Tomorrow morning it seems likely that £50 billion will be injected into the banking system.
Tonight the market capitalisation of RBS is £14.9 billion.
Barclays is about £24 billion.
LLoyds TSB is worth £13.5 billion.
HBOS is worth £5 billion.
I’m assuming HSBC is not in this deal.
That means the total market capitalisation of these banks is £58 billion now, on a downward trend. In reality that means that the government can ask for 50% of all these banks as a condition of any deal, with a ratchet to increase the stake if more losses are discovered requiring additional support or that reduce the value of the investment. Anything less than 50% makes no sense: it would not reflect current fair value.
We should have a nationalised banking system tomorrow in exchange for this new capital, albeit one with significant quoted minority interests which will require the new management of these banks to be accountable for their actions. I sincerely hope that is what we get. Anything less and the deal for the taxpayer will be unforgivable.
And please don’t tell me companies are always worth more than their market capitalisation making this analysis inappropriate. That only holds true in normal markets. This is an abnormal market where market capitalisation has only been sustained by the prospect of a government bail out. They are almost certainly worth less than their market cap right now. That’s because they’re actually bust. That’s why a stake of more than 50% is justified for the cash injected.