Why reveal RBS, HBOS secret at all?
Nevermind that the Bank of England kept secret for a year its massive loan to HBoS and RBS (LON:RBS), why on earth did it choose to break its silence on the day Lloyds Banking Group (LON:LLOY) announces its record rights issue?
The revelation could have ruined the Lloyds Banking Groups capital raising.
As it happens, the stockmarkets immediate reaction was to welcome the £13.5bn rights issue designed to fill the black hole caused by Lloyds TSBs takeover of HBoS, but this issue still has a long way to run.
The Bank is the lender of last resort and in October 2008, after Lehman’s collapse, HBoS and RBS had tried everywhere else and needed money desperately.
The £25bn borrowed by BBosS from the Bank was much more than its stockmarket value. If the Bank had not provided the funds, HBoS would have gone bust taking the rest of the banking system with it; but announcing the emergency funding would likely have caused a run on the bank that had the same effect.
So the Bank had sound reason for keeping the loan secret: it had no real choice. However, Lloyds TSB did have a choice. Its directors agreed to take over the rival as a commercial deal. They reduced the terms once as HBoS’s troubles became clearer but in reality, HBoS was not worth a penny and the fact it had to borrow from the Bank was a strong indication its problems were bigger than it admitted in public.
The Bank of England had good reason to rescue HBoS, but Lloyds had no reason to save it. It could have left the job to the Bank, seen it nationalised like Northern Rock, and would not now be 43 per cent owned by the government and suffering such huge losses is has to raise another £22bn of capital on top of last winter’s £17bn.
But while the Lloyds directors knew of the Bank rescue, shareholders did not, and it is doubtful they would have approved the HBoS takeover is they had known. There was clearly a false market in both banks’ shares in autumn 2008 and the takeover and capital-raising documentation must surely constitute a false prospectus. And while Royal Bank off Scotland repaid its £35bn emergency loan before its December 31 year-end, the HBoS debt should have appeared in the year-end accounts.
A class-action surely looks likely. Anyone who bought either HBoS or Lloyds TSB shares, anyone who took up the share offers (not many, hence the state’s 43 per cent) and anyone who voted for the merger has lost. Yet whom do shareholders sue?
Action against Lloyds Banking Group is suing yourself; suing the Bank of Treasury will be a big task. And can we trust the Financial Services Authority to investigate the false market when the regulator was a party to this deceit?
If the Bank’s timing in revealing this secret was ill-timed because of the rights issue it is equally badly timed because Lloyds is holding another shareholders meeting just two days later to approve the capital raising. Shareholders should use it to give their board a very uncomfortable time.
But now we know the Bank is not totally open and honest, why should we ever again believe it? Who knows if a bank – Lloyds even – is not being propped up even now? If the Bank was right to act in secret when it rescued HBoS, perhaps it would be right to keep the secret for ever. The question isn’t why it waited a year to tell all, but why it told at all.
