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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Lloyds TSB Nationalisation End Game, Another £280 Billion of Tax Payer Liability

Companies / Nationalization Mar 07, 2009 - 12:42 AM GMT

By: Nadeem_Walayat

Companies Best Financial Markets Analysis ArticleThe government is about to announce the defacto nationalisation of Lloyds TSB as capital of £5 billion is expected to be converted / injected into the bank that takes the governments real stake to 75% (officially 65%). On top of this the government will guarantee an estimated £275 billion of the banks bad debts which will be dumped onto the tax payer by means of the Asset Protection Scheme. It was less than 2 weeks ago that the government committed £400 billion for the insurance of toxic securities, which according to my calculations has so far already committed £325 billion to RBS for its toxic securities, therefore we are well north of the £400 billion limit. The toxic debt insurance scheme is akin to getting your car insured AFTER you have crashed it.


Therefore the government has just dumped some £600 billion of toxic debt onto the tax payers. So all of the losses are borne by the tax payer whilst the culpable bankers continue to reward themselves with bonuses for phantom profits that never existed in the first place as the whole collatorised debt ponzi scheme is fast turning out to be the mother of all scams, the consequences of which the tax payers will be forced to bear for many years of not more than a decade as the recent analysis ( Bank of England Ignites Quantitative Inflation ) pointed out that the only solution for the government is to inflate its way out of liabilities that continue to mushroom towards £4 trillion from 1.5 trillion at the end of 2007 as the below graph illustrates.

Lloyds TSB's Path Towards Nationalisation.

Back on September 18th 2008, the shotgun wedding between Lloyds TSB and HBOS (Takeover) was hailed as a smart move by much of the mainstream press, but as I voiced at the time ( Lloyds TSB Takeover of HBOS for £12 billion, £2.32 per share ) that Lloyds TSB may come to regret the decision as the economic slump unfolds, which is now coming to pass. Now the government has squanders more than £30 billion in terms of capital injections and a further potential loss of as much as £275 billion as per the amount of debt insured.

Defacto Nationalisation was inevitable as I pointed out more recently on the 13th of February (Will HBOS Bankrupt Lloyds TSB into Nationalisation?)- Given the size of the HBOS and Lloyds TSB loan book, then that £10 billion loss is just the tip of the ice berg as 2009 will turn out to be a worse year than 2008 in economic terms as £10 billion of share holder equity cannot hope to defend against a loan book well in excess of £1 trillion, where even a further 1% loss due to bad debts would equate to more than total shareholder equity, and given the crash in UK house prices of 20% to date with a further 18% expected as per the UK housing market forecast, I cannot imagine how the bank can hope to survive in its present form.

Is the Worst Behind us ?

I am afraid not, we are perhaps at the the half way point (if we are lucky) which implies further capital injections into the bankrupt banks coupled with at least another £600 billion in terms of asset protection insurance. Then we have the budget deficits of as much as £200 billion a year to contend with, as mentioned earlier the consequences of all of this debt will be low economic growth and much higher inflation following the ongoing deflationary crash into mid 2009 that will equally be followed by a powerful inflationary up thrust that will send sterling crashing towards parity to the U.S. Dollar and interest rates soaring as investors balk at holding UK government bonds (gilts) which will likely trigger a series of further Quantative Inflation measures as the British economy is unable to wean itself off of Mervyn Kings magic central bank wand that conjures hundreds of billions out of thin air, that will be necessary to finance the huge budget deficits.

Unfortunately there is no free lunch as Germany's Weimar Republic and Mugabe's Zimbabwe found out. With the unfolding trends gathering pace it is definitely time for holders of sterling to put preservation of their hard earned savings at the forefront of their minds with what now seem as the inevitable consequences of:

1. Falling UK government bond prices as the amount of government debt and liabilities continues to mushroom towards £4 trillion.

2. Continuing sterling bear market which targets parity to the U.S. Dollar.

3. Rising commodity prices as the crackpot policy of Quantative easing is copied around the world which devalues ALL currencies.

4. Sustained period of economic weakness for many years which favours emerging markets such as China in terms of capital growth.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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