Lloyds to writeoff £13bn!

Graham_Devon

misskool wrote: »

I didn't say this was good news. Please don't put words in my mouth.

Bad news is when I lose my job, otherwise, the sky isn't about to fall on my head and I'm not about to die from swine flu. I know I'm a crazy optimist

Well that explains why you are still waiting for doom!

It's all around you! You just don't want to see it

julieq wrote: »

Things certainly are bad, but the news about Lloyds today isn't cataclysmic or indeed unexpected. It's an asset writedown for a company operating highly profitably.

It's difficult here, because the moment you stray away from the idea that everything is going to go worst case, you're characterised as a hyper optimist even when in fact you're steering a middle course.

You are hardly just straying away. You are stating it simply does not matter, its not as if it's cash is it....

It IS cash to banks, it's their blood, and your regarding it as nothing and not even worthy.

You watch the FTSE collapse a bit further over the coming week, and you will see just how important these things are you are regarding as "nothing".

It's impact, is far FAR wider than just lloyds profits.

julieq

Generali wrote: »

That would be true for most businesses but for banks they have to show capital adequecy as well as having the cash flow to be able to meet the bills.

Asset price writedowns directly impact on the amount of money a bank can lend or even (as seen with LloydsTSBHBOSC&G/Brad 'n' Bing/NRK/RBSNatWestAmro) cause the bank to become insolvent.

So what in the Lloyds balance sheet indicates a risk of impending insolvency?

julieq

Graham_Devon wrote: »

You are hardly just straying away. You are stating it simply does not matter, its not as if it's cash is it....

It IS cash to banks, it's their blood, and your regarding it as nothing and not even worthy.

You watch the FTSE collapse a bit further over the coming week, and you will see just how important these things are you are regarding as "nothing".

Graham, the writedown is about 6% of the Lloyds TSB loan book. It's not the end of the world. If it were, the entire world financial journalist community would be jumping up and down in glee and reporting it. And it isn't.

If you overegg every story, you lose credibility. This is not good news, but it isn't cataclysmic news.

I said months ago I wouldn't go anywhere near the FTSE because it is about the most volatile investment going just at them moment, and I stand by that - no-one in any business has a clue how the recession is going to play out even when they're sitting on top of the trends and indicators.

If you've decided to invest in stocks and shares then maybe what the ftse does is important. Otherwise it's just an indicator of the level of confidence investors have, and it's really not a surprise that they're edgy.

misskool

Graham_Devon wrote: »

Well that explains why you are still waiting for doom!

It's all around you! You just don't want to see it

I could go through my whole life looking for something to go wrong or I could go through my life living it to the best of my ability. So far (in my albeit rather short life), it's always been the things that are unexpected that have changed my life.

Generali

julieq wrote: »

So what in the Lloyds balance sheet indicates a risk of impending insolvency?

Not a lot any more I would think. That was the whole point of nationalisation! The Government was the only group of people with money that were prepared to buy equity at the price required to keep Lloydsetc solvent. Nationalisation and the various schemes designed to hide the extent of banks' losses by keeping the value of some of their assets higher than they would be otherwise.

Just a final thought for everyone to ponder as they slumber. What do you think will happen to the value of banks' reserves once interest rates start to rise given that a large proportion of those reserves are held as Gilts and other Government debt? What will that do to bank solvency? What do you think will thus have to happen to Government spending as the next phase of the bank bailout? (I'll give you all a clue - the price of Gilts falls as interest rates rise)

Thrugelmir

julieq wrote: »

And Lloyds balance sheet shows over 400 billion of assets. So where is the problem exactly?

Because most of the £400 billion is owed to depositors.

The only part of this which belongs to Lloyds is primarily share capital plus retained profits.

By writing down £20 biliion or whatever. Lloyds will ultimately have to generate cash for the losses which crystalise.

By raising the SVR , Lloyds will generate additional profit which will turn into cash which will strengthen its capital position. A slow process but most likely the way forward.

Lloyds may not be raising its SVR at the moment as its plan is to control around 30% of the UK mortgage market. So is in a position to attract quality mortgage business. Once this objective is achieved it can afford to raise rates whilst remaing highly competitive.

Masomnia

mbga9pgf wrote: »

If their asset balance sheet was so great, why does the public own 70% of lloyds today then?

You're confusing it with RBS I think. The government only owns ordinary shares in Lloyds now, since the preference shares have all been redeemed (saving Lloyds £480million in interest payments), and these are around 43% of the total share capital.

Just sayin'.

Heyman_2

Generali wrote: »

Just a final thought for everyone to ponder as they slumber. What do you think will happen to the value of banks' reserves once interest rates start to rise given that a large proportion of those reserves are held as Gilts and other Government debt? What will that do to bank solvency? What do you think will thus have to happen to Government spending as the next phase of the bank bailout? (I'll give you all a clue - the price of Gilts falls as interest rates rise)

It all has the potential to get very messy doesn't it?

Interest rate rises are consistently mentioned here as essentially the lighting of the touch paper, as in once they start rising we'll see carnage in all sorts of areas of the Economy.

It depends to what extent the Government's hand is forced with regard to IR rises - I know you've said in the past that if they can't sell at the Gilt auctions then they might have to raise rates but demand still seems to be good -

http://online.wsj.com/article/BT-CO-20090707-703794.html

Have I got this right? I know there's more to it....

Generali

julieq wrote: »

So what in the Lloyds balance sheet indicates a risk of impending insolvency?

The Lloydsetc balance sheet for 2008 shows:

Assets: £436,033,000,000
Liabilities: £426,334,000,000

Thus they have equity of £9,699,000,000

If they're writing down £13,000,000,000 of asset value they need to increase their assets to remain solvent (negative equity is insolvency as well as an inability to pay the bills).

You can't just look at the asset side of the balance sheet and say everything's fine 'cos they've got £400 billion!

Generali

Heyman wrote: »

It all has the potential to get very messy doesn't it?

Interest rate rises are consistently mentioned here as essentially the lighting of the touch paper, as in once they start rising we'll see carnage in all sorts of areas of the Economy.

It depends to what extent the Government's hand is forced with regard to IR rises - I know you've said in the past that if they can't sell at the Gilt auctions then they might have to raise rates but demand still seems to be good -

http://online.wsj.com/article/BT-CO-20090707-703794.html

Have I got this right? I know there's more to it....

What you're saying is correct - demand for Gilts is holding up right now. The problem isn't borrowing a lot for a short period, it's the apparent assumption by the Government that they can continue to borrow money at very low rates pretty much indefinitely.

If rates rise then there will be all sorts of nasty effects that people haven't really been talking about. One of those is that Gilt values will fall and so bank reserves will take another huge battering.