funds that have bought the stock on the basis of its dividend payout."

It's funny how investors don't want to buy the stock if they can't get a dividend. This is the financial road to hell that was paved with good intentions. This is why governments need to be extremely careful when they step into the private sector and especially the capital markets. The US plan of preferred share dividends was intentionally set low at 5% to ease the pain of the warrants and the CEO pay. Fortunately, there were no restrictions on dividends unlike the UK plan. This means these banks can continue to reward shareholders and attract capital through equity issuance should they want.

Also, the US is taking additional steps beyond the forced capital injection that will help. Remember, the lessons from Japan are that you have to remove toxic assets as well as recapitalize the banks or you will lose a decade or two of GDP.

The Federal Reserve's commercial paper program should assist with easing the credit crunch once it gets going. Also, the asset purchases under the TARP will help remove some of the toxic assets and simultaneously recapitalize the banks. These additional, critical steps are missing from the UK and Europe plans, so far. Capital disintermediation should occur from these countries to the US as the US gets their new programs working. This should mean the US dollar remains firm until these countries follow the leader.



Andrew Busch

Andrew B. Busch here