Lloyds’ deal failure sends the banks into a tailspin

The bank — created by the emergency takeover of failed lender HBOS by Lloyds TSB — shocked the City and Westminster when it said it has not yet agreed a deal with the Treasury about insuring billions of pounds worth of toxic assets.

Lloyds also confirmed Halifax and Bank of Scotland owner HBOS lost £10.8 billion last year. It more than wiped out the £807 million profit made by Lloyds TSB.

Lloyds shares fell 26%, or 19.2p, to 55.8p and have now lost 76% of their value since the HBOS deal was agreed in September. Royal Bank of Scotland was down 17%, or 4.9p, to 24.1p, Barclays sank 17%, or 18.9p, to 94.1p, and HSBC was off 6%, or 331/4p, to 4933/4p. Simon Willis, an analyst at NCB Stockbrokers, said: "They haven't managed to conclude a deal on asset protection, and the uncertainty led to disappointment."

Lloyds chief executive Eric Daniels said talks with the Treasury about joining the Asset Protection Scheme are "progressing and well advanced", but warned "there can be no certainty about the outcome".

It was hoped Lloyds — 43% owned by the taxpayer after a £17 billion Government bailout — would agree a deal with the Treasury along the same lines as that secured by Royal Bank of Scotland yesterday.

RBS put £325 billion of toxic assets into the Government's insurance programme at a cost of £6.5 billion.

The 2% fee was seen as a coup for RBS and Lloyds was hoping to secure a similar deal for around £250 billion of assets.

However, talks last night stalled over the size of the fee leaving bank and Treasury officials haggling over the terms today.

Daniels and his chairman Sir Victor Blank have faced a backlash since taking on HBOS in a deal that was stitched up with the help of Gordon Brown.

Shareholders are livid at the fall in the share price and the cancellation of the much-cherished dividend, for years seen as one of the best in the industry.

Daniels defended the HBOS takeover today and denied it was a mistake. "We bought it at the right price and at the right time," he said. "We believe it is a very strong franchise but it is absolutely having issues. The deal isn't what's driving the share price."

He warned of job losses at the bank but said the majority of staff cuts could be achieved through natural staff turnover or voluntary redundancy programmes.

Sir Victor said all the bad news at HBOS was now out in the open but warned of further losses this year.

"Against a backdrop of recession and an ongoing global financial crisis, we expect 2009 to be another challenging year," he said.

"Whenever the economic conditions do begin to normalise, however, we believe we will be in a very strong position to reap the benefits. Our imperative is to manage the business as effectively as possible during these challenging times."