LONDON, Mon Oct 13,(bdnews24.com/Reuters) - Britain waded in with 37 billion pounds ($64 billion) of taxpayers' cash to bail out three major banks on Monday, in a move that could leave it as the main shareholder in at least two of them.
In return for the British government's money, the banks will be forced to curtail the bonuses that many believe encouraged a risk-taking culture that precipitated the global financial crisis. They will also have to scrap dividends.
Under the UK plan, Royal Bank of Scotland will boost its capital by 20 billion pounds, issuing 15 billion pounds' worth of shares underwritten by the state, and 5 billion pounds in preference shares directly taken by the government..
HBOS and Lloyds TSB will also participate in the government scheme "upon successful merger," the Treasury said..
Finance Minister Alistair Darling said extreme times called for extreme measures and that he was prepared to make even more money available if necessary.
"It's necessary because we are going through quite extraordinary circumstances the world over, and I'm determined to do everything we can to stabilize our banking system and make it stronger," he said.
"And in return for it, of course, there will be restrictions on what happens in boardroom pay, and we're also getting guarantees in relation to increased lending to businesses, as well as to mortgages, too."
EUROPE ACTS
The measures are being echoed across Europe as countries try to adopt a common approach to avoid a total meltdown in the financial system and its knock-on effects on the global economy.
Prime Minister Gordon Brown said he believed Britain was taking the lead in dealing with the crisis.
"This is perhaps the first government to do what I believe a large number of governments are going to do over the next few days," he told a news conference.
The German Chancellor Angela Merkel is set to give further details at 9 a.m. EDT of a draft bill seen by Reuters that earmarks 400 billion euros ($550 billion) in guarantees for banks and will also provide them with fresh capital.
In Paris, a report by Dow Jones Newswires said the French government would create a 40 billion euro fund to take stakes in banks, though the French presidential office declined to comment on the report.
Italy is also expected to take measures to shore up their banks, and French president Nicolas Sarkozy predicted a series of announcements.
LLOYDS REVISES HBOS OFFER
Back in the UK, Lloyds, which agreed to buy HBOS as part of an earlier bank rescue plan, also said it had revised down the price it was paying to 0.605 of a Lloyds share per HBOS share from 0.833 previously.
The UK Treasury laid out a series of conditions attached to the bailout, including a commitment by the banks to lend to homeowners and small businesses at 2007 levels, limits on executive pay, and government input on new board appointments.
Britain's Financial Services Regulator said in a separate statement that past pay levels "may have been inconsistent with sound risk management," but it would not get involved in setting remuneration levels.
Barclays said in a statement it would boost its capital by more than 6.5 billion pounds but expected to do so without government help.
The British banks will try to sell shares to existing investors, but the government will buy any shares not taken up.
RBS chief executive Fred Goodwin became the highest profile British bank executive to lose his job to the crisis. He will be replaced by Stephen Hester, chief executive of British Land and a former Abbey National banker.
The rescue plan could result in the government becoming the biggest shareholder, and even a majority investor, in Royal Bank of Scotland and a combined HBOS/Lloyds TSB.
RBS has been criticized for a highly acquisitive strategy that catapulted it from a domestic player to one of the world's biggest banking groups in less than a decade.
"Leverage is great in boom times, but it can be awfully dangerous when things get difficult, especially if they get difficult very quickly," chairman Tom McKillop said.
SHARES REACT
Shares in RBS had dropped 27 percent to 55 pence by 5:42 a.m. EDT, and HBOS had fallen 28 percent to 89 pence. Lloyds TSB was down 0.2 percent.
"There is potentially very substantial dilution there," said James Hamilton, banks analyst at Numis Securities of the RBS share fall.
Other banks rose, however. Barclays was up 6.4 percent, and HSBC was up 8.5 percent.
"It does solve the liquidity problem. This is the end of chapter 2 of the horror story, but unfortunately chapter 3 -- the recession -- is on the way," Hamilton said.
Bank-to-bank sterling lending rates for three months slipped slightly to between 5 and 6 percent from well over 6 percent on Friday but are still far in excess of the Bank of England's target rates.
Brown's handling of the financial crisis appears to be rebuilding his reputation with voters.
A YouGov poll published by the Sunday Times at the weekend showed Brown benefiting from the crisis politically. The opposition Conservative party's lead has halved from 19 percent to 10 percent over the last month.
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