Imagine, for a moment, that you were a shareholder of Lloyds. You wake up this morning to hear that the government has just nationalized the bank. What emotions would you feel? Despair? Regret? Resignation? Or would it be anger?The world has seen some shocking financial scandals in the last two years, but the destruction of Lloyds has to be one of the worst. This bank was reasonably managed. Certainly, it had its share of dodgy loans, but it was no Northern Rock or RBS. Lloyds could have weathered the financial storm. Profits would have fallen; it might have needed to downsize; but it did not require a government bailout.
But instead of surviving the crisis, Lloyds ended up a victim. To understand why, we need look no further than Downing Street. Last summer, Brown and Darling had a problem - HBOS. After NRK, New Labour would not have survived a second bank run. So, Brown personally brokered this merger, in order to save his sorry skin. This transaction was based on a cynical, self centered political calculation that ignored the interests of Lloyds shareholders.
However, Brown wasn't the only one to blame. Lloyds management didn't undertake any serious due diligence. If it had bothered to look at the HBOS loan book, they would have uncovered a cankerous pile of septic debt, waiting to infect the Lloyds balance sheet. Following Brown's political imperatives, the management dived into this merger, the infection spread, and Lloyds went into toxic shock.
Throughout this sorry mess, the interests of shareholders have been totally ignored. Their private property - Lloyds Bank - has been misused to protect the political interests of New Labour. Billions of pounds of private wealth were destroyed by this merger. Moreover, two banks were nationalized, when only one was in trouble.
The implications of this catastrophic scandal will spread beyond the unfortunate shareholders of Lloyds. Can any UK shareholder feel safe? Can anyone feel confident that private property can be protected from self seeking politicians? Can shareholders call to account those managers and directors entrusted to look after their interests?
Lloyds shareholders have just learnt that here in the UK the answer to those three questions is no.
so what happens to this thesis if the shareprice jumps tomorrow and continues on an upward curve?
ReplyDeleteCityUnslicker,
ReplyDeleteI somehow doubt that the shareprice can jump back up to 300, which was where it was back in August 2008.
Alice
Llyods management were really dumb to buy it though, and the shareholders were equally dumb to approve it.
ReplyDeleteGiven that we have just lived through the largest housing bubble in British history, Llyods would probably have gone bust anyway.
I always thought this deal was insane the moment it was announced.
ReplyDeleteI'm still left puzzled why Lloyds Bank were so accommodating in saving Labour's neck?? No, really. What possessed them?
I would imagine the directors of these banks names all start with Sir or lord and they where ennobled by brown/blair as a down payment on future services.
ReplyDeleteConsider that:-
ReplyDelete1 Lloyd have identified £260 billion to put into the asset protection scheme. Mostly HBOS.
2 They will accept the first £25 billion of loss
3 They are prepared to pay £16 billion for the privilege.
What exactly is in there, it doesn't sound too promising?
JKA
No one should be investing in banks anymore. Any banks anywhere. Buying bank equity is nothing but a speculative timing bet that nationalization does not happen in the near term.
ReplyDeleteOr for that matter, most companies. A lot will need to be on some form of government bailout to survive.
This is the biggest debt deflation in the history of the world. The lion's share burden of wealth destruction will be on the equity shareholders who will be wiped out in many more companies, and the taxpayers, who will take ownership and then socialize the remaining losses.
LLoyds had been drooling over HBOS for years and were in merger talks two years ago. Discussions between HBOS Hornby and Lloyds Daniels prompted Victor Blank to ease the deal through regulators with his overtures to the Prime Minister.
ReplyDeleteCheck out the timeline here.
http://www.guardian.co.uk/business/2008/sep/26/lloydstsbgroup.hbosbusiness
You can't blame Brown, the young Hornby may well have been the canny one.
JKA
The LTSB shareholders voted yes on this deal but there was some serious bullying by the government going on. The recent collapse in share price also has a lot to do with NuLab announcing the insurance scheme and then taking forever to formalise it.
ReplyDeleteAs for toxic loans, part of the deal is that LTSB essentially starts making more of them in a pathetic attempt to save GB's backside. Would you want to be the owner of such an institution? When Daniels inevitably leaves, blamed by the pols for "failure" I hope he learns from Goodwin and demands cash upfront. I wouldn't trust these scumbags to keep any promise.
Alice,you have identified three groups here - (1) Lloyds shareholders, (2) our Govt, and (3) Lloyds mmgmt. Purely from this perspective, let's take at look, individually at these three:
ReplyDelete(1) are the losers! They have only themselves to blame... and their advisers. Anyone still holding banking shares have only themselves to blame. Either they are wise and can see the future beyond common (and even specialist) knowledge, or they are too foolish. And greedy!
(2) are the winners!! Against all human (financial/economic) reasoning and widsom, they managed to convince the Lloyds board and shareholders to do such a stupid thing. I am tempted to think that the government was only thinking of the greater good of the country, and had no other nefarious purposes.
(3) are the mystery!?! I don't understand their motivation or goal at all. With their astute financial and economic knowledge, these professionals of the highest order and paid to reflect such skillsets, cannot certainly be considered incompetent. So the only other explanation is... the unthinkable - corruption of the highest magnitude, with criminal implications. Come to think of it, this is not such unthinkable anymore. We are seeing more and more of it in the daily news...
Joseph
Joseph,
ReplyDeleteThanks for your interesting comment.
I still have some sympathy for shareholders. When they voted for this merger, they had no idea what was really going on. They didn't know, for example, that Lloyds management had no clue about the quality of HBOS's loan book.
Nor did shareholders fully understand the malign intent of Brown and the gang.
Alice
ReplyDeleteAnonymous said...
"Would you want to be the owner of such an institution?"
Seems we all are now... whether we wanted to or not!
"these professionals of the highest order .... skillsets..": how archaic such phrases sound.
ReplyDeleteThese greedy, self-regarding dolts might be nearer the mark.
It seems as though some are convinced that Labour is the cause of the Financial boondoggle that is unfolding now. Sadly they along with the Conservatives are merely the enablers. Profits privatized/ Risk( read:rubbish) transferred to Taxpayers. The fact of the matter is that the majority of finacial services industry investors have bought in to a great big British Ponzi scheme. This is phase of discovery and rather than reverting to the tired process of politicising all the blame I myself am looking for the people leaving out the back door with all the cash.
ReplyDeleteThe shareholders you say, but of course a lot of these must be held in pension funds, right? An example. I, in a moment of madness bought a shares ISA in 2000 just before the crash! They actually went above the original investment sometime last year - how I now wish I had taken the money out. Now worth about 70% of the original. The point I am making is that a lot of ordinary folk were encouraged, persuaded, arm twisted to use personal pension schemes that were sold as a one way bet.
ReplyDeleteWhen people wake up to what has happened on that front the riots will start I reckon.
"This is phase of discovery and rather than reverting to the tired process of politicising all the blame I myself am looking for the people leaving out the back door with all the cash."
ReplyDeleteI agree this would be the grown-up approach but the problem is the entire debacle has had a political dimension from day one.
Both here and elsewhere, the Governments have gotten fat (politically) from the huge growth of credit (or should that be debt?) and the illusionary feelings of wealth.
America stumbled from a Clinton administration keen to be seen to drag the riches down to those at the bottom - and when it appeared to work we all forgot that true wealth is earned not sprayed around. Then Bush, further primed the pumps to soften the Dot Com and 9/11 wobbles. Even the warning that Enron provided was ignored.
Here, we had a Government that believed it would stay in power just as long as people continue to swallow the line that Labour was a better steward of the economy than the 'other lot'. And while the good times rolled, it wasn't difficult to maintain that fiction. Hence the often repeated lines about 'no more boom and bust' and hilariously 'the best Chancellor since 468 BC'.
The fact is, Labour had no intention of reining in the excesses, beefing up regulation (even when others warned them of the grave risks to the economy) or controlling Government prolificacy. They effectively gambled everything on black but unfortunately its come up red.
But you are right, it wasn't just the Governments at fault. Everyone from the banks to property speculators has sat at the same casino table with their own pile of chips... sometimes, with someone else's chips too.
And the winners?
At the moment those that got rich have been protected by the Government's rigging of the economy... the over borrowed and indebted enjoy artificially low interest rates, the failed bankers keep their jobs and the Government rolls on in the face of despair. Meanwhile, the saver, the ordinary shareholder, the minimum wage worker or Mom & Pop business and those who profited little over the past few years are losing the most.
Ultimately, there will be few leaving the back door with sacks of cash... excepting a few well connected and well publicised persons with their 'thank you very much' pensions; banker and politician alike. But the darkness is coming for the rest of them. The Government cannot now prevent the collapse indefinitely, they've just thrown their last spanner into the works, there's nothing else left.
What comes next will bring down the biggest of them. It ain't going to be pretty but it will have an element of justice.
Alice, I agree - the whole Lloyds fiasco stinks... erm, of something.
ReplyDeleteThe question I think needs asking surrounds a potential breech of fiduciary duty by the management. If this is the case, then this is a straightforward case of serious fraud and needs to be prosecuted. The bit that's tricky is that it seems remarkably unlikely that there could be any successful prosecution if the cabinet are implicated.
John Pickworth: exactly so.
ReplyDelete"I still have some sympathy for shareholders. When they voted for this merger, they had no idea what was really going on. They didn't know, for example, that Lloyds management had no clue about the quality of HBOS's loan book."
ReplyDeleteAlice,
I can not believe that "Lloyds management had no clue about the quality of HBOS's loan book". This is just gross incompetence. Any transaction of this size carries with it some extremely critical risk management and consequent due diligence. Innocent (ignorant) board, not!?! Irresponsible (criminal) actions, yes?!?
What were the shareholders paying the Lloyds management for? "When they voted for this merger, they had no idea what was really going on. They didn't know, for example, that Lloyds management had no clue". Tsk tsk...
Shareholders deserve such management, if they encourage these kind of morally corrupt greedy pigs...!!!
Joseph
Joseph- Lloyds HBOS was a politically brokered marriage. Gordon Brown was saving the world, sorry, banks. Given the turbulent circumstances, Lloyd's would have been very unwise to resist the Government's urge to save HBOS. However you cut it, I don't think you can discount the political dimension (no-one would dismess banker's culpability either). Carry on trying to, and I think I will assume you are one of Dolly Draper's bots.
ReplyDeletePerhaps secretly the real truth is that well managed Lloyds was perceived as some sort of financial threat if it survived the downturn. They could have swallowed up the good parts of HBOS on the cheap and left ALL the debts to the government. Instead it has become very costly and Llyods have lost big time.
ReplyDeleteEd Thomas,
ReplyDeleteI don't see your point at all. You seem to be saying that if a politician asked a banker to drill a big hole in his ship, the banker should? I expect nothing less of two-faced politicians. But, I don't expect professionals paid astromical amounts by the shareholders to run these companies to be ignorant or irresponsible.
Am I angry? Yes, I am. I withdrew from the share markets in good time, and coverted everything to cash. But, my pensions are in negative territory. And they have the nerve to charge me management fees. I blame these bankers all the way... Deflation is good, as I can get more for my money. It is inflation I am worried about.
I am not a politician, nor aligned with any of the political ilk. It is a sorry state of this country that it has been brought to ruins due to political manipulations into every sphere of our life, and we almost accept it willingly. The bankers did too, and both the bankers and these politicians made hay while the sun shined! The current crop of Conservatives are no good either. They supported Labour all the way, and their policies are not much different. We need radical changes, and much stronger leadership than Cameroon... a la Obama! I have never voted Labour. But you are free to assume what ever you think. As I am free to assume what I believe.
Joseph