Countries In Trouble.. Capitulation Surely?

Yesterday was just one of those days. An 800 point intraday fall on the Dow with a 300 point recovery in the afternoon session is the type of market that traders dream of, stockbrokers lose hair over and governments hate.

With a couple of trading days like we have had the market and investors are beginning to wonder whether we have reached the point of capitulation, basically the point where people say ‘to hell with it’ and dump everything. Scarily it doesn’t look that way.

Having spoken with a number of friends who are traders and brokers very few are reporting that clients are calling up to dump stock. One stockbroker said “It’s bizarre really, even though the market has plummeted we have been getting more calls from clients who want to average down than we have from clients wanting to dump.”

This lack of total capitulation is being attributed in some respects to the Internet and financial TV shows. One broker said “I was around in 87 and the scariest thing was that we just did not know what was going on. In today’s market, clients are watching the same information as we are and because of this they are less likely to panic”.

A broker at a small company specialist said “The media have caused some of my clients to lose lots of cash. The tabloid press should be ashamed. I suppose we should be used to them sensationalising everything but they have to take some responsibility for retail clients getting shafted. Some companies with sound balance sheets a great product and little exposure on a macro scale are being killed when there is no need for it, when the dust settles the regulators should look at these so-called experts and bring them to book.”

This particular broker saves his most venomous comments for the financial bulletin boards, “You have people on these bulletin boards spouting absolute lies, plain cold lies. How can a broker be fined or have his livelihood taken away if he misleads a client but an anonymous numpty on an Internet site can say whatever he wants, market manipulation in affect, and nothing happens, double standards in the name of free speech. It makes me sick”

It seems that much of the criticism of the media, regulators and government from those inside the industry, stems from the belief that a clear concise plan is not in place. This may be on the way in the UK at least after the Chancellor met with senior officials from the UK’s top banks.

The chief executives of Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS last night met the chancellor, Alistair Darling, and other senior members of the Tripartite Authorities.

The banks are understood to have told Mr Darling that they broadly back a plan for the Government to take equity stakes in return for capital injections.

Analysts yesterday predicted the Government might need to pump between £30bn and £50bn into the banks.

Sources said last night they expect a plan of action to be hammered out over the next couple of days. The cash injection would be in the form of preference shares, and it is possible the Government would hand over some cash now while also saying there would be a pot of cash available if banks need money several months down the line.

“There is a realisation that some of the more radical options have to be put on the table,” a senior banking source said.

While unenthusiastic about part nationalisation, the banks hope that if the Government helps to bolster their capital it might provide a much-needed boost of confidence to investors.

The worry for the industry and now, believe it or not, actual nation states, is that the governmental money coming into the banks will be followed by massive regulatory changes.

Iceland agreed yesterday to guarantee it banks in a similar move to Ireland, part of the reason for this is that if the Icelandic banks are to benefit from selling toxic assets under the US bail-out plan they had to make this move and they fear that US oversight may be the consequence.

There was even talk of Iceland becoming bankrupt. The trigger for the panic over Iceland’s solvency came Monday, when the government pumped €600 million ($827 million) into Glitnir Bank hf, the country’s third-biggest bank by market capitalization, taking a 75% stake.

Meant to reassure financial markets, the bailout instead heightened concerns that Iceland might have to prop up its other banks too, but that it lacks the resources to do so.

Iceland has a population of just 300,000 and a gross domestic product in 2007 of around $20 billion — less now that the currency has fallen so sharply. Its major banks have foreign-currency liabilities totaling $120 billion.

“If the Icelandic government is forced to bail out those banks, its debt could go up to astronomical levels as a share of GDP,” says Ben May, an economist at London consultancy Capital Economics.

That concern has pushed up the cost of buying insurance on debt issued by Iceland’s government to a level that normally indicates a borrower is in severe distress. On Friday, traders said it cost $1.5 million up front plus $500,000 a year to insure $10 million of Icelandic debt against default. That is up from $271,000 a year with no up-front fee a month ago, according to Markit Group, a credit-information firm.

“There is skepticism that Iceland’s finances could cope with a systemic banking failure,” said Gavan Nolan, a credit analyst at Markit.

When there is potential for a country to go bust, you have to admit, capitulation cannot be far off, if it has not already reached that point this week.