State to inject £50+bn capital into four banks – and Goodwin to go

Before the market opens tomorrow morning there is to be an announcement on specific arrangements made with major banks in talks over the weekend. This information comes from BBC Business Editor, Robert Peston, whose personal sources of inside information in the financial word have been the focus of press interest and investigation over the weekend. (A handfull of colleagues from his days at the Financial Times have been fingered. They now occupy senior positions at the Bank of England and in Westminster as Government advisers, so they’re pretty well self-selecting suspects. Let’s not pretend that this is a covert operation. It’s officially licensed – guided even – and so is Peston.)

it is widely expected in the finance industry that RBS, HBOS, Lloyds and Barclays between them will exchange a total state capital investment of around £50+ billion for preferential shares in their companies.

This will be a very big moment in the history of British banking. It signals the failure of the largely unregulated capitalist model and the return to a form of widescale nationalisation.

We raised the question of control yesterday and we expect this to become a matter of increasing focus. Although the Government is still insisting that it will not require a representative on the board of each of the banks which will then be part nationalised, it is hard to see how this line can be held.

This is especially the case when as, potentially with RBS, the state will own almost 50% of the company. In addition, the Government has said that where other banks choose to raise capital from existing shareholders through a shares issue, it will buy any unsold shares. These will be voting shares. Like it or not, control is an issue a decisive government would bring within its strategic grasp rather than let events progressively dictate it.

What the Government is saying as a decoy, is that it will attach alternative conditions to any investment. The obvious candidates here are some apparent restriction on executive pay; and a requirement that the banks recommence lending to individuals and small businesses. This last is clearly crucial in undamming the flow of money in the market.

We use the word ‘apparently’ advisedly in relation to action against executve pay. There will be a bit of gesture politics to satisfy angry voters but any serious action on this front is not something the most optimistic rookie gambler should bet on. It may be – and should be – possible to set conditions to govern the award of bonuses – but we’ll have to see how real is the Government’s vaunted resolve.

The well-informed Robert Peston’s prediction is that the state investment in RBS will be about £20bn (we think it will be more); that HBOS will be obliged to raise £12bn; that Lloyds TSB will raise around £5bn; and that Barclay’s, which only wanted £3bn, has agreed under pressure from the Treasury, Bank of England and the Financial Services Authority (FSA), to take £7 billion.

There are two remaining strong speculations on events tomorrow:

• one is that Lloyds will demand a renegotiation of what it will pay for HBOS
• the other is that Fred Goodwin, Chief Executive of RBS, will fall on a well-gilded sword. Robert Peston’s pick for his replacement is Stephen Hester from British Land and who are we to argue.

(23.15) Breaking News: It has been announced that the Lloyds TSB takeover of HBOS has already been renegotiated and is on track. Tomorrow’s press are headlining Fred Goodwin;s resignation, which has, of course, been heavily trailed.