Thursday, October 16, 2008

UK vs. US: Recapitalization Plans Compared

There are substantial differences between the US recapitalization plan and the UK recapitalization plan that is widely being hailed by the media right now. has a nice table showing some of the key differences. One big difference is with the 12 percent dividend the UK banks are required to pay. 12 percent dividend? Given that loans to homeowners and businesses will be in the 5-7% range, the banks will only be able to pay that dividend thanks to leverage. They can lend out several times more in loans than they have in equity.

However, if I were a shareholder, I'd know that there will be very little chance for me to profit. The shares will be very depressed for a long while, until the government sells and gets out of the banking system. Basically, there is no way for the banks to raise capital from private sources now. Who the hell will buy stock with all these restrictions and no potential for profit? With this move, the UK just nationalized all of the banks they injected capital into. There will be no other source of funding for these banks. The capital market is closed to them until the government gets out, period. That's a huge difference between the UK and the US. US Treasury's terms were not so harsh that it removed all profit potential. Government will share in the gains, but won't hog all the upside for itself. And with that comes the possibility of raising money from private sources.

Has the UK and The Bank of England bit off too much to chew? I don't know, we'll have to see, but thanks to their harsh terms, they'll have to recapitalize their banks unilaterally. And I thought the UK was against unilateral actions.

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