Standard Chartered £3.3bn rights issue

Interesting news on the wire:

13 October 2010
                         Standard Chartered PLC
Standard Chartered PLC ("Standard Chartered" or the "Company") 
today announces a 1 for 8 Rights Issue to raise approximately 
GBP3,258 million (net of expenses).
·      Standard Chartered has delivered seven successive years of 
record income and profit, and the Board continues to see exciting 
opportunities for significant growth across its market footprint in 
the world's fastest expanding economies. The third quarter 2010 
Interim Management Statement released today builds on a strong 
performance in the first half of 2010.
·      The Board believes that the new Basel III arrangements will 
see regulators raise requirements relating to minimum capital 
ratio levels and they may accelerate the transition timetable. To 
accommodate such increases, the Group may have to constrain 
RWA growth, sacrificing these growth opportunities, unless new 
capital is raised.

Note the arguments used to support the rights issue: that the Basel 3 increased capital requirements will prevent future growth so please invest more equity in our bank to enable us to seize these amazing growth opportunities.

A common character trait of most senior bankers I have worked with is their obsession with aggressive success. This takes no prisoners. It promotes an atmosphere among the more senior echelons whereby any questioning of the assumption that the bank will go from strength to strength will be a career limiting step for the enquirer.

Indeed many senior bankers actually believe the nonsense underlying announcements such as this. But they are also smart. Over a private coffee most of my senior banking contacts will smile and concede that bolstering the bank’s reserves in this way, at a time like this, makes a great deal of sense.

Why? Not for the reason stated in this circular. Most bankers know that we are in a kind of phoney phase (pre collapse 2), and that inflating reserves with genuine equity (as opposed to fake profits from derivatives trades booked previously, the income from which has not actually been received) is a good insurance policy. This rights issue could therefore help this bank emerge from the coming second collapse wave as one of the survivors.

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