More bad news from the banks means more bad news for the Luxury Property Market in London

The luxury property market in London is closely tied to the health of the financial services industry and more bad news this week from the banking sector will add to the downward pressure on prices.

The cost of the British taxpayer’s bailout of Royal Bank of Scotland has now exceeded the taxes paid by the bank over the last ten years. Back in 2006, Fred Goodwin, the bank’s former CEO bragged that taxes were part of the bank’s “contribution to society.”

“The benefits of our success stretch far outside the company,” Goodwin, 50, wrote in RBS’s 2006 corporate responsibility report. “We continued to be the largest corporate taxpayer in the U.K.,” he wrote. That helped in “supporting the government in the provision of public services such as schools, hospitals and state pensions.”

Oops. RBS reported a combined net profit of £32.5 billion between 1998-2007. And a £28 billion loss in 2008, the largest in British corporate history.

British Prime minister, Gordon “no more boom and bust,” Brown continued his tirade against the banks, “I’m angry at the Royal Bank of Scotland and what happened. These are irresponsible risks that were taken by a bank with people’s money in the U.K.,” he said. Which is not really helping the situation and rather glosses over the fact that Mr. Brown was chancellor of the exchequor between 1997 and 2007.

Back in 2004, Queen Elizabeth II knighted Mr. Goodwin for “services to banking.” I wonder if they can take those back?………

Barclays bank shares continued their slump as it becomes apparent they need more capital. But Barclays have managed to dig themselves a rather large hole. They refused government funding during the first run on the banks and instead went to the Qatari and Abu Dhabi royal families for the £7.3 billion they required in October.

Abu Dhabi’s royal family and two Qatari investors purchased a 32% stake alomg with a high-interest bearing loan. Barclays fell 10% yesterday in London to the lowest in 20 years after the bank said its agreements stipulate it must offer additional shares at a discount to the Middle East group before accepting any money from the U.K.

This “anti-dilution,”  clause has made it all-but impossible for the British Government to take a meaningful stake in the bank. If the bank raises fresh capital before the end of June, the Middle Eastern investors would receive a greater number of shares for their original investment without paying more. If Barclays were to raise fresh capital at last night’s closing price, for example, it would automatically hand almost 50% of the bank to the Middle Eastern investors. The only way to get around the anti-dilution clause, should Barclays need more money before the end of June, would be if new capital was raised at more than the 153p-a-share at which paper issued to Abu Dhabi and Qatar is due to convert into Barclays stock.

This puts the government in the position of having to pay 153 pence a share, at a point where the market price is around 52 pence – or injecting taxpayer’s funds into a bank that would then become more than 50% middle-eastern owned. Mr. Brown is already fairly unpopular and I can’t see this being welcomed by the British public or the other shareholders with open arms

According to the Times, this clause was inserted at the insistence of Amanda Staveley, chief exec of PCP capital who were the middle eastern advisors on the deal.

A few things to be learned from the current state of the British banking system.

1. Amanda Staveley is worth every penny she was paid.
2. The British bank heads do not know or understand banking
3. If RBS has lost ten years profit in one year – assuming no more losses this year, which is unlikely – we should have a pretty good idea of where prices for luxury property in London are headed.

Plan accordingly.