Terry Murden, in an otherwise excellent comment ("Now the HBOS deal is done, the anxious wait begins for job cuts" Scotland on Sunday, 14 Dec.), states what may seem plain fact that "the real alternative to Lloyds TSB was the complete failure of HBOS." But, it was never that simple. It is not a view of the accounts, not even given the loan defaults in 2008. These are only 1.5% of the bank's assets,half of which should be recovered. "Failure," commonly understood, means 'bankruptcy'. But, there are no hard facts supporting this. Lord Dennis Stevenson said the bank was brought low by a liquidity problem. Wholesale funding is expensive, but so is it for most banks. The interbank market is lop-sided, borrowers outnumber lenders, hence the Bank of England's interventions. HBOS has substantial drawing rights at the Bank of England and the offer of a large Government stake (1). Its balance sheet is better than others. It could have stayed independent. But, after a botched share issue and attacks by short-sellers that still continue, management panicked and agreed a firm deal with Lloyds TSB, brokered by the Prime Minister. Decided in haste, this will be repented at leisure.
The consequences are 20,000 - 40,000 job losses, sell-off of HBOS busines assets, (some possibly to firms that Lloyds has dealing with and investments in), more severe book writedowns and integration of both banks operational systems. Of the 145,000 staff of the two banks voluntary redundency will see about 14,000 go. Another 8,000 or so jobs will go possibly with the sale of HBOS subsidiary businesses. But, on top of that it is conceivable thre will be 20,000 involuntary redundancies!
For more on the decision and the consequences see http://lloydsbankgroup.blogspot.com/
(1 ) £38bn available as draw-down funds. At the time the Government's recapitalisation was announced - £37bn of taxpayer funding for HBOS, Lloyds and RBS - the Government said it would make another £25bn available next year to the clearing banks. On 18 Nov. 2008, the eve of the Lloyds TSB shareholder vote on 19 Nov. in Glasgow, when 95.8% for the takeover of shareholders voted for the takeover, the Government (Chancellor Darling) concentrated minds by firmly stating that the merger is a condition of Lloyds receiving £5.5bn of state money and HBOS £11.5bn, and this also days before RBS shareholders vote on its £20bn bail-out (and this was also when Barclays was under the stress of stinging rebukes from its shareholders for having preferred more expensive foreign sovereign investors to UK Government investment.)
Partly to avoid referral to, or blocking by, EU Competition law and single market principles, The statement spelt out how any new bank bail-out will be more punitively priced than the existing deals. The preference share element of the recapitalisation will "be based on prevailing market conditions, with due regard given to the rate at which eligible institutions have announced the issue of such instruments most recently". The coupon on Barclays' preference share instruments was recently priced at 14pc, plus a substantial fee, compared with the 12pc for the state rescues of HBOS, Lloyds and RBS. The Treasury added that any new capital raising would be done at a discount to the current share price and that the discount was likely to be more punishing than the 8.5pc in the agreed deals.
The Chancellor said: "To the extent that HM Treasury is asked to underwrite an offering for ordinary shares, the price would be at a discount to either the market price or, if applicable, the placing price agreed on October 13, whichever is lower. The percentage discount would not be less than the percentage discounts applied in transactions already announced." When HBOS and Lloyds seek to raise new equity from shareholders and refuse some of the offer, this will be bought at substantial discount by the Government as effectively the 'underwriter'. This likely to be so and leave the new Lloyds Banking Group more than 50% owned by the Government. Lloyds' circular in advance of its own shareholder vote warned that, should the merger deal be blocked, the Financial Services Authority would require it to raise £7bn, and HBOS would need to raise £12bn as a standalone entity.