The rather unusual news from the UK is that the British government has grabbed control of Lloyds TSB PLC as a part of guaranteeing loans worth £260 billion.
According to a statement from Lloyds TSB, “About 83% of the insured assets were acquired when the bank bought HBOS.” The details, as reported by Bloomberg, can be found here
One question which has been raised before and will no-doubt be raised again, is exactly why did Lloyds TSB agree to help HBOS? Just because the government asked?
At the time, Lloyds were the strongest bank in the UK - and the most conservatively run. Whilst being operated in a relatively low-risk manner made it a figure of fun in the banking world for years, it seemed a much more appropriate stance once the credit crisis was in full-swing.
One would presume, that all Lloyds needed to do was to weather the storm and survive. By mere fact that much of the banking and financial services industries in the UK are failing, they would be left as a strong company with significantly fewer rivals in the market. This may all sound simplistic, but could it not have been a workable plan?
Instead, they jumped in at almost zero notice as a “white knight” to save HBOS. Why? Isn’t it rational to let competitors fail if there business model is not sound?
And lets be clear, if a bank the size of Lloyds TSB is in need of £260 billion, of which 83% relates to HBOS loans, you can presume that the HBOS business model was not sound. In fact, it calls into question what on earth the HBOS management were doing. If HBOS were employing any risk managers to assess their loan book, it seems to suggest that they were not very good at their work.
Or, perhaps they were just fine as risk managers, but upper-management overruled their concerns. Neither is a very appealing answer to this question.
Lloyds TSB shares have taken a hammering on the London Stock Exchange so far this year - and as a small shareholder - I have been watching and grimacing closely.
So back to the issue, Why Did Lloyds TSB Buy HBOS?
What exactly did Gordon say to make them buy a competitor at almost zero notice with no chance to look at the books? Why did such a conservative business take such a big risk? Is the government trying to ruin every UK shareholder by bringing the stock market to it’s knees? And what now that the government owns 75% of the bank?
This is important, because the government now owns 75% of Lloyds TSB and HBOS. After Northern Rock, the UK government has almost nationalised the UK banking sector now. How scary is this? Will shareholders be compensated????????