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HBOS humbled

Robert Peston | 08:31 UK time, Monday, 21 July 2008

HBOS's £4bn rights issue has been an absolutely colossal flop.

It is, in fact, the quintessence of a flop.

HBOS branchThe deal will probably enter the City lexicon as the phrase "doing an HBOS", to mean how not to raise money - though that would be unfair, because HBOS is the victim of a rights-issue system that is cumbersome and slow (and should therefore be reformed).

But here's the important point.

HBOS has got its money, some £4bn.

So this is not a case of an important bank being deprived of vital capital.

What's happened is that its own shareholders don't want the new shares, or at least they want only 8% of them.

Shareholders cold-shouldered the sale because the price of HBOS shares (and other banks' share prices) plummeted at the make-your-mind-up moment last week, after the woes of Fannie Mae and Freddie Mac took investors to the brink of nervous breakdown.

The remaining 92% of HBOS rights shares will go to the underwriters, unless they can be placed in the market over the next couple of days.

That means about £2.2bn of stock will be shared between just two investment banks, Morgan Stanley and Dresdner Kleinwort (they kept about 60% of the underwriting on their own books, and distributed about 40% to other investment institutions).

Here's what's irksome for HBOS.

Underwriters like Morgan Stanley and Dresdner are reluctant buyers of shares in these circumstances, not long term investors - even though both have hedged their exposure to HBOS and are therefore not facing colossal losses.

The market knows that the underwriters would want to sell their stock at the earliest opportunity, which would keep HBOS's shares under downward pressure at a time when the weak housing market is doing quite enough to depress its shares.

So HBOS is keeping its fingers and toes crossed that investors who actually want to hold its shares can be persuaded to buy in the coming hours.

To digress for a second, the way that the likes of Morgan Stanley and Dresdner hedge or lay off their underwriting exposure raises some jolly interesting questions. If for example a Morgan Stanley short-sells stock in another bank as a hedge, that short-sale can have the effect of actually depressing HBOS's share price, however brilliant Morgan Stanley may believe it is in neutralising contagion.

That said, Morgan Stanley and Dresdner have shown significant backbone in backing HBOS in a financial climate that's probably as bad as it could possibly have been. They did not wobble in the way that Citigroup did a few weeks ago during Bradford & Bingley's turbulent fund-raising.


  • Comment number 1.

    Its a difficult market and most investors have a very short term horizon when investing. Me, I'm one of the few who took up the rights. As a very long term customer of Bank of Scotland (a great bank), I have always regretted not being a shareholder too. Recent times have made it possible to get a good deal on an excellent bank for the long term.

  • Comment number 2.

    I have never seen such a spectacular display of confidence in the board of a listed company by its' shareholder base before.

    Surely has to make the management wonder what it is that they are doing wrong that their owners will not back them with any more of their cash.

    But hey, the remuneration committee will still recommend and approve massive bonuses and valuable share options for this highly regarded management.

  • Comment number 3.

    The banks that got it right were the ones that went early with their rights issue. The ones which have delayed are the ones who are going to have the problems.

    Where are the risk-takers now?

  • Comment number 4.


    ... "in a financial climate that's probably as bad as it could possibly have been" (last para.)

    May I please borrow your crystal ball?

    The ITEM club today issued what I think is a quite upbeat review of the economy. They predict only a 15per cent drop in house prices.

    Well is 15 per cent enough to stabilise the structure of society. Let me explain what I mean. a house for 240,000 (a modest 2/3 bed terrace) needs an income of over 50,000 a year - BUT the average income is about 25,000 so the average person cannot afford to buy a modest family house (i.e. cannot afford to start a family) House prices need to drop by 50 per cent for this to happen (or wages rise by 100per cent). Yet the ITEM club in all their wisdom only predict 15 per cent.

    This will not dig us out of the hole t will only drop society deeper in it - unless they are proved wrong. I think that this it far more profoundly depressing than the troubles of HBOS!

  • Comment number 5.

    How much influence has negative media coverage had in putting off the Shareholders?

    How much do Shareholders fear Market manipulation by Shortsellers (and stock lending).

    And why has no one considered issuing Convertible Preference Shares, my favourite.

  • Comment number 6.

    If lack of confidence has undermined the Sharesale, it will make the situation for Borrowers worse in the Short term.

    ie the costs of capital are being forced up by market activity.

    The Bank of England needs to take decisive action to reduce Interest Rates and restore liquidity in the money markets.

    Then the rest of the Economy can start to find its point of equilibrium.

    Without that action the Inflationary effects of imported Commodity Price Inflation will damage the economy far more seriously.

    Stability of Housing costs enable other Price (cost of living) shocks to be coped with much easier.

    Both together is rather lethal.

  • Comment number 7.

    Provided that HBOS has got its money, they need not worry too much about the share price in the short term, unless they need to raise further capital.

    Surely the egg is on the face of the underwriters, who seem to have misjudged the issue price. HBOS existing shareholders are benefiting from the underwriters paying a premium for the new shares - hence MS/Dresdner shareholders are the ones who should be crying - as well as any other bank that needs to raise capital, as they are unlikely to repeat the same trick as HBOS.

    The worst part of it is that - as I understand rights issues - this kind of thing can easily be avoided by pricing the rights far below the market rate, and allocate in proportion to existing holdings.

    This way only the most pessimistic of existing shareholders would not take them up, the discount would neutralise the dilution of existing shares - directly or cashed in through a secondary market for the rights.

  • Comment number 8.

    #6 supercalmdown

    Wasn't the liquidfying of markets after LTCM, the dot-com bust and 9/11 how we got here in the first place?

    Isn't the relative collapse in the value of the US dollar due to the low interest rates set by the Fed a factor in the commodity price explosion?

    I would agree that we are facing lethal economic conditions but surely more of the same medicine is going to kill the patient?

  • Comment number 9.

    It could have been titled Shortselling HedgeFunds give Underwriters Stock Indigestion.

    Maybe I should work for a paper !

  • Comment number 10.

    Interest Rates have a differential effect on exchange rates - sometimes.

    Exchange rates are based on confidence, or on demand for exports.

    Unfortunately anyone reading our News will have their confidence reduced.

    Raising Interest Rates won't help.

    In fact it will damage business - damage families - and send out the wrong signal to international investors.

    They will say Interest Rates have gone up - Recession is far more likely.

    Better to harmonize Interest Rates with the USA (reduce) or with Europe, either might help - a little.

  • Comment number 11.

    Recession is more than just likely: it is here. It just hasn't shown up in the numbers yet.

    Having been through four recessions in my working life what bothers me about this one is the speed of the events.

  • Comment number 12.

    It doesn't surprise me in the least that ordinary shareholders shunned the opportunity to take up this issue. As a Barclays shareholder I declined their offer for one very good reason.

    The management of the bank is the same as that which traded so recklessly in buying US junk debt, which was the route cause of their coming cap in hand to shareholders in the first place. Until I can see some evidence of corporate responsibility I will not trust them with further penny of my hard earned cash (I mine is hard earned not resulting from stupendous "city bonuses" for making risky trades).

    Bankers take note - Joe Public isn't as foolish or daft as you would like to take them for.

    By the way, it's good to read that the economic slowdown isn't effecting trade so much in London (Business news today) - the rest of us aren't so lucky - but as long as the West End is OK, then all's well with the world!

  • Comment number 13.

    I too took up my HBOS rights - and expect that due to the bargain price, I shall make some serious profits in due course. I am a long term investor and do not need cash at present, or indeed for a few years.

    What appals me about the whole affair is that the market, or certain elements of it, has deliberately manipulated the share price to ensure it fell below the rights issue price of £2.75 in order to make a quick profit. The share price running up to the deadline had little to do with the real or potential value of the shares. Having said that, as a long term customer of Bank of Scotland also, the Bank is no longer the quality jewel it used to be as many parts of it have been dumbed down as a result of the Halifax influence - but it is still the largest mortgage lender, largest savings bank and has the largest nmber of private shareholders of any UK institution. No other Bank can claim these crowns - it is a symbol of Britishness - those who knock it at present will regret the day they did not take up their rights.

  • Comment number 14.

    Check out Merryll Lynch, Citigroup and many other major bank results and wonder ye in amazement at the multibilllion dollar hits they are taking. All avenues of support such as the Far East, reserves and loans are slowly being exhausted and now the desperate measure of raising funds by rights issue is beginning to fail because surprisingly investors refuse to buy shares at a premium to the market. Only asset sales remain and if a large majority of institutions are dumping subsiduaries and shares in a fire sale there is only one way values can go. The government has its fingers in the dam but there is only so much support that can be given. Praise be that there are some souls out there willing to buy... but not with their own money, obviously. Please could someone give me an upside to this..quickly?

  • Comment number 15.

    I have been a HBOS shareholder since the day they gave me free shares and have reinvested dividends throughout this time. Not once in any media coverage have I seen any examples of the impact upon the collapse of HBOS on the small investor.

    I have 456 shares that at their peak were worth circa £11.50. That is £5244. Now they are worth circa £2.70 or £1231. which is a 'loss' of £4013. I was asked for £500 and sold my rights for £30, well that windfall paid for, er, nothing. That is still a 'loss' of £3983. Not being vaguely interested in the 'science' of the stock market I do not understand what my shares will be worth when diluted and have ceased caring. I keep my cash stockpile in a high interest bearing account and don’t really care what happens to the stock market, only interest rates. The last 7 years of endless phantom money is over forever and luckily I never believed it so am largely unaffected.

    I am also lucky in the fact that my 'loss' never cost me anything in the first place, but in answer to those that ask whether the media influenced me, no, the share price below £2.75 did. Why would I want to give someone £500 for something that is worth less than that?

    Face it, we are in a global recession, the money backing any form of credit was never there and house prices are collapsing as the emperor can at last no longer ignore the little boy who is telling him that he is wearing no clothes. Me? I’m off to invest in Northern Rock and Bradford and Bingley, they are a dead cert and after that a chain of buy to lets both in this country and also Spain. See you on a Channel 4 property program.

  • Comment number 16.

    One observation and one crazy conspiracy.

    With all the recent rights issues from our banks the market has immediately rushed to the rights issue figure. It's as if the market has no idea how to value the share price and so is just using the figure that some-one else is giving it, knowing that it'd be a worse case scenario.

    Some-one on here before suggested that the underwriters might be driving down the share price in order to take all the shares themselves because they think they'll do well from them in the long run.

  • Comment number 17.

    Will keep and eye on the HBOS share price the short has not yet paid big dividends (not much lower between Friday and today) but I suppose they MS and Dres cannot loose if the share price holds up they just sell more HBOS volume safe in the knowledge this will help their short.

  • Comment number 18.

    It’s no coincidence that HSBC is the best performer amongst all banks on the FTSE.

    They have no need of capital and can pick the business they write.

    Sadly too many people are fixated on the UK property and the mortgages that underpin it.

  • Comment number 19.

    Why should investors have any confidence in the current board of directors of HBOS?
    This is the very board that has brought the bank to its knees with the begging bowl outstretched.
    Sack the board and bring in the new and you might get a lot more luck with the offer.

  • Comment number 20.

    I still think Convertible Preference Shares would have been a far better option than a Rights Issue.

    Rights Issues just play into the hands of Shortsellers.

    Maybe that was what was wanted.

    Of course the City has not quantified the long term effect of putting people off investing in Shares.

    How much in terms of future Sales (trades) have they lost because of all these Shenanigans?

    The long term cost could well outweigh the Hedgefunds shorterm shortselling gains.

    I still believe the issue of Fund Managers lending their Clients Shares should be examined.

  • Comment number 21.

    Poacher and gamekeeper - nice work if you can get it!


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