Wednesday, 30 November 2011

HBOS case

A bit more info on HBOS case. I lived in the UK through the summer of 2008 and I was outraged by this case because I was a taxpayer in Britain and I knew we would end up shouldering the burden (as it happened).

On the wake of the subprime mortgages HBOS was going under given the illiquidity inherent to the banking . Meanwhile, Lloyds (the most boring bank in the UK) was doing ok as it hadn’t gone into fancy financial toxic stuff.

But HBOS was Scottish, the UK PM Gordon Brown is Scottish and the Labour Party obtained lots of votes from Scotland. The government would be harmed by the demise of HBOS (as it had been with Northern Rock) and, as governments always do, they acted in their own interests: Gordon Brown pushed Lloyds’ CEO to acquire HBOS for political reasons, not for economical reasons.

Lloyds’ active shareholders didn’t want Lloyds to acquire HBOS: they kept appearing in the press. The independents in the press indicated that it was a very bad deal. It was apparent to everyone! HBOS’ own shareholders hadn’t taken up the rights issue in July 2008. It didn’t matter: Gordon Brown personally brokered the deal with Lloyds TSB. An official said: “It is not the role of a Prime Minister to tell a City institution what to do”.[that official was right, but the PM Brown intervened anyway].

The Lloyds TSB board have stated that merchant banks Merrill Lynch and Morgan Stanley were amongst the advisers recommending the takeover. [mmm wasn’t Morgan Stanley the underwriter that had been caught out? Banks have a too cosy relation with and too much influence on the governments. This will always happen: IMHO the solution is to curtail governments’ power.]

UK government assurance to save the banks and dispensation with respect to competition law and “don’t worry, public money is no one’s and the government will give it away” convinced just enough Lloyds shareholders to approve the takeover.

Result of the government’s strategy:

In late 2008 UK government loaned heaps of cash to Lloyds and ended up nationalising not only HBOS but the whole of Lloyds. [hey taxpayers’ money is free, isn’t it!]

From FT 2010: The dramatic scale of losses suffered by Lloyds Banking Group through the acquisition of HBOS was laid bare on Friday when the part-nationalised UK lender’s full-year results revealed it had made £30bn of provisions over the past two years on loans inherited from the deal.

Well done, Gordon. Thanks so much.