Something I don\’t understand

(OK, another one of the many things I don\’t understand).

RBS shares fell yesterday, or Friday, or something.

But why does this mean the bank is closer to bankruptcy/nationalisation?

I can understand that the shares will fall if people think that is is indeed closer to either: but why does the fall itself make the fate more likely?

13 comments on “Something I don\’t understand

  1. I guess the answer is that confidence is necessary for a bank to do business, so with no confidence no business.

  2. The causation is the other way. Because people think the bank is worth close to nothing, the share price falls.

  3. The fall in the share price does, indeed make it difficult to raise new capital, for example by a rights issue, except from the Government, therefore should RBS be undercapitalised, it makes nationalisation more likely.
    So in one sense I guess it is true but I don’t really think that is what the media commentators meant. I think they were just mistaking cause and effect.

  4. I’d go with confidence, but if they don’t need more capital, then if I was the Government, I would engineer the mother of all short squeezes…

  5. Even “Jeremiah” Peston doesn’t seem to think that the bank is failing, as if it did, so would UK PLC. Personally, I’m going to give the sheep another couple of days of fire-sale bailout and then start buying RBS. I could well be wrong, if so I lose a bit, but if I’m not… 🙂

  6. A fall in market capitalisation may result in a downgraded credit rating, which would make recovering far more difficult.

    I think (though am probably wrong) a falling market cap. would also require a bank to repair it’s balance sheet either by borrowing money or selling assets.

  7. methinks the falling share price is fear of having your shares stolen sorry nationalised by gorgon the saviour of the world

  8. RBS 25p shares are currently around 11p each. Under what circumstances can I buy a million, send them to the registrars, and ask for my 25p a share – £250K ?

    Only if they’re being wound up ? And where do shareholders come in the queue for payouts ? After all the other creditors ?

    Tim adds: first question? None. Second, yes.

  9. “methinks the falling share price is fear of having your shares stolen sorry nationalised by gorgon the saviour of the world”

    This is like blaming windmills for wind. It’s actually another classic media mistake during this crisis, which is similar to the one Tim is pointing out (ie arse over tit) which is to say something like ‘nationalisation threatens to wipe out shareholders’ or even ‘the takeover threatens to wipe out shareholders’ when the share price is telling us that they have already been wiped out. In fact cluelessness that they own something worthless is a hallmark of shareholders throughout history – I remember Eurotunnel.

  10. Because the directors won’t have collateral on their own loads?

    “Barclays yesterday disclosed that Fritz Seegers, one of its directors, had pledged shares he owned in the bank as collateral against loans from another bank – in breach of City guidelines. Seegers, who is married to an Indonesian princess, used his Barclays shares in August 2007 when they were worth £6.60 to raise funds to buy more shares in the bank at £6.80. Barclays shares have since fallen to 60p.”

  11. Sigh, Let’s try again.

    Maybe the bank directors might find that the value of their shares is insufficient collateral for loans they have taken out.

    http://www.guardian.co.uk/commentisfree/2009/jan/23/confidence-in-banks

    “Barclays yesterday disclosed that Fritz Seegers, one of its directors, had pledged shares he owned in the bank as collateral against loans from another bank – in breach of City guidelines. Seegers, who is married to an Indonesian princess, used his Barclays shares in August 2007 when they were worth £6.60 to raise funds to buy more shares in the bank at £6.80. Barclays shares have since fallen to 60p.”

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