[Marxism] British govt takes over Lloyds

Fred Feldman ffeldman at bellatlantic.net
Sat Mar 7 16:14:30 MST 2009


Government takes over Lloyds
Taxpayer will own up to 77% of banking group after disastrous merger with
HBOS as pressure grows on board to resign
Jill Treanor, Nick Mathiason and agencies
Saturday 7 March 2009 10.33 GMT  

The government today confirmed it will take majority control of Lloyds
Banking Group, with the taxpayer owning 65% of the voting shares in return
for insuring £260bn of the group's toxic assets.

After days of detailed negotiations the terms of the takeover were announced
by the Treasury, with Lloyds making a commitment to lend at least £28bn over
the next few years.

The government is to insure the bank's riskiest loans and in return the
taxpayer will up its ownership of the bank from 43% to 65% – rising to 77%
when non-voting shares are included.

Alongside taking extra shares and obtaining the commitment to lend to
businesses and individuals, the Treasury will upgrade £4bn of the non-voting
shares it already holds.

The government's fee for limiting Lloyds' losses from £260bn of potentially
bad assets totals £15.6bn. Under the insurance scheme, Lloyds will take the
first hit of up to £25bn on toxic assets before the taxpayer steps in.

The new ordinary shares in the bank will be offered to existing private
shareholders first, with the government committing to buy whatever is left.

Stephen Timms, the chief secretary to the Treasury, told BBC Radio 4's Today
programme: "I think in due course this new Lloyds... is going to be a strong
and successful bank, and the arrangements that we have been able to
facilitate I think will ensure that this is going to be the case."

Asked about speculation that the taxpayer could lose up to £100bn on the
deal, Timms replied: "Precedents would suggest that the loss would be a
great deal less than that, but as I said we just don't know."

Timms rejected suggestions that the prime minister had "destroyed a great
bank" by pushing Lloyds to take over HBOS as it neared collapse.

Eric Daniels, the group chief executive for Lloyds Banking Group, said:
"Participating in the government's asset protection scheme substantially
reduces the risk profile of the group's balance sheet.

"Our significantly enhanced capital position will ensure that the group can
weather the severest of economic downturns and emerge strongly when the
economy recovers. We believe that this is an appropriate deal for our

The company was forced to ask for further support because of the heavy
losses run up by HBOS, which it took over to save from collapse.

The government has already struck a similar agreement with Royal Bank of
Scotland (RBS), which last week posted a UK record loss of £24.1bn. RBS has
agreed a deal to place £325bn of riskier assets such as commercial property
loans and mortgage-backed securities into the government scheme.

The Lloyds deal will heap pressure on the group's senior management who will
face calls to quit for walking into a merger that has dramatically
destabilised the enlarged group. The board met throughout yesterday to
discuss the terms offered by the Treasury.

In a day of frenzied speculation about the delay in agreeing terms, there
were rumours the entire board was prepared to resign because of creeping
government control.

Most of the pressure was on Sir Victor Blank, the chairman, who brokered the
rescue takeover of HBOS last year with the approval of Gordon Brown.

Daniels was also feeling the heat after admitting that Lloyds had conducted
between three and five times less due diligence than normal when deciding
the terms of the takeover.

Daniels is known to have been resisting the prospect of having a bank with a
taxpayer stake above 50%. The government's shareholding of 43% came about
from the £17bn of public funds being injected into the enlarged bank during
last October's bail-out.

The rescue was made at the height of the banking crisis but the extent of
the problems inside HBOS have proved worse than expected. Last week Lloyds
admitted HBOS had made £10.8bn of losses because of problems with corporate
loans. Huge loans to construction firms were the subject of intense
negotiations with government officials. Many are now worthless.

Daniels has been vocal in his dislike of the terms of the preference shares
attached to the bail-out, which carry an interest rate of 12% and an annual
bill for the bank of £480m. Converting the preference shares into ordinary
shares would cut the interest rate but allow the government's influence to

Lloyds failed to persuade the government that its preference shares should
be converted into new B shares carrying no voting rights, so as to keep the
taxpayer's influence below 50%. Lloyds shares had risen 4% to 42p on earlier
hopes that the board would agree terms.

It is understood that Lloyds is concerned about the impact of wider taxpayer
control on its existing shareholders – particularly the 3 million private
investors who own shares in the combined bank. This is the largest number of
private investors on any company's shareholder register and is the result of
the flotation of Halifax a decade ago when members were offered free shares
in the former building society.

Lord Mandelson, the business secretary, said the talks were tricky.
"Obviously when you're making a change like this, introducing new measures
or instruments to enable the banks to recover, it involves a negotiation
about the terms, the pricing and all sorts of conditions that are attached
and that involves a fairly difficult, tough negotiation between the
government and the banks," he told Sky News.

As well as having to reluctantly accept more taxpayer influence, Lloyds will
have to agree to targets to increase lending this year and next, and change
the way it pays its staff, from branch-based staff to bankers offering loans
to major companies.

RBS was the guinea pig for the so-called "asset protection scheme". The
terms being offered to Lloyds are thought to be more stringent because of
the quality of the assets being insured.

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