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Markets live transcript 11 Feb 2009

Posted by Paul Murphy on Feb 11 11:01.

Markets live chat transcript for the chat ending at 12:23 on 11 Feb 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)

PM:

Hello there
PM:

This ML from AV
PM:

Bit of a busy morning for a change
PM:

Plenty of corporate stuff
PM:

Plenty of bail out stuff
PM:

Plenty of economics
PM:

We’ve even got plenty of politics
NH:

Yes, is Crosby done for??
PM:

I don’t know. He must be feeling a tad uncomfortable.
NH:

We are talking here about the Moore memo, which Sam got hold of first thing.
NH:

Slammed it up on the site.
NH:

Here
NH:

http://ftalphaville.ft.com/blog/2009/02/11/52320/hbos-the-moore-memo/#comments
PM:

This of course is the so called whistle blower Paul Moore – former head of risk management at HBOS – who says he was ousted after questioning the growth strategy at HBOS.
PM:

Directly put Sir James Crosby in the frame.
PM:

This has given the press something palpable with which to turn to Crunch into a Get Gordon story.
NH:

Certainly has
NH:

Sir James clearly former ceo of HBOS – before Hornby – has been advising Brown on how to rescue the banks last autmn – and also deputy chairman of the FSA.
NH:

Here’s some key bits from the memo
NH:

5.1 One final observation I would make about the HBOS disaster is this; wasn’t it actually Sir James Crosby rather than Andy Hornby who was the original architect of the HBOS retailing strategy? At first this was good in that it purported to be a “Customer Champion” strategy. The problem was that a reduced margin strategy is predicated on the need for improvements in cost control and at the same time massive increases in sales. It is now clear that this disastrous “grow assets at all costs” strategy was what led to HBOS’s downfall and humiliating demise by the forced acquisition by Lloyds.
NH:

5.2 Sir James is still the Deputy Chairman of the FSA and advises the government on how to solve the mortgage crisis. Some might now also question what his “contribution to financial services” has in fact been when this will have led to millions of people in excessive debt, 10,000s who will lose their jobs and many more whose balance sheets have been impacted by the precipitous fall of the HBOS share price – apart from the reduction in competition in the retail financial services market threatened by the new Lloyds Group?
NH:

5.3 Shouldn’t the Committee be asking him to testify?
PM:

Point is this – how on earth has Crosby managed to avoid the heat up until now.
PM:

It was absolutely clear that he was the architect of the huge expansion of HBOS.
PM:

He’s the one who sanctioned Peter Cummings exploits – yeah?
PM:

He’s the one who put signs up in the corporate division saying “Come on all you short fat blokes who want to take a property punt.”
NH:

Er, who you referring to Murph.
PM:

No one.
PM:

It just came out.
NH:

Anyway we have commented numerous times here that Crosby’s appointment at the FSA – and his role advising on the bank bail out – looked very odd indeed given his track record.
PM:

But nothing changes, does it?
PM:

Look at Stephen Carter. His rise has been inexplicable.
PM:

His main accomplishment before heading Ofcom was leading what was then Britain’s worst managed company – NTL – which proceeded to collapse under about $13bn of debt.
PM:

He hasn’t looked back since.
NH:

I think we’re getting a bit too political. We don’t really know anything about politics.
PM:

We can have a view!
PM:

But you are right.
PM:

Lets move on.
11:08AM
PM:

How about Arcelor — mentioned below of course
NH:

well, hands up. we got the stuff on the dividend well and truly wrong
NH:

it was cut in half
NH:

but the rest of it
NH:

well I think we were fairly accurate
NH:

beat guidance for Q4
NH:

Q1 – on target to marke $1bn
NH:

paid down a lot of debt – $6bn i think
NH:

and they have also managed to get financing facilities in place for another chunk of debt
NH:

and of course there is no cash call
NH:

and the shraes are up
NH:

not a bad bit of RAW for a Tuesday afternoon
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
PM:

NH:

i have analyst comment on the figs if anyone is interested
NH:

stock was up around 4% five mins ago
NH:

Paul’s screen has delayed pricing so no point putting a quote up from that
PM:

Okay — ta
11:12AM
PM:

dinker — taht’s not our Tracy
PM:

Tracy: “If you type my name into Google you jsut get lots of stuff about memory loss.”
NH:

11:13AM
PM:

Anyway — wider market….
PM:

How we looking this morning — on the back o fWall St????
NH:

we are higher
NH:

but only just
NH:

up 5 points at 4,218
PM:

Quite a result tho — The Dow was off 4.6%
PM:

fairly resilient
NH:

yup
NH:

given what happened on the Street last night
NH:

actually here are some Dow facts for you
NH:

it fell 381.99 points, or 4.6%, to 7888.88. – lowest close since late November
NH:

Bank of America was its weakest stock, dropping 19%, and Citigroup fell 15%.
NH:

The Dow is down 10% for the year to date and within 4.5% of its five-and-a-half year closing low of 7552 on Nov. 20.
PM:

hmmm
PM:

a test of the lows could be on the cards in the US
NH:

possible, very possible
NH:

anyway London is holding up well
NH:

because the US futures are pointing toward a small bounce
NH:

and we did fall almost 100 points yesterday
NH:

although not sure that explains things entirely
NH:

anyway
NH:

banks leading the market lower
NH:

taking their cue from the US financials
NH:

and the general air of disappointment over the Geithner plan
NH:

mind you what exactly were people expecting?
NH:

a silver bullet that would suddenly cure all of the ills of the banking sector
PM:

well, they were probably hoping for a bit more detail on the bad bank
PM:

aggregator bank or whatever it is called
NH:

true
NH:

though it is interesting to see how Team Obama have been spinning this
NH:

have a look at these selected snippets from the WSJ
NH:

Obama officials called the minimal details given Tuesday intentional and said they will work with both Congress and the public to fully develop their plans. In part, the Treasury was trying to avoid a repeat of the experience of former Treasury Secretary Henry Paulson, who was faulted last fall for shifting gears and not consulting Congress about changes to his rescue plan. At the same time, the administration was under pressure to get something out quickly, despite limited manpower less than a month after the inauguration.
PM:

A good dig at Paulson in there
NH:

yep
NH:

The Obama team also steered clear of consulting Wall Street about its plan in an effort to avoid being seen as joining with a much-maligned industry, officials say. Top bank executives have been complaining in recent days of being frozen out as the administration crafted its plan.
Two senior executives at a large New York bank said Tuesday that Treasury officials recently told them that they wouldn’t be consulted on the bailout until after Mr. Geithner had unveiled its broad outlines. After Tuesday’s announcement, the executives said they were hoping to wield some influence.
NH:

but which ever way we cut things there was a lack of detail on the bad bank/toxic asset plan
NH:

and that is weighing on the banks
PM:

indeed
Lloyds Banking Group (LLOY:LSE): Last: 91.50, down 3.4 (-3.58%), High: 95.90, Low: 87.50, Volume: 11.10m
Royal Bank of Scotland Group (RBS:LSE): Last: 23.20, down 0.6 (-2.52%), High: 24.00, Low: 22.20, Volume: 46.47m
Barclays PLC (BARC:LSE): Last: 109.70, down 3.7 (-3.26%), High: 113.00, Low: 105.50, Volume: 26.90m
NH:

of course the next big newsflow for the UK banks will be detail of the UK Government’s asset protection scheme to be published end February
PM:

right
PM:

there must be loads of comment around on the plan
PM:

I think we should put some of it up
NH:

will start with something from Citi
NH:

on the read across for the US banks
NH:

The Plan Is Lacking Key Details — The Treasury Secretary laid out the
“Financial Stability Plan”, which provides a framework for how the remaining
TARP money will be deployed. From a conceptual level, the plan hits on the
right issues. Problem is how it will be executed, and only details provided were
that stress test applies to banks over $100b in assets and capital injections will
be done via convertibles with a strike price set at modest discount to Feb 9 close
NH:

More Clarity on Stress Test Would Help — We see capital adequacy as a
function of 3 parameters: embedded credit and other MTM losses on balance
sheet, timing of these losses, and lastly the trajectory of capital levels given
first two parameters while factoring in pre-tax pre-provision earnings. In Figure
2, we show our estimates of cum losses and show by bank where we see TCE &
Tier 1 ratios bottoming. Our assumptions are based on our view that losses are
absorbed as loans are worked out, and this may differ from the gov’t method.
Another critical factor is timing, with a longer timeline being a positive for the
banks. Lastly, what benchmark will gov’t use (TCE or Tier 1) and what level.
NH:

Weaker Banks Underperformed Today — BKX was down 14% with market
concluding that weaker banks will be the losers in this plan (see Figure 1). The
reason being that the weaker banks are less likely to pass the stress test, and
will be forced to raise capital at levels below tangible book. However, even the
“stronger” banks were down today, which may reflect a view that their returns
may suffer competing against banks w/ large gov’t ownership.
NH:

Which Makes Sense Based on What We Know Now — One of the goals is clearly
to get the bad assets off the bank balance sheets. In our view, banks have
been reluctant to sell due to wide bid/offer, and if gov’t only provides financing
this will not solve the issue, instead it needs to provide some sort of guarantee
or non-recourse funding in order to give investors comfort to buy, which may
raise the “bid”. On other side, gov’t may include market pricing in its stress
tests, which may force down the “offer”. Thus, the stronger banks benefit from
lower marks since they have better ability to hold the assets until conditions
improve and have less risk of dilution from forced capital issuance.
NH:

Stock Picks — Top picks are STT and BK because of large securities books
that benefit from reduction in liquidity marks. Of regionals, we like KEY, which
should perform well in stress test and is trading at significant discount to TBV.
BAC looks very cheap here, and seems to price in significant dilution already.
NH:

and here’s Merrill’s take
NH:

Short on details, long on promises
The Treasury’s new Financial Stability Plan (FSP) was released with a reasonable
structure yet little in the way of detail. The general themes had been anticipated
for some time: another round of capital injections, a plan to allow for the purchase
of distressed assets, an expansion of the Term Asset-backed Liquidity Facility
(TALF) and a housing program aimed at reducing foreclosures. Media reports of
the four program sizes suggest the FSP will be financed using the remaining
TARP funds.
NH:

Best of the pack
Although the TALF is not yet operational we see the expansion of this as yet to be
used program as a positive. Experience with the commercial paper funding facility
(CPFF) and other Fed lending programs suggest that this program will be
effective in helping to offset the slump in credit creation. Quintupling the size of
the program to $1 trillion from the initial $200 billion to facilitate the purchase of
newly issued asset-backed securities (among others) should help keep credit
flowing to consumers (if they want it) and the economy.
NH:

Partners
This public-private fund to purchase distressed assets is potentially the keystone
to the entire plan. Yet, the amount of information provided regarding the plan was
minimal and therefore we cannot evaluate the possible efficacy of this aspect of
the SFP. The Treasury Secretary noted that the program could be $1 trillion in
size. However, the purchase method, the interest of private participants and the
methodology for valuing assets is all uncertain. Linking this program more tightly
to the capital injection program would have eliminated the need for the “stress
test” and rationalized the size of any capital injection.

Bottom line
The market seemed to react negatively to a lack of details after a build up of
market anticipation. It appears to have been disappointed by what is perceived as
a continued “ready, shoot, aim” approach. While the Treasury likely weighed the
cost and benefit of holding off on the announcement in order to iron out details,
the market seemed to be hoping for more clarity than was provided today.

NH:

and finally
NH:

here is something from the banking team at Nomura
NH:

Read across for European banks from the Geithner Plan

Conclusions

Reiterate negative sector view towards European banks in general. In particular, we would see a negative read across to the UK domestic banks, if policy action proves to be similar.

NH:

For bank equity holders this looks clearly negative, particularly compared with expectations.

First, there appears to be no effective subsidy to equity holders-why should there be?

Second, the scheme to buy toxic assets does not look likely to do so at attractive prices to the banks and may therefore trigger write-downs and recapitalisations. Alternatively, banks may well be unwilling to use the scheme, because of the write-downs involved. There is still uncertainty on how the assets will be priced (and this has been heavily criticised in the press). However, it appears to rely on private sector based price discovery, backed by government financing.

NH:

Meanwhile, there is the prospect of further dilution and limits on distributions. The proposed stress tests for the capital positions of major banks has been taken negatively by bank equities. As an aside, the scheme appears supportive to other capital instruments, as government capital looks likely to go in ahead of equity holders, but behind debt capital holders.

The pressure for more co-ordinated disclosure and pricing of assets is likely to raise questions for banks where there are uncertainties over whether their marks are sufficiently conservative.

NH:

The funds deployed to restart lending are clearly large. The $1000bn for toxic assets is large, so roughly 10% of outstanding mortgage debt and 7% of GDP. So it may have a better chance of success than previous measures in restarting lending. Even so it is still well short of the 11% of GDP in the early 1990s thrift programme. The additional $1000bn in the form of the TALF is incremental to the liquidity measures the authorities already have in place, which we think aggregate to some $10 trn. In terms of the effects on economies as a whole, again the issue appears to be a judgement between the scale of the problem and the scale of the policy response.

However, to us, leverage in the major economies needs to fall and we are not convinced that policy action regardless of scale is likely to succeed in reversing that. It will also be interesting to see how much of the proposed measures will be financed by ‘unconventional means’ ie the famous quantitative easing.

NH:

Main points of the plan:

1) Comprehensive stress test. Large banks will need to meet a stress test, although unquantified in the statement. At the same time disclosure is expected to be increased and be more co-ordinated.
2) Capital injections will be in preferred stock convertible at a ‘modest’ discount; coupon still to be determined. This implies the risk of dilution, although the cost of the preferred is an important unknown.
3) Establishing an organisation to manage the government’s holdings in financial institutions. This is similar to the UK body.
4) Public-Private capital fund to invest in toxic assets-$500bn to $1000bn in size. The objective is for private markets to establish the price for assets. To us, this is likely to imply write-downs for banks that use the scheme, as private risk capital is involved, although it is still not clear how the scheme will work.
5) TALF to be expanded to $1000bn from $200bn and broadened to include CMBS and possibly other assets. Designed to get securitisation markets going.
6) Restrictions on dividend payments on ordinary shares to $0.01 per quarter until government capital is repaid. Other restrictions apply too, notably committing to new lending and on executive comp.

PM:

that’s a good note
PM:

who is it by?
NH:

Robert Law and his team at Nomura
PM:

ah
PM:

the former Lehman banks team
NH:

yep
NH:

right
NH:

time to move on from the banks
PM:

Well before we do — how about this Irish stuff?
NH:

amazing news
PM:

Irish Life subbing Anglo a cool 9bn
PM:

9bn ?????????????? HELLO
NH:

which it then removed a week later
NH:

and apparently everyone was happy with it
NH:

auditors
NH:

regulators
NH:

the govt
PM:

Why havent we seen wholesale resignations in Dublin yet
PM:

Crony capitalism, Irish style
NH:

you can’t really say that and generalise about the Irish in that way
NH:

sterotyping
PM:

I can i’m Murphy
PM:

a Murphy
NH:

but you are not Irish
PM:

PM:

I’m a plastic paddy
PM:

Maybe Fitz could help us on this one. is crony capitalism fair?
PM:

ir(c)eland has come to my rescue also
NH:

mind you didn’t Lloyds sub HBOS a couple of billion before the deal of the century was completed
PM:

And podge
PM:

yeah — but the Lloyds bung wasnt secret!
NH:

true
PM:

That said, maybe there have been secret bungs in the UK — and we just dont know about them yet
PM:

So many details about what happened last September are clearly still to come out
NH:

but they will
NH:

and we will all be gobsmacked
PM:

11:27AM
PM:

lets move on
PM:

Inflation report??
NH:

it is out
NH:

and king is being grilled by hacks at the moment
NH:

here’s the speech he gave introducing the report
NH:

Two key developments shape the MPC’s latest projections. First, tighter credit conditions for households and businesses will bear down on demand both in the United Kingdom and abroad. Second, rising energy, food and import prices will push up on inflation.

Both developments are now more acute than in November. And as a result, the near-term outlook in today’s Report is one of inflation rising sharply alongside a marked slowing in growth. The Committee’s aim is to bring inflation back to the 2% target in the medium term. But in doing so, it faces a difficult balancing act.

NH:

The process of re-pricing risk in global financial markets has continued. Equity prices have fallen sharply – the FTSE All Share Index by 11.5% since November. And as banks in the major financial centres adjust their balance sheets, credit conditions faced by households and businesses have tightened further, as revealed by the Bank of England’s Credit Conditions Survey.

The impact of tighter credit conditions is apparent in property markets, and is particularly likely to affect investment in commercial and residential property and perhaps business investment more generally. The household saving rate is likely to rise, slowing the growth rate of consumer spending, signs of which are already evident in official and survey data of retail sales.

As I explained in my speech in Bristol last month, the adjustment we are experiencing is part of a longrun rebalancing of the world economy that, in the United Kingdom, will mean some shift in total demand, away from spending and importing, towards exporting. That process will be supported by the 6% fall in sterling’s effective exchange rate over the past three months, which will help to offset the weaker outlook for the world economy. But the fall in sterling will also put upward pressure on import prices and moderate the growth of real disposable incomes.

NH:

The Committee’s latest projection for GDP growth is shown in Chart 1 on page 7 of today’s Report. The projection is based on the assumption that Bank Rate moves in line with market expectations, which have fallen substantially since November. In the near term, growth slows sharply, primarily as a higher personal saving rate and rising energy and import prices dampen consumer spending, but also as business investment moderates. Growth then begins to recover as the effects of lower interest rates and the fall in sterling work through. The profile is somewhat weaker than in November. In the Committee’s judgement, the potential for further falls in asset prices and tightening of credit conditions means that the balance of risks around the central projection is on the downside, particularly over the next eighteen months.
NH:

The Committee’s latest projection for CPI inflation is shown in Chart 2 on page 7 of the Report, again on the assumption that Bank Rate follows the path implied by market yields. In the central projection, inflation rises sharply from 2.2% in January to around the level at which I would be required to write an open letter to the Chancellor. The profile is significantly higher than in November, reflecting the recent announcements of increases in household gas and electricity bills as well as rising import prices. The impact of rising energy and import prices is already apparent in businesses’ input costs, which are rising at their fastest rate for more than a quarter of a century.
NH:

As food, energy and import prices stabilise, inflation should start to fall back towards the target. The challenge for the MPC is to balance two conflicting risks to the medium-term outlook. On the downside, a sharper slowing in activity would threaten to pull inflation below the target. On the upside, if the central projection were to materialise then, by the end of this year, inflation will have been at or above target in all but 5 months in 3 years. In those circumstances, keeping inflation expectations anchored firmly on the 2% target could not be taken for granted. In the Committee’s judgement some slowing of demand growth, by reducing pressure on capacity, is likely to be necessary to bring inflation back to the target in the medium term.

The balance of those risks will depend on the stance of monetary policy. In the Committee’s judgement, if Bank Rate follows the path implied by market yields, CPI inflation is, in the medium term, more likely to be above the target than below. But Chart 3 on page 8 of the Report shows the projection for CPI inflation assuming that Bank Rate remains unchanged at 5.25%.

NH:

Under that assumption, the Committee judges that inflation is more likely to be below the 2% target than above. The Committee will be monitoring the risks closely and constantly updating its assessment.

It is important to remember what monetary policy can and cannot achieve. The changes we are seeing in financial markets are one aspect of a wider shift in the world economy as some of the imbalances unwind. Changes to risk premia, asset prices and exchange rates are all part of the necessary adjustment. Monetary policy neither can nor should try to reverse these changes in relative prices. But, although the Monetary Policy Committee cannot deliver a completely steady path for output growth, it will take into account the implications of changes in financial conditions for demand, and hence, inflation. And it is the outlook for inflation in the medium term on which the Monetary Policy Committee remains focussed.

NH:

a lot to get through there
NH:

but the main point is on inflation
NH:

and these pars
NH:

The balance of those risks will depend on the stance of monetary policy. In the Committee’s judgement, if Bank Rate follows the path implied by market yields, CPI inflation is, in the medium term, more likely to be above the target than below. But Chart 3 on page 8 of the Report shows the projection for CPI inflation assuming that Bank Rate remains unchanged at 5.25%.

Under that assumption, the Committee judges that inflation is more likely to be below the 2% target than above. The Committee will be monitoring the risks closely and constantly updating its assessment.

NH:

which means further rate cuts
PM:

right — so how is sterling doing on the back of this
PM:

GBK
NH:

offered, sir!
PM:

PM:

I bet
NH:

against the dollar $1.437
NH:

and a euro buys 0.899
NH:

and King is saying some interesting stuff on QE
NH:

King: MPC To Mull Boost To Money Supply “Before Very Long”
NH:

BOE’S KING-CLEARLY QE SOMETHING WE WILL HAVE TO DISCUSS AT NEXT MEETING
NH:

RTRS-BOE’S KING-BUYING GILTS IS A NATURAL PARTNERSHIP TO BUYING OTHER ASSETS TO EASE CREDIT CONDITIONS

10:42 11Feb09 RTRS-BOE’S KING-PROBLEM IS THAT SUPPLY OF MONEY IS NOT RISING FAST ENOUGH

10:40 11Feb09 RTRS-BOE’S KING-WE WILL BE MOVING TO BUY A RANGE OF ASSETS, WHICH WILL ALMOST CERTAINLY INCLUDE GILTS

PM:

(Monkey — will call at 12, apols for delay, was at tricky meeting yesterday pm)
11:35AM
PM:

CROSBY GONE
PM:

BLOOD AT THE FSA
NH:

he has gone
NH:

moore gets his revenge
NH:

claims scalp
PM:

PM:

PM:

Thesee are Reuters flashes at the moment
NH:

still protesting his innocence
NH:

says it was all fully investigated
NH:

are you happy now Paul?
PM:

Well……..
NH:

Crosby has paid the price
PM:

Not really — just seemed odd that he was appointed to the FSA position in the first place
PM:

But there also is this issue that there are very few senior banking practitioners around who are not tainted in some way
PM:

Where do the gov and the regulators go for advice?
NH:

can’t get hold of the Crosby press release yet
NH:

and I can’t get the reuters snaps because our news feed is delayed
NH:

but I have got this
NH:

FSA press office can’t yet confirm – they’ve just seen Beeb headline
PM:

NH:

that’s why I can’t find a press release on the FSA website
NH:

they don’t know
PM:

This will have come out of Westminster
NH:

was this is a Pestowire exclusive?
Top News from Top Sources. The BBC’s Business Editor, Robert Peston, has played in important role keeping the British public fully informed during these difficult times.
PM:

It’s all over the wires — not just BBC
NH:

right
NH:

here is the Reuters story
NH:

ONDON, Feb 11 (Reuters) – James Crosby, the former chief exectuive of HBOS
and the deputy chairman of UK regulator the Financial Services Authority, said
in an emailed statement:
* Ex-hbos CEO james crosby says resigning from the fsa board with immediate
effect
* Ex-hbos CEO james crosby says accusations by former hbos risk manager had
no
merit
* Ex-hbos CEO crosby says accusations by former hbos risk manager were
independently, extensively investigated, which found allegations had no
merit
* Ex-hbos CEO crosby says he is “genuinely independent of government” and
has
no political connections or affiliations
* Ex-hbos CEO crosby says resigning from fsa board as he feels “th
NH:

genuinely independent of government, eh
11:43AM
PM:

(Mick — i hear you )
NH:

of course there are other things going on this morning, including some pretty dismal jobs data
NH:

The number of people claiming
jobless benefits in Britain rose by less than expected in
January but the rate nonetheless rose to its highest level since
February 2000.
The closely watched ILO measure of unemployment did not
breach the 2 million mark in the three months to December,
contrary to most analysts’ forecasts, but the outlook for the
job market remains bleak.
PM:

Got any comment on those figs??
NH:

I have
NH:

Howard Archer
NH:

at IHS Global Insight
NH:

The labour market news is less awful than feared, but this really is of very little comfort as the data are still pretty horrible. Sharply contracting economic activity, persistent very tight credit conditions and depressed business sentiment are taking a major toll on jobs, and there can be little doubt that worse is to come.

Despite rising a less-than-expected 73,800 in January, claimant count unemployment has still soared by 236,800 over the past three months to be at its highest level since mid-1999 at 1.233 million. In addition, unemployment climbed by 146,000 in the three months to December on the International Labour Organization measure to be at an 11-year high and on the brink of breaking through the 2 million mark. The ILO unemployment rate jumped to 6.3%, which is the highest level since August 1998.

NH:

Meanwhile, employment fell by 45,000 in the three months to December, but this was limited by a33,000 rise in part-time jobs. Full-time employment fell by 78,000. Meanwhile, the number of job vacancies was down by 76,000 in the three months to January.

It seems inevitable that unemployment is headed sharply higher through 2009 as the economy likely contracts through the year and the number of jobless is then likely to rise further still in 2010 amid only slowly developing recovery. Reports of companies laying off workers are becoming depressingly commonplace, while an increasing number of companies are folding. Latest labour hiring surveys clearly point to further sharp employment reductions. Indeed, it is highly possible that unemployment on the International Labour Organization will reach 3 million by the end of the year while claimant count unemployment could very well reach 2 million. Furthermore, unemployment seems likely to rise further in 2010 and we expect it to peak at 3.3 million on the ILO measure, giving an unempolyment rate of arond 10.5%.

PM:

ta
11:45AM
PM:

Phew
PM:

Shall we do a bit of stock specific stuff?
NH:

good idea
PM:

what about British Land??
NH:

we are running a big rights issue story on the site this morning, that’s FT.com not Alpha
NH:

for those of you who might have missed it
NH:

here is the story
NH:

by our prop correspondent Dan Thomas
NH:

British Land is set to become the latest major property company to launch a huge rights issue to secure its balance sheet and raise funds for future activity.

The company, which is the UK’s second largest real estate investment trust, has begun sounding out investors to act as potential underwriters to the issue. It is expected to come to the market fully underwritten, with much of the risk to be taken by its advisors, UBS and Morgan Stanley.

NH:

Although an issue has been under consideration for some time, the sale of Meadowhall shopping centre in Sheffield on Monday for £588m to London & Stamford, the opportunity fund investors backed by Abu Dhabi sovereign wealth, has eased the pressures on the company’s balance sheet. The sale has allowed the company to reduce some of its debt burden, making the issue less of a necessity.

But it is still expected to go ahead on Thursday, and may serve to help the company position itself for when the property market finds a floor. The equity raised will help British Land unlock more than £2.7bn in undrawn credit lines, which are currently not being used for fear of raising gearing levels further. The decision may also mean putting talks to sell other parts of its portfolio on the backburner, for example the discussions around the Broadgate estate in the City of London.
British Land is said to be encouraged by the success of Hammerson’s fully underwritten £584m issue on Monday

NH:

Hammerson’s shares bounced 9 per cent following the announcement, which was generally welcomed by investors as securing the company’s future balance sheet position. British Land, which is larger than Hammerson, is expected to be received equally warmly by investors.
Marketing the issue is expected to continue on Wednesday, before the third quarter results on Thursday. Almost all companies in the property sector are looking at ways of raising new money, with particular urgency among those that have seen a rapid drop in the value of their assets cause problems with gearing covenants. Other companies considering similar equity raising measures include Liberty International, which reports later this month, Segro and Brixton. No one from the company was available for comment.
PM:

V interesting story
PM:

do we have any idea what they are looking to raise?
NH:

not that the moment
PM:

and what level the discount could be pitched at???
NH:

I think those decisions are still ongoing
NH:

lots of contact between advisers and shareholders
NH:

but it will probably be at a whacking discount
PM:

NH:

around the level of the Hammerson issue
NH:

in fact I am hearing that they will look to raise around £600m like Hammerson
NH:

actually here’s the view of one sector specialist I was talking to this morning
NH:

With BL it’s very hard to say as it depends on how much headroom they want (Hammerson only need 25% value falls before covenants are in trouble again) and how many other asset sales they have in mind (which started with half of Meadowhall). Think the rumours of them selling part/all of Broadgate are unfounded. Also depends if they intend on raising additional equity to go shopping with their £2.7bn of undrawn facilities. A figure similar to Hammerson would probably be most likely. Regarding the discount, 60% ish seems to be par for the course at the moment in order to get it underwritten, so again I’d expect similar to Hammerson.
PM:

600m is pretty hefty
NH:

it is
PM:

market cap?
PM:

2.5bn
NH:

true
NH:

but if BL can put concerns about its debt levels to bed
NH:

and shareholders decide to back it – is effectively give it the seal of approval. This company gets to survive the downturn etc
NH:

well, it could do a Hammerson and rally hard on the announcement
NH:

of course, results will also play a part
NH:

and they are due out tomorrow as well
PM:

British Land stock is down 2p at 487
PM:

btw
PM:

but then so are all of the props today
Liberty International (LII:LSE): Last: 386.25, down 6.25 (-1.59%), High: 388.25, Low: 374.25, Volume: 843.33k
Land Securities Group (LAND:LSE): Last: 682.50, down 17 (-2.43%), High: 695.00, Low: 675.00, Volume: 583.68k
NH:

actually on Land Secs
NH:

there are rumours around this morning that they could be the next prop to go for a cash call
NH:

no more details at the moment
NH:

but just a feeling they are getting ready to move
PM:

ta
11:50AM
PM:

now — we were being asked about Reckitts earlier
PM:

Below…
PM:

Good move this morning on the back the statement
PM:

Any analyst comment on that Neil??
NH:

yep, a few bits
PM:

Sotck is up 4.7%
NH:

as usual Reckitt has beaten expectations
PM:

up 124p at 27.46
NH:

here’s Citi
NH:

Citi View — An impressive set of results given the economic circumstances
prevailing in Q408. OTC healthcare would appear to be the major positive. It is
not going to get any easier in the coming quarters, but Reckitt’s recent material
share price outperformance seems wholly justified with these results in mind.
We view the guidance as appropriately sensible (and note: guidance from
Reckitt usually means something).
NH:

and here’s MF Global
NH:

COMMENT:
We remain confident that RB/ will continue to outperform peers within the global HPC sector.
Furthermore, we highlight that the guidance of 4% net revenue growth ought to be ~2x the growth rate for
the global HPC market in ’09. We believe that RB/ has the best mix of products with strong brand equity,
best management team in the sector, and scope for op. margin expansion on the back of an acceleration
of its OTC franchise in emerging markets.
Similarly, we believe that Nestle [BUY; CHF 56 TP] is best positioned within the food producer sector due
to its diversified portofolio, with significant exposure to ‘health and wellness’, differentiated price points,
diversified product range (value to super-premium). We think NESN is a core holding within the consumer
space and feel that NESN’s 20% discount (close to 52-week low) to the sector is unjustified
NH:

and finally Investec
NH:

Strong Q4/FY results
The Q4 is strong and ahead of both our and the market’s expectations. FY09
guidance of +8-10% is ahead of our expectations and throws down a gauntlet
to the rest of the sector. The numbers suggest that the ‘Reckitt model’ is
weathering the storm. However, Pharma and FX are sweetening the numbers
and we note that margins in the core ex Pharma were down in Q4, despite an
A&P saving.
NH:

Reckit Benckiser has filed a strong set of FY and Q4 results that will throw down
a gauntlet to rest of the sector in the light of Unilever’s (rated Buy) disappointing
Q4 results last week.
The numbers look to us be ahead of consensus expectations at both the
underlying level and in actual fx, driven by better than expected fx translation.
Underlying sales growth was 10% for the FY and 8% for the quarter (vs. our 9%
and 8% respectively).
Underlying operating margin improvement was 80bps for the FY and 40bps for
the quarter (vs. our 60bps and 0bps).
Reckitt is guiding to 8-10% income growth for FY09 (vs. our forecast of 6%),
which we see as a signal of confidence for the coming year.
Viewed in the round, we see these results as a positive surprise and as
evidence that the ‘Reckitt model’ is weathering the storm thus far.
We do, however, note the impact that the Pharmaceuticals business is having
on the overall underlying numbers. This is a concern given that this business
loses licence exclusivity later this year and is expected to contract markedly.
Pharma is continuing to grow ahead of our expectations, and we estimate that it
enhanced the organic sales growth rate by c.2% in Q4. Excluding Pharma,
operating margins in the core fell by 20bps in Q4, despite a 70bps reduction in
A&P investment.
NH:

hope that helps
PM:

It does — thank you
11:53AM
PM:

ok
PM:

let’s have a quick look at the miners
PM:

hit hard by profit taking yesterday
PM:

and a bit of recovery this morning
NH:

small
NH:

actually gathering pace
NH:

Rio making particularly good ground
PM:

Moving 113 at 20.06
PM:

That’s a 6% move
NH:

results tomorrow , as Bullish below notes
NH:

when we will get to find out if Rio is going to do a deal with the Chinese to cut debt
NH:

or if it scraps the deal
NH:

and goes for a huge rights issue instead
NH:

which would be welcomed by most shareholders
NH:

now, the Aussie press
NH:

which seem to have been ahead of the game on this story
NH:

are all pretty much of the opinion that assets sales and some some of convertible issue to Chinalco is a goer
NH:

have a look at these headlines I picked up this morning
NH:

Chinalco may invest as much as USD 20bn in Rio Tinto to gain more access to commodities, a person with knowledge of the matter said.

Chinalco is in talks to buy bonds that will convert into Rio shares and purchase stakes in Rio mines. An announcement is planned for 12 Feb. when Rio publishes its annual earnings, the person said.

NH:

Western Australia would not object to Chinalco buying into Rio Tinto assets as long as it was in the state’s interests, according to the premier of Western Australia.

Also, Rio Tinto is in talks with several Japanese energy companies to sell its stake in Energy Resources of Australia, the Herald Sun reported, citing people close to the company. Rio Tinto has received expressions of interest from the companies, and the talks are at an early stage, it said

PM:

hmmm
PM:

still not sure this deal will go ahead
PM:

but anyway I guess the market will like if a jumbo rights issue doesn’t appear
PM:

(Chris Pell — we’ll have to check that, came from the newsedge service we partly use here)
PM:

back to Rio
PM:

longer term
PM:

I think a rights issue would be the better course of action
NH:

UBS would appear to agree with you
NH:

they have issued a pretty good note on Rio this morning
NH:

which says why rush into a deal with the Chinese
NH:

why not take your time and think about things coolly
PM:

a good iidea
NH:

indeed
PM:

especially in the wake of the boardroom bust up
NH:

here’s the note
NH:

Rio has many options – no need to rush it

The aim should not be US$10bn of net debt reduction ASAP, in our view
Rio is due to report FY’08 results on Feb 12th. It is possible that it announces
measures to address its US$38.9bn of net debt (as of end Oct ’08). Increasingly, it
is looking like this could include a capital injection by and possible joint ventures
with Chinese interests. The Financial Times has reported this could reach US$20bn
in value – we think this an unnecessarily large sum. We are concerned that mgmt’s
primary aim may be to reach its stated target of US$10bn net debt reduction by end
2009 rather than take their time and get the best possible deal for all shareholders.

NH:

Scrip or scrap the dividend
We forecast Rio has US$13.8bn of net cash flows over the 2009-10 period and undrawn facilities of US$6.5bn to make up the shortfall of US$18.9bn of debt
repayments due by Oct 2010. In addition, we think there are additional sources of
cash conservation from greater than expected working capital release (BHP
managed US$4.5bn) and scripping or scrapping the 2009 and 2010 dividend (cash
saving US$3.5bn), although Board hubris may get in the way on the latter.

Would not like to see the crown jewels sold at the bottom of the cycle
We estimate disposal proceeds could now reach US$23bn, without resorting to
selling stakes in the key iron ore operations. We await details on JV’s or placing
with Chinese interests and in theory like the logic. A rights issue is still possible.

NH:

Valuation: Buy rating and £22 target is unchanged
Our target is based on c. 0.5x our NPV estimate of US$62/share (£43).
PM:

so don’t sell the crown jewels at the bottom of the cycle
NH:

in one
NH:

here’s some more from the note
NH:

Our position on Rio has been that the company has more options to pay down its
US$39bn of net debt than first appeared. Most importantly we forecast strong
organic cash flows from most of Rio’s high quality, low cost operating assets
(the exception may be the lower margin aluminium division).
The following are the key parameters:
— At end Oct 2008 Rio reported net debt of US$38.9bn
— Rio needs to repay US$8.9bn in October 2009 and US$10.0bn in October
2010.
— Rio mgmt have stated a target of US$10bn debt reduction in 2009.
We believe the options available for Rio include the following:-
Net cash flows
Working capital release
Un-drawn debt facility
Scrapping or ‘scripping’ the dividend
Disposals
Joint ventures
Increased stake in Rio by Chinalco
Rights issue
We think that Rio can create tension in all of these options by
considering/progressing all of these, thus trying to ensure that potential
investors/acquirers etc pay a ‘fair’ price rather than a ‘knock-down’ price. We
do not believe that there is only one solution and we do not believe that Rio, the
company, should be placed at any risk whatsoever by mgmt’s stated aim to
reduce net debt by US$10bn by the end of 2009. We trust they will act with
caution and in the best interest of all shareholders.
PM:

Cheers
12:00PM
PM:

Bear with us a mo while we just go and check out this BoE issue
PM:

See whether we pubbed stale speech
NH:

right got to the bottom of the speech thing
NH:

it seems the newsedge put up an old one
NH:

and that could be because the BoE site was linking the Feb report to Nov earlier this morning
NH:

anyway here is the Feb statement
NH:

INFLATION REPORT PRESS CONFERENCE
Wednesday 11 February 2009
Opening Remarks by the Governor
NH:

The UK economy is in a deep recession. Monetary, fiscal and financial
policy have all responded vigorously to that prospect. But the length and depth
of the recession will depend to a significant extent on developments in the rest
of the world, where a severe economic downturn has taken hold. Growth in the
advanced and emerging market economies fell sharply towards the end of last
year. And world trade is contracting rapidly.
As in the UK, the scale and synchronised nature of the downturn around
the world has been driven by two factors – a further tightening of credit
conditions following failures in the international banking system, which means
that lending, especially to companies, is still slowing, and a collapse of
confidence, or “animal spirits” in Keynes’ description, that is leading to falls
in spending and production. Restoring both lending and confidence will not be
easy and will take time.
NH:

In many countries, governments have now taken significant measures to
improve conditions in financial markets and support lending. Three weeks ago,
the UK Government announced a five-point plan to restore the flow of lending.
One of the five points is the creation of an asset purchase facility operated by
the Bank of England and aimed at increasing the availability of corporate
credit. The Bank of England will open its facility to make purchases later this
week. In due course, the plan should help to alleviate credit conditions for
corporate and personal borrowers. But even when all of the measures are in
place, it will take time for banking and credit market conditions to improve and
longer still before they begin to have a noticeable impact on activity.
To cushion the downturn in spending, policymakers around the world have
cut interest rates and loosened fiscal policy. At home, the MPC has cut Bank
Rate from 5% to just 1% in the space of five months. To some degree, the effect
of those reductions has been blunted by the problems in the banking sector. But
monetary policy is by no means ineffective and, when combined with the sharp
fall in sterling of more than a quarter since the summer of 2007, the fall back
in commodity prices, and the easing of fiscal policy, will provide a significant
boost to demand.
NH:

The Committee’s latest projection for GDP growth is shown in Chart 1
(GREEN CHART) on page 7 of today’s Report. The projection is based on the
assumption that Bank Rate moves in line with market expectations, which when the
Report was finalised were for Bank Rate to fall to around ¾% in the middle of
this year, before rising back to around 3% by the end of the forecast period.
The central projection is for output to decline in the first half of this year,
so that four-quarter growth falls further in the near term. It is markedly lower
than the projection in November, as a deteriorating labour market and increased
uncertainty weigh on consumption, companies run down their stocks and scale back
investment spending, and the weakness in world demand restrains export growth.
Further ahead, output growth increasingly responds to the substantial policy
stimulus, an improvement in the availability of credit, and a reduction in the
trade deficit as expenditure switches towards home-produced output.
At present, CPI inflation remains well above the 2% target. The
Committee’s latest projection for future inflation is shown in Chart 2 (RED
CHART) on page 8 of the Report, again on the assumption that Bank Rate follows
the path implied by market yields. The near-term path of inflation is uneven,
reflecting changes in energy prices and the temporary cut in VAT. But in the
medium term, inflation falls well below the 2% target, as a substantial margin
of spare capacity more than outweighs the waning impact on import and consumer
prices from the lower level of sterling.
NH:

The prospects for economic growth and inflation remain unusually
uncertain, not least because of the extraordinary events of the past few months.
The Committee judges that the balance of risks to the path for GDP is very much
to the downside, reflecting in large part uncertainty about when lending and
confidence will recover. But the risks to inflation are more broadly balanced,
reflecting the possibility that the sharp depreciation of sterling may push up
on inflation by more than the Committee expects.
At its February meeting the Committee judged that an immediate reduction
in Bank Rate of 0.5 percentage points to 1% was warranted. Given its remit to
keep inflation on track to meet the 2% target in the medium term, the
projections published by the Committee today imply that further easing in
monetary policy may well be required. That is likely to include actions aimed at
increasing the supply of money in order to stimulate nominal spending. So let me
assure you that, with the full range of instruments at its disposal, the
Monetary Policy Committee can and will take action to return inflation to the
target and so ensure that economic growth will again match its potential.
PM:

Thanks for clarifying that Neil
PM:

Fresh speech.
NH:

right bear with us
NH:

just tuning into PMQ
NH:

I have it now
PM:

I can’t write this ML stuff, read the Skype, check the emails, check the news wires, check the reuter terminal AND watch the blinkin TV
PM:

Info overload Neil — im too old
NH:

Gordo saying DC trying to trivialise matters
PM:

Actually now we’ve got it up
NH:

DC asking him why he does not apologies for Crosby
PM:

Cameron is seriously on his case
NH:

wasnt it a miss judgement to appoint him to all that roles?
NH:

that’s DC
PM:

(Praxis — what are fluffers, or is the explanation not suitable for work)
NH:

on Crosby
NH:

Brown just won’t saying anything about Crosby
NH:

nothing at all
NH:

going on about how he saved the financial world
NH:

blah, blah, blah
NH:

FKA – it is past 12.00pm. you can sign off if you like
NH:

HH looks like she has been drugged
NH:

FTSE 100 now down 16 points at 4,198
NH:

right shall we finish up
PM:

NH:

don’t want to annoy poor FKA
NH:

we should be doing somthing else – like real work
PM:

here’s a good story from Barry Ritholz ‘ Big Picture
PM:

PM:

he was writing a book for McGraw Hill called Bailout Nation
PM:

But they cancelled the book — seemingly because he criticised rating agencies
NH:

really
PM:

And McGraw Hill own S&P
NH:

of course
NH:

how interesting
PM:

How could he discuss the crisis in depth without criticising the rating agencies???????
PM:

Hat Tip Naked capitalism on that
PM:

Anyway — i want some lunch
NH:

me too. that’s far better than blogging PMQ.
PM:

Moneky — will phone now — let me just dig out your number
NH:

and one more thing, we have a copy of the Crosby email
NH:

actually it is the FSA statement on the resignation
NH:

The Financial Services Authority (FSA) can confirm that specific allegations made by Paul Moore in December 2004 regarding the regulatory risk function at HBOS were fully investigated by KPMG, which concluded that the changes made by HBOS were appropriate. The chairman of the FSA will write to the Chancellor of the Exchequer by the end of today, setting out the details.
Sir James Crosby has decided to resign from the board of the FSA, for the reasons he has set out in his public statement, and we would like to thank him for his very significant contribution to the FSA over the past few years.
For further information please contact the FSA press office on 020 7066 3232.
PM:

(Monkey — call me on 07775 705 884 — i cant make out your no from the msg)
NH:

so that’s alright then
NH:

KPMG said everything was fine
NH:

so it is
NH:

and was
NH:

and will forever be
NH:

got that everyone
NH:

were KPMG the HBOS auditors??
NH:

and I finally have Sir James’ statement
NH:

Sir James Crosby’s statement in full:

In the light of recent media coverage I have decided to issue a short statement.

Just over three years ago I resigned my position as CEO of HBOS.

Towards the end of my time as CEO of HBOS, as part of a wider restructuring of group functions the Risk Function was elevated to report direct to the CEO.

As part of this I asked one of our risk managers, Paul Moore, to leave HBOS.

At the time he made a series of allegations.

These were independently and extensively investigated on behalf of the Board, the results of which they shared with the FSA. That investigation concluded that Mr Moore’s allegations had no merit.

Last autumn (on a BBC programme) and again yesterday at the Treasury Select Committee he repeated substantially the same allegations. HBOS has reiterated its view that his allegations have no merit.

Questions have also been raised about my independence from government.

During the last two years I have devoted considerable time to producing two reports for the Government; the first on identity assurance and ID cards (published last March) and the second on mortgage finance (published last November).

I am confident that anyone who either worked with me on the reports or indeed anyone who has read them will conclude that they are the work of someone who is genuinely independent of government. In addition I want to emphasize that I have absolutely no political connections or affiliations.

I am full of admiration for my colleagues at the FSA and the work they are doing under extreme pressure.

As a non-executive director I have an absolute responsibility to ensure that I do not make their task any more difficult.

Therefore, whilst I am totally confident that there is no substance to any of the allegations, I nonetheless feel that the right course of action for the FSA is for me to resign from the FSA Board which I do with immediate effect.

NH:

indeed, I did nothing wrong
NH:

but I jump anyway
NH:

right, Paul is now on the phone to Monkey
NH:

so I am going to wrap things up
NH:

thanks for all your comments today
NH:

see u all tomorrow
NH:

for another action packed session of Markets Live
NH:

byeeeeeeeeeeeeeee
NH:

Thanks SWF great point
NH:

one would have thought these allegations would have been investigated by someone independent
NH:

not the company’s own auditors
NH:

who presumably sat in on risk comm meetings
NH:

and were privvy to all sorts of documentation
NH:

amazing, what a white wash
PM:

You still on?
NH:

yeah
PM:

Goo point on the auditors
Gold Oil – little resources play, with assets in Peru, Colombia and Cuba. Not for the faint-hearted.
NH:

sorry banging on about KPMG
PM:

In fact the audit profession generally has dodged the Crunch so far…
NH:

and John Tiner who was CEO at the FSA when this happened
NH:

well he came from KPMG after 20 years of service  – UPDATE: Correcting to show that Tiner worked at Arthur Anderson and KPMG.
PM:

yes yes
NH:

it is a small world
12:23PM
PM:

Thank you for all the comments this morning
PM:

Good fun
PM:

We will be back tomorrow at 11am
PM:

Seeya!

This entry was posted by Paul Murphy on Wednesday, February 11th, 2009 at 11:01 and is filed under Uncategorised. Edit this entry.

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