RBS Pummeled as Nationalization Looms

Good Afternoon Folks!

Well, now we know why our financial stocks crumbled last week. RBS stock dropped a whopping 66% after the UK government announced it was forced to pump additional capital into the bank. The government now owns 70% of this piece of garbage:

"Gordon Brown on Monday unveiled a second bank rescue package including powers for the Bank of England to lend up to £50bn directly to businesses, as he accused the Royal Bank of Scotland of taking ”irresponsible risks” as the bank’s shares collapsed.

His comments came as RBS on Monday warned it could report an annual loss of up to £28bn, following the mis-timed acquisition of ABN Amro, the Dutch lender it acquired as part of a €71bn (£63bn) hostile break-up bid in 2007.

The outburst from Mr Brown came as the Treasury agreed to replace the £5bn in RBS preference shares held by the government since the October bailout with ordinary stock. This will increase government ownership to almost 70 per cent.

Shares in RBS fell 20.1p or nearly 60 per cent to 14.6p, valuing the bank’s capital at less than £6bn, as investors feared the bank may be fully nationalised.

The scheme, which will be detailed more fully by the end of February, will allow banks to buy government protection for eligible assets by paying a fee, which will be agreed case by case. The fee is most likely to be paid through the issue of preference shares to the government, but the Treasury said it would consider taking cash.

The banks will remain responsible for a “first loss” amount, similar to an excess in a normal insurance claim, and will also remain liable for about 10 per cent of the residual loss. The government insisted on this clause to make sure the banks had an incentive “to endeavour to keep losses to a minimum.”

The assets can be denominated in any currency. Those most likely to participate in the scheme are portfolios of commercial and residential property loans; structured credit assets, including certain asset-backed securities; and other corporate and leveraged loans. The scheme is expected to continue for at least five years.

Similar schemes are expected to be set up in other countries, and the government said it would hold discussions with its international partners to co-ordinate them. Details of a similar scheme being considered by the US government are expected to emerge in the coming days, while other countries are expected to follow."

My Take:

Now this is interesting folks. It appears that the UK really starting to get pissed as they slowly get their hands around exactly what these banks did. These institutions took more risks than Evil Knievel!

I listened to Gordon Brown's announcement this morning. He was not a happy camper. In my eyes the nationalization risks just rose substantially for many banks around the globe.

Everyone is beginning to realize that nationalization may be the only way to permanently clean up these banks and exterminate the cockroaches that created this mess. If this happens the common stock goes to zero folks. I expect a violent reaction to the downside in the financials in next week.

Now I see why Citi and BofA scrambled to get earnings out on Friday. They knew this disaster was about to be announced. Traders were obviously front running this news as they violently dumped the financials all last week. Don't you love how we the people are always the last to know?

IMO, Owning shares in any large bank right now is suicidal! I will be interesting to see what the markets do tomorrow. Its Obama's big day so they might give stocks a pass.

Stay Tuned!