UK Banks - still a mug's game?

Some of the brokers seems to be slowly warming up to the idea of investing in the UK banks. Yesterday we saw one analyst who now thinks that the Government may look to help out the equity in banks. His idea is that the Government could take on some of the extreme tail risk that banks have to hold capital against under the Basel II requirements. This would potentially free up around £40-50bn in capital, thereby stimilulating more lending.

Its a nice idea, but I am personally sceptical. The argument that the Government will help out the banks without penalising the equity is, I think, politically naive. If I were Gordon Brown, I would be looking for a way of solving the problem while also screwing over the equity holders, as this would have the best result for Labour's polls. Therefore, the most likely outcome in my view is still further Government equity injection, at the expense of current shareholders. This would then likely be followed by splitting the banks into a good bank and a zombie bank. The latter takes all the bad assets at a discount and is then run down. Remember, in Sweden where this policy was undertaken successfully, it did not happen until 2 years into the recession. In the UK, the loan losses have barely started.

With this in mind, I cannot avoid concluding that investing in banks is still a mug's game. They are not necessarily shorts, just uninvestible.