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Unsteady HBOS could be facing full State takeover
Paul Waugh, Deputy Political Editor14 Oct 2008
PLANS for the full-blown nationalisation of Halifax Bank of Scotland have been drafted by the Treasury amid fears that its merger with Lloyds TSB is in danger of falling apart.
Only 24 hours after Chancellor Alistair Darling's unprecedented bank bail-out plan was unveiled, there were fears that the cost to the taxpayer could soar even further if the takeover of Britain's biggest mortgage lender collapsed.
Critics pointed out that plunging share prices for the Royal Bank of Scotland, HBOS and Lloyds TSB could cause serious problems for the Government.
Just as worrying, the interbank lending rate a key indicator of whether banks are beginning to trust each other again fell only slightly last night.
The Treasury was today sitting on a paper loss of £2 billion after investors took fright at its rescue plan.
As the full implications of the bail-out sank in, analysts also warned that yesterday's deal could swamp the public finances if the Office for National Statistics decided that the banks' liabilities should be added to public debt.
The Institute for Fiscal Studies said that adding RBS's £1.8 trillion in liabilities would leave Britain with a huge national debt of £2.6 trillion.
Although shares in the FTSE bounced, those in the individual banks being semi-nationalised plunged. HBOS slumped 27 per cent, Lloyds TSB 14 per cent and RBS eight per cent.
Gordon Brown declared yesterday that the Government was buying bank shares "at the bottom of the market" and with a discount, but it became clear that prices were sliding further.
If the bank shares continue to slump, private shareholders are increasingly likely to reject the chance to buy their stock. But given the millions of mortgages and savings affected, if they fall substantially lower then the Government may have to step in just as it did with Northern Rock and Bradford and Bingley.
The Government is currently likely to end up with 60 per cent of RBS and up to 43 per cent of a merged Lloyds TSB and HBOS.
If the Lloyds TSB-HBOS deal does fall apart, Treasury officials have indicated that they are ready to do "whatever is necessary" to address problems at HBOS, including 100 per cent nationalisation.
Lloyds TSB and HBOS renegotiated the terms of their merger last night. Lloyds is now offering just 0.6 of its shares for every HBOS one.
Without backing from Lloyds, the management at HBOS is seen as so thin that the taxpayer would have to be protected by a full-blown state takeover.
Private investors have been "spooked" by the Treasury's decision to ban the three banks from paying dividends to ordinary shareholders.
There are also concerns that government involvement will restrict the banks' ability to make commercial decisions on lending to businesses and housebuyers.
The takeover of HBOS by Lloyds TSB was given the go-ahead by the Prime Minister last month after he agreed to suspend competition law.
But Tories have criticised the closeness between Sir Victor Blank, the Lloyds chairman, and Mr Brown. There are also concerns that ministers are trying to limit the political fall-out of the collapse of HBOS by getting Lloyds to protect jobs in Scotland.
Some Conservatives today warned that a new HBOS-Lloyds TSB "superbank" would stifle competition because it would have 30 per cent of the mortgage market and 35 per cent of savings.
Michael Fallon, deputy chairman of the Commons Treasury Select Committee, said: "The result is likely to be fewer savings products, fewer mortgages and less choice all round for the consumer. Barclays thought it could carry on without taxpayers' money, so why couldn't Lloyds?
"We should have clear rules for how many banks we need and what share of the market each can have."
MPs were set to debate the Banking Bill in the Commons today, but Mr Brown faced criticism from one of his closest political allies, Geoffrey Robinson. The former paymaster general told BBC's Newsnight that "the Government", and not just regulators, had been partly to blame for failing to police the City properly over the past decade.
Reader views (12)
I don't think Lloyds shareholders are happy with the government messing with a perfectly sound bank like Lloyds and getting them involved with HBOS. If that occurs they should be entitled to a tax refund for helping the government out.
- Colin Snelling, Melbourne Australia, 15/10/2008 04:04
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I guess maths is not some Scots strong point, by all means take the 9bn or so UK Gov received from Oil revenues that the Treasury received last year, off which 2bn is from tax and vat on petrol which will be 90% English and Welsh motorists anyway. In return England and Wales won't give the massive subsidy in public spending which is far higher per capita than south of the border. Its also funny that when oil was below $20 a barrel we heard little from the SNP on this supposed oil dividend for Scotland.
- Not Scottish, U.K and London, 14/10/2008 22:12
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Peter Glazier,
I pay extra tax which, by use of the (discredited) Barnett formula is allocated in a block grant to prop up Scotland. Every Scottish citizen gets at least 30% more tax revenue than the English do. Scotland costs us more than the European Union. I do not want to pay this extra tax thank-you. There is no gratitude for it.
The House of Commons library has a paper which analyses and debunks the old chestnut about North Sea Oil. I note what Andrea says about that. Check the House of Commons library Andrea.
There is no such thing as 'Scottish waters'. What Andrea means is that the land terminals are in Scotland (but friends of mine in Shetland want independence from Scotland for the same reason!)
My wife is of a different race and ethnicity - the only racism we've ever encountered has been in Scotland (a double whammy because it was against both of us - I'm English that was my problem!)
And we had to bail out their banks as well! Nothing changes since the Darien project does it?
- Anglo, Sussex UK, 14/10/2008 20:18
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The aim of this plan is to put the banks on a more sound footing, but restricting the payment of dividends while charging 12% interest on the pref shares is going to hamper the bank instead. If the government wants private shareholders to take up their entitlement to buy the shares, they are going to have to allow dividends to be paid on the common shares or at least allow them to buy into the preference shares as well.
- Dan, Devizes, 14/10/2008 18:19
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What the market wants, of course, is a multi-billion pound bail out by taxpayers which is entirely cost-free for existing shareholders. Seriously, what planet are these people living on? Presumably these are the same market analysts who did nothing to impose discipline on the banks when the bubble was inflating, and who failed to notice the toxic nature of the debt accumulating on banks' balance sheets, despite abundant warnings from economists, journalists and regulators. The Government has a wider responsibility, which is to ensure that the fragility of the banks doesn't bring the rest of the economy down - if this requires full nationalisation, so be it. Hopefully it won't come to that, but shareholders enjoy no right of veto when the public interest is at stake.
- Daniel, London, England, 14/10/2008 18:04
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Plan B please. The deal seemed a good one but the market is saying HBOS is not worth it at any price. Lloyds need to protect their shareholders and by the sounds of it pick a new chairman less easily lent on.
- Stuz Graz, Wimbledon, England, 14/10/2008 17:36
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I am a proud Englishman and an even prouder Brit. Lets stop knocking the Scots an get together as we have for centuries and sort out the problem.
I am definitely not a Labourite but recognize that Gordon Brown did not create the situation but it behoves him to try and resolve the crisis.
Give him a chance or would you have him resign and have the country (UK) spend weeks in limbo with a lame duck government.
- Peter Glazier, Sao Paulo, Brazil, 14/10/2008 17:25
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'Private investors have been "spooked" by the Treasury's decision to ban the three banks from paying dividends to ordinary shareholders.'
I fully agree the stupid decision to ban the banks from paying dividends to ordinary shareholders will kill these three bank once for all. Otherwise if follow the US model with government taking minority stake and higher valuation with no limit on dividends payment, then share will rebound and the tax payers' money investment will have a real chance to make a good profit, otherwise if these three goes, next in line will be hsbc, barclays and the whole financial system.
- Superstar, london, 14/10/2008 16:18
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Let's not forget the oil field revenue the government has raked in with a large percentage coming from fields in Scottish waters.
It all started when they allowed 100% + mortgages. Educate people how to budget, live within their means and save.
Has anyone ever been happy with the government? Stop moaning and take a look at what you can do closer to home.
- Andrea, Edinburgh/London, 14/10/2008 14:17
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What else can you expect from a Scottish bank?
They continue to sponger from the English taxpayer - what's new?
- Anglo, Sussex UK, 14/10/2008 12:35
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Your last point is quite crucial. The government seems to want to exert influence over the banks' lending policies.
If we are all agreed that the current crisis is the result of excessive lending by banks to uncreditworthy individuals how is the latest dictat from the government about banks having to continue to lend at last years levels supposed to sort out the problem? In my opinion Brown can see the housing market sinking down the drain and thinks he can try this trick to support it by forcing banks to continue to lend to sub prime borrowers.
How cynical to use taxpayers money to try to retain enough 'feel good factor' to win one more desperate election. Typical of this government.
- Mark, City of London, 14/10/2008 11:32
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But Crash Gordon and his bunch said he saved us all?!? What a fine mess Nu Labor has created and then they try and blame everybody else except themselves for squandering money for 10years and taxing us all to dead...
- Georgie, Islington, London, 14/10/2008 11:06
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