At least two FTSE 100 companies struggling to pay dividends

Discussion in 'Current Affairs, News and Analysis' started by hong_kong_fuey, Apr 15, 2008.

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  1. Independent

    If this is true -- and Warner is not prone to fabricating stories, and he is a respected journalist within the media -- then the banks are virtually bust. Though, no surprises there as far as I'm concerned. Is the day of reckoning beckoning? Potentially very worrying, indeed.
  2. balls.

    Rights issues arent used to pay dividends, they are used to inject working capital into which ever organisation issues them.
    That capital is then used day to day to fund the organisation.

    It is nonsensical to issue rights to pay a dividend, as by issuing said rights, you are increasing your shareholder base, and therefore decreasing the possible dividend for the year going forward, and therefore depressing your share value.
  3. This is the state we're in Daede. Of course, by issuing rights, or by allocating more shares in lieu, then the share price decreases, thus ensuing a reduced dividend and potentially a reduced market capitalisation value. Crazy, or what. Desperation in action. The irony is that the banks' are now begging for tax payer assistance -- those very same tax payers that they have ripped off and lied to for decades. Alternatively, watch for the sovereign wealth funds circling overhead like vultures so that, eventually, the Chinese government could control a large percentage of our banking sector. :x
  4. oldbaldy

    oldbaldy LE Moderator Good Egg (charities)
    1. Battlefield Tours

  5. Well, if it's true maybe this has something to do with it.

    The solution to stock market volatility: castrate 'em all.
  6. Your conclusion is illogical. I don't see a correlation between the alleged rights issue of Bradford and Bingley (a small mortgage bank) and the allegation that two FTSE 100 companies are struggling to pay dividends. In fact, I don't know how you've jumped from one isolated (alleged) case to a totally distinct (alleged) case. After all, the theme of the paragraph in question, in the Independent piece, is that two of the largest companies in Britain have declared their forthcoming dividend payments, and yet they are struggling to make the payments since their clearing banks (which wouldn't be B&B) don't have the reserves necessary to allow payment. However, the allegation in the piece could be true, or it could be false. Expect it to be denied and hushed up if true, however. After all, if one or more of the big five banks (which are used by blue chip companies) didn't have a healthy deposit reserve, and this rumour were to spread, then we could expect Joe Public to congregate en masse for the mother of bank runs. I see another £15 billion pumped into the banking sector this morning by the BOE. Does that sound healthy to you?
  7. They just got it. 15 billion from the BoE according to BBC Radio.
  8. Um, no.

    The rumoured rights issue is more about capital adequacy than anything else. If you're really interested google 'Basel Capital Accords', but briefly, every time a bank lends money, it has to put a bit of extra cash aside in a safe place in case the loan goes bad and the bank loses the loan amount. This is called 'regulatory capital' and is carefully monitored by the FSA and/or BofE (can't remember which). If regulatory capital gets too low, then the bank can't do any new business.

    A rights issue would increase the amount of regulatory capital that the bank has.

    The other issue in the market at the moment is a lack of liquidity, ie ready cash, which is why the Treasury is putting this additional £15 billion into the system. Although by all accounts there wasn't that much demand. Edited to add: The extra £15 billion is essentially a loan from the BofE and will have to be repaid with interest by the banks borrowing it.
  9. Of course it's about capital (in)adequacy. Why else would a major company want to issue rights? The Basel II Accord fractionated the fractional reserve system even more than it previously was, meaning that banks could operate with an even lower capital base. This is one of the fundamental problems with the fractional reserve system. For every pound deposited the banks' are allowed to lend ten or more pounds. Furthermore, Basel II relaxed the rules regarding off balance sheet reporting so that complex investment vehicles, such as derivatives, wouldn't appear as expenditure/risk, whilst they would appear as capital assets (thus increasing the amount a bank can lend), and as profits when the time to cash in came. It's strange how this came about when the original aims of Basel II were to reduce risk in the sector. Basel II is overseen by the Bank for International Settlements.

    So, a rights issue would increase the amount of capital (as the shares would be used as liquidity) that the bank has. However, the rules of supply and demand apply. If a bank issues more shares then obviously the share price would decrease in value. Therefore, the dividend the bank pays -- at least on an individual share basis -- would be reduced.

    Liquidity is not technically 'ready cash' . Liquidity refers to assets that can be liquidated into cash. However, in a deflationary environment (such as the one the banks' find themselves in currently), where there is a shortage of cash, assets are very difficult to liquidate and, therefore, cannot be considered as ready cash. What you are referring to is 'core liquidity' which includes cash, T-bills, bonds, etc).

    Edited to clarify.
  10. Ooh goody, we've got uncontrollable inflationary pressures AND deflationary pressures! Can anyone remind me what happens next, I wasn't born the last time it occured? I think we're approaching a sh!t/fan interface scenario. :slow:
  11. Or do we get lots of business laying off people to maintain there profits but having to pay higher taxes cause of all those people now claiming benefit? Oh what a vicious circle!
  12. Says it all, total FUD, today's markets:

  13. So we are not doomed then?!! Fecking banks and I hope they lose the court cases on Bank charges :D
  14. I'm surprised you didn't pick me up on a repo not technically being a loan ;)

    This is going to get very technical very quickly if we try and argue the merits of Basel II (plus I would get out of my depth very quickly as my knowledge is general, rather than specific).

    I am surprised that you seem to be arging against fractional reserve systems in general though. To me it seems that this is the best way forward. How much of a capital reserve should a bank have? Nothing is too low; 100% is too high (not all loans are going to go bad); anything in between is a fraction. We could argue endlessly about the correct percentages however. IMHO it's not inappropriate to rely on a Bank's internal systems when it comes to modelling some of the more complex structured products.

    I grant you the right-issue comment, it will decrease the share price, although not as much as you intimate as the additional capital will be used to enable future growth (unless the regulators are demanding increased capital requirements, which I haven't heard, but wouldn't be a bad idea).

  15. I'm too knackered to write a decent reply, though I would like to. Not that I know what is going to happen, as these are unprecedented circumstances, though it's possible to postulate on what could happen. Needless to say, deflation is the worst of all evils as far as the worlds of finance, banking and politics are concerned, since it increases the value of commercial and state debts, and it brings a world of pain for everybody except creditors. Policy makers and central bankers are doing everything in their power -- such as re-inflating the money supply to stimulate the banks, thus threatening to induce inflationary forces -- to avoid a deflationary spiral. However, apart from inflation the danger is that they'll create an even bigger bubble that will burst in the future, with even more devastating consequences.

    Depression follows deflation as sure as night follows day (see Wall Street Crash, 1929). If a depression occurs we can expect unemployment to hit thirty per cent or more. Soup kitchens, anyone? Don't laugh, it could happen. Though it may not: it all depends on whether the policy makers and central bankers can get the banks to function again. However, if they do manage this gargantuan, almost impossible, task then there would inevitably be rapid inflation. Possibly hyperinflation.

    Currently we're experiencing price inflation. This is of the imported variety and is primarily due to the rise of the middle classes in places like China and India. As more finite resources are consumed then obviously the law of supply and demand applies. If there's more demand for a commodity then it follows that its price rises.

    Now, if depression on a global scale does occur then it follows that price inflation that is linked to demand may subside. However, if we go back to consider the central banks' and governments' re-inflating the money supply, we see that this could induce price rises -- even hyper-inflationary rises -- due to the devaluation of currencies. As more of a currency becomes available then its value decreases. Thus, prices must rise to compensate.

    Ultimately, it's possible (though not certain) that we could be about to witness continued price inflation, followed by deflation and depression, and followed by hyperinflation and a continued depression. This is real sh1t hit the fan territory, the end of the world as we know it. The kind of thing that starts major wars.

    It's also possible -- and this is what the policy makers are aiming for -- for a protracted period of severe inflation that will make today's inflation feel like a warm bath. Of course, by inducing inflation then they may be able to avoid depression. Furthermore, commercial and governmental debt would be eradicated thus easing fiscal conditions somewhat. The Chinese and other major creditors to the Western powers would be most urined off since the value of their assets would be reduced rapidly.Wars? Don't smile yet, if you're thinking that your debts will be wiped out too. They won't, since the banks' will likely impose inflationary premiums onto your debts. Therefore, the value of consumer debts will increase in nominal terms. So while the debts of the richest and of governments will decrease the ordinary person will still suffer. Bummer.

    No country in the world is immune from what's currently occuring, but some are better positioned to weather the storm than others. Needless to say, Britain is toward the bottom of the league of survivability. I fear that we will be a basket case in five or six years. I so hope to be wrong.

    You never know. It may all be fine in a year or two. That's what the mainstream media is trying to get us to believe.