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Saturday, 14 February 2009


UK Financial Investments Ltd. (UKFI) already owns 100% of Bradford & Bingley and Northern Rock, and 68% of Royal Bank of Scotland (RBS) and 43% of Lloyds Banking Group (LBG), the merged Lloyds TSB and Halifax Bank of Scotland (HBOS). The total commercial banking assets this represents exceeds about $4 trillions and is therefore the biggest financial services group in the world! By virtue of being a government agency, UKFI and those parts of its conglomerate that are nationalised - all this by law now stands outside of regulatory supervision of the FSA and other national financial regulators in Europe including C-ebs at the EU level. Now the opportunity has arisen, following the LBG interim trading statement, to complete the entity neatly by increasing the government share of LBG to more than 50%.
If this is what Eric Daniels, CEO of LBG, wants to have happen, then fine. He told the Treasury Select Committee that except for the takeover of HBOS his bank would not have been in need of a government shareholding (liquidity infusions via the Bank of England is another matter). If it is not what he wants to happen, then I suggest heads should role for the cack-handed way in which the interim trading statement was drafted and announced. As argued in the my blogs in the figures have been misrepresented giving a false impression of the underlying profitability and soundness of HBOS.
Speculation is mounting in the UK media that the Government may be preparing to increase its stake in LBG, after Chancellor Alistair Darling declined to rule out the option of nationalisation, having previouslysaid it is undesirable. The group stunned the City by warning of £10 billion in annual losses at HBOS, which it rescued with direct Government backing, involvement and approval when Lehman Bothers collpased on 15 September 2008. The takeover completed on 16 January 2009. LBG may have thought that results for the period preceding the takeover completion would not have had a dramatic effect on its shares and other bank shares. If so, that was a foolish assumption, not least now that short-selling is again unconstrained.
UKFI owns 43% of LBG after the government pumped £17bn into the two banks, and was left with paper losses of more than £2.5bn at a low point yesterday when Lloyds' shares had fallen 40%.
The Chancellor, Alistai Darling has defended the Government decision to broker the merger of Lloyds and HBOS and offer financial backing, saying that failure to do so would have brought down HBOS and potentially collapsed the whole UK banking system.
Speaking from the G7 finance ministers summit in Rome, he said the immediate priority was to identify banks' bad assets and "put them out of the system", warning that without this step normal lending to businesses and individuals cannot resume. The official reason for the merger was funding (liquidity risk) which means inability to fund the gap between loans and deposits. This lies more essentially at the heart of the problems of the banks - wholesale funding so that the banks will not have to dramatically call in loans and reduce their loanbooks by up to 30% at worst. The funding gap in UK banks is about £800bn to be reinanced over 3 years and £185bn has been supplied by the Bank of England's SLS in 2008, and another £200bn or so will follow in 2009. So, arguably, this is all being taken care of via the Bank of England.
Asked on two occasions during an interview with BBC2's Newsnight whether he could rule out nationalisation of LBG, Mr Darling did not do so. Instead, he responded: "I said in January there is a range of options that we will be deploying, a range of levers that can be pulled to help all banks, because I have made it very, very clear that the integrity of the banking system is very, very important. What we are focusing on at the moment is making sure that we can identify these bad assets and then deal with that problem. That's our focus at the moment and that will continue not just here but it will continue across the world as well."
Liberal Democrat Treasury spokesman Vince Cable, who has become an always available ever-ready gloomy crtic of the government, said: "It looks increasingly as if Lloyds is being dragged under by the dead weight of HBOS, a financial disaster created by Andy Hornby and his predecessor, Sir James Crosby. Obviously we need to digest the detail, but it looks increasingly as if Lloyds HBOS will now go into majority public ownership, followed inevitably by nationalisation." Ken Clarke, for the Conservatives, is in catch-up mode and finds himself echoing the Cable.
Eric Daniels who undoubtedly felt he had the trust of the government and therefore may have believed they would take his opinion on the matter, may now find that he has no more freedom for manoeuvre than he gave HBOS and his bank is now firmly in political hands and what happens to it will be determined by the Treasury.
The Conservatives have been most anxious that the Government's control should be arm's length and temporary.
This was transparently not so in facilitating the Lloyds TSB, HBOS takeover/merger. Eric had insisted on no reference to the Competition Commission. The Government complied, but found that this was roundly resented. There was a lot of popular and even institutional tacit support for the action by the Merger Action Group before the Competition Appeals Tribunal to make the case for referral to the Competition Commission as recommended by the OFT. Eric wanted the freedom to determine himself what parts of HBOS to keep and what to sell. Now all of that commercial latitude may be taken away and will be decided by the Treasury's UKFI board. How it operates and decides matters is not subject to FSA approval or Companies Act or Code of Conduct.
The remaining private shareholders are along for the ride, very much on the tiger's back. Some of the major institutional investors may have envisaged no more share value dilution and opportunities to cherry-pick in the HBOS carcass. One law that will not apply, however, is that if LBG is nationalised whatever is sold out of HBOS parts or Lloyds TSB parts will be subject to full EU competitive tender and the decisions will be by UKFI board, not the LBG board. The commercial freedom to exploit the merger that Eric Daniels so ravenously desired will be lost to him!

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from Sunday Herald

HBOS: lawyers circle as Darling 'dithers'

By James Cusick and Business Editor Colin Donald
ALISTAIR DARLING fought yesterday to quell speculation that the government will soon take control of the troubled Lloyds Banking Group by saying the "best place for such banks is in the private sector".
Speaking from Rome at a meeting of G7 finance ministers, the chancellor's attempt to rule out the imminent nationalisation of Lloyds comes as lawyers representing leading bank shareholders begin exploring a possible legal case against both the bank and the government, which recommended the Lloyds TSB takeover of HBOS.
Lloyds' already-low share price crashed by a further 32% last week when it announced that HBOS would be posting a loss of some £11 billion for last year. In UK banking, this loss is only exceeded by the £20bn hit announced last month by RBS.
Despite that, there were reports last night that the group was preparing to pay out £120 million in bonuses to staff.
A lawsuit, which could last for years, will be founded on the statement made in the Commons last week by Lloyds' chief executive Eric Daniels, who said that "between three and five times less due diligence" was used to investigate HBOS's finances when the prime minister helped broker the merger and dismissed the usual referral to the Competition Commission.
Almost 96% of Lloyds shareholders backed the merger, which got a clean bill of financial health from Lloyds chairman, Sir Victor Blank. Daniels called it "a very good purchase".
The £11bn HBOS losses are mainly centred on the corporate division that continued to take risks in commercial property and housing investments when the rest of the banking sector was easing away from such deals.
With the government already owning 43% of Lloyds after a £17bn cash injection, the jump to a state majority holding of over 50% is seen as inevitable, despite Darling's wish to keep the bank a private concern.
While the government formally nationalised Northern Rock and Bradford & Bingley, it has resisted calls to take control of RBS, despite its majority shareholding. A similar fate awaits Lloyds if the losses force the bank to turn to the government for a widely anticipated second bail-out.
Despite predictions from LibDem Treasury spokesman Vince Cable that public ownership and nationalisation now look inevitable, Darling insisted that government policy on who should run UK banks had not changed.
"We believe banks are best run in the commercial sector, privately owned, and properly regulated and supervised," he said.
However, Michael Fallon, a Tory member of the Treasury Select Committee said: "The taxpayer already owns 40% of this group and if more help is required that means we are heading towards nationalisation, not just of HBOS but of Lloyds too. This is a disaster a disaster for the taxpayer.
"Politically inspired mergers have a bad record and Eric Daniels's statement to us about doing about a fifth less due diligence than normal has come back to haunt him."
Although Darling wanted to discuss the G7's Rome communique, his predictions for a "difficult year ahead" and the need for countries to avoid being protectionist, the government's banking troubles and the effects of recession remain the dominant issue hitting Labour's fortunes in the polls.

Shadow business secretary Kenneth Clarke said yesterday that the HBOS- Lloyds merger had been a disaster and that the government was dithering.
Two polls in newspapers today show Labour's poll decline is continuing, with a ComRes poll for the Independent On Sunday giving the Tories a 16-point lead over Labour and YouGov poll in the Sunday Times showing the Tories 12 points ahead.
Robert McDowell, a leading banking economist who was part of the Edinburgh-based Merger Action Group (MAG) which led a legal bid to prevent the "shotgun marriage" of HBOS and Lloyds TSB at the competition appeals tribunal in December said: "Friday's disaster was the result of presentational incompetence by the Lloyds Banking Group.
"Eric Daniels and Victor Blank got very chummy with government, and were rewarded with control of 30% of the UK banking industry. What they didn't realise is that they were riding the tiger, and now they can't get off or they will get eaten.
"If, as looks very likely, the government increases its stake, it will be UK Financial Investments ltd, the largest financial holding company in the world with $4 trillion in assets, that will be making the decisions about who gets the juiciest bits of HBOS, not them."

Lloyds' blackest day

How could a government inspired merger to save a collapsing bank go so badly wrong? James Cusick sifts through the wreckage.
LAWYERS REPRESENTING shareholders in the newly formed Lloyds Banking Group will this week begin exploring a case for litigation against both the bank and the government over the shock 32% drop in the bank's share price. The share price slide followed an unexpected announcement that the HBOS division of Lloyds would incur a record loss for a UK bank of £11 billion.
The potential key to a successful law suit against the senior management of Lloyds will be the admission by the bank's chief executive, Eric Daniels: he told the Treasury Select Committee last week that Lloyds had carried out "between three and five times less due diligence" on its investigation of HBOS's financial health than it would normally have done in a routine takeover.
Lloyds shareholders voted 95.98% in favour of the takeover, which at the time was described as "an overwhelming endorsement for the logic of this transaction" by the Lloyds chairman, Sir Victor Blank.
Daniels had previously described the deal as "a very good purchase", with Blank stating last month: "I believe everything is out there as far as HBOS is concerned."
Except everything was not "out there" as the City learned on Friday afternoon. The added billions of HBOS losses, mainly run up inside the corporate division run by Peter Cummings, was twice what analysts had been led to believe.Cummings's department was hugely exposed to lending and investment deals in the housing and commercial property sectors in the UK. Although it made HBOS a £5.7bn profit in 2007, this last year it has been forced into a £7bn write-down.
The extent of the corporate loans which had gone bad was well known inside the bank - staff with links to Cummings's department had already been told they would be getting no bonuses this year, and rumours inside HBOS about the true state of the division's arithmetic suggested things were in a dire state.
Although due diligence was affected by the banking crisis last year, a situation which the chancellor, Alistair Darling, said meant the government "didn't have months or weeks to look at it", lawyers will want to know what information was actually supplied by HBOS, how this was analysed by Lloyds' banking experts and accountants, and what pressure was put on Lloyds by the government to take over the ailing HBOS rather than see it go the way of Northern Rock and Bradford & Bingley and become a fully nationalised bank completely in state hands.
With the scale of the corporate losses eating into Lloyds' capital cushion, and speculation that the bank may be forced to convert some of the preference shares it sold the government into ordinary shares simply to beef up capital balances, a majority shareholding of the organisation by the UK taxpayer now looks inevitable.
Vince Cable, the Liberal Democrats' Treasury spokesman - who accurately predicted the nationalisation of Northern Rock, despite government denials - said: "It does look increasingly likely that Lloyds will go into public ownership followed inevitably by nationalisation."
During the peak of the banking crisis last September, Gordon Brown was pivotal in brokering the deal between HBOS and Lloyds. The prime minister told Blank that, in order to avoid any potential delay, there would be no referral to the Competition Commission. In effect, the rule book on mergers in the industry was rewritten for Lloyds.
Although the government subsequently pumped cash into both HBOS and Lloyds, taking its combined stake in the group to 43.5%, Lloyds - with the government's blessing - pressed on with the merger that when completed gave the new Lloyds Banking Group control of 25% of British personal banking and of about 28% of the UK mortgage market.
Though this is yet another dent in the financial credibility of the government and inflicts further damage on the prime minister's claim to be leading the global recovery by having his policies copied internationally, there appears to be no immediate contrition over the wreckage left by the undiscovered HBOS losses. Through unofficial channels, the Treasury was saying the Lloyds-HBOS deal was a commercial one, not a politically arranged marriage.
But with Darling failing to publicly rule out nationalisation as the remaining option for the group, the political criticism of the deal is mounting.
Cable claimed HBOS was a "financial disaster" created by its two former chief executives, Sir James Crosby and Andy Hornby. Gordon Brown was forced to distance himself from Crosby last week after he resigned as deputy chairman of the Financial Services Authority, the City's regulatory body. A former HBOS executive alleged that he was sacked from the bank by Crosby, who was chief executive until mid-2006, for warning that the expansion policy of HBOS was creating a dangerous risk to the bank's financial health. Crosby's resignation came just 30 minutes before Prime Minister's Questions in the Commons last Wednesday.
Although Crosby quickly dismissed the accusations, the FSA was left damaged after it admitted that it had been concerned since 2002 about the risks being taken inside HBOS, and that it had been warned two years ago the bank was growing too quickly.
This is the kind of detail that lawyers will begin to stack up in their case against senior executives of Lloyds who were pushing for a merger.
And if the FSA knew about the risk warnings, then why didn't the Treasury, the chancellor and the prime minister, who were all pushing for Lloyds not to join Northern Rock and Bradford & Bingley in the ranks of nationalised banks?
Cable's description of the merger as a "disaster" was matched by the Conservative Party's shadow business secretary, Ken Clarke. The former chancellor said: "Lloyds TSB was a boring bank, it was a steady bank, it hadn't done silly things."
And Clarke said that if the government hadn't forced through "this shotgun marriage" then Lloyds might be in a "more comfortable position" now. He added: "I was one of those who joined in from the backbenches saying that once it was obvious that both these banks needed a large amount of government support, they shouldn't have been allowed to merge."
Although Daniels told the Commons select committee last week that taxpayers would make "a very handsome return" on the government's stake in his banking group, that is not the way things look this weekend, with nationalisation and a further bail-out looking necessary.