Saturday, August 6, 2011

Confirmation of solvency and not liquidity crisis [update]

A Telegraph article confirms that we are dealing with a solvency crisis where investors are asking what countries and banks are solvent.

The only cure for a solvency crisis is disclosure.  Once it is known who is solvent and who is insolvent, then steps can be taken to address the issue.
As America continues to reel from the loss of its top-flight ''AAA'' credit rating for the first time in modern history, The Sunday Telegraph can disclose that US investors sold out of British banks in the last week, precipitating a £22 billion reduction in the value of the top four banks including state-backed Lloyds Banking Group and the Royal Bank of Scotland.... 
The Sunday Telegraph understands that the sell-off of shares in Britain's four largest banks – Lloyds, RBS, Barclays and HSBC – was the result of a significant push by US investors to move out of the sector. 
The news, coming at the same time as America's credit downgrade, appeared to highlight the uncertainty and lack of clarity among investors, as they desperately sought to place cash in safe havens.
More from a different article in the Telegraph.
Britain’s four largest banks – Lloyds Banking Group, Royal Bank of Scotland, Barclays and HSBC – saw a collective £22bn wiped from their market values, with three of the four seeing price declines approximately double the 10pc fall across UK markets as a whole. 
The Sunday Telegraph understands that large parts of the sell-off were the result of US long-only fund managers selling out of established positions in the sector....
The sell-off came ahead of Standard & Poor’s downgrade of the US’s sovereign credit rating from AAA to AA+ – a move which came in the early hours of Saturday morning – heightening fears that the sell-off could yet intensify. The news goes to highlight the uncertainty in the sector, and again underlines concerns major investors have about future regulatory controls to be placed on the British banking industry....
One senior source within one of the four banks said: “What we’ve been seeing is a strong trade out of developed market banks and into emerging market banks and Scandinavian banks.” 
These are banks where the issue of solvency is much less pronounced.
He went on to say that the US banks and long-only fund managers had been leading the charge. Sources at other institutions confirmed the asset flow. Another said: “There’s been a huge amount of flow going back to the US. But because the banks tend to be bigger than most, the amounts look somewhat disproportionate.” 
The US is still perceived as being able to bailout its too big to fail banks.
Meanwhile London-based investors moved to offer what little support they could to the banks. “The trouble is there’s a complete buyers’ strike,” said one fund manager at a leading British institutional investor....  
“All of these share price declines are not being driven by short-sellers but by long- holders selling out,” said a Data Explorers spokesman. 

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