Oops, the government has overpaid for a bank again
ABNAmro and HBoS have both brought down the banks that bought them but they are completely different. Royal Bank of Scotland’s mistake was to overpay for a good bank; Lloyds’ error was to buy a lousy bank.
Yet the UK government has made the same mistake as both Scottish banks by paying too much to nationalise them. It is now investing £16bn for a 21 per cent share in Lloyds when the market values the whole of the bank at just £6.5bn.
If you have any banking business in the UK you are probably now a customer of the government. The state banking subsidiaries now include Lloyds, Cheltenham & Gloucester, TSB, Halifax, Bank of Scotland, RBS, NatWest, Coutts plus other financial services companies including Scottish Widows, Clerical Medical, Direct Line, Churchill, IF, esure and the Insight pensions manager.
This affects you, your customers and your staff as well as the tax you will be paying for years.
But while HBoS has done for Lloyds what ABN Amro did for RBS, they are entirely different banks. The Dutch Amro was a well-run bank with containable bad assets. RBS’s mistake was to enter an auction with Barclays that resulted in its paying far more than the bank was worth then, nevermind now.
Lloyds thought it was buying HBoS at a knock down price but didn’t do its homework and bought a bank that is worth less than nothing: it is bust and risks busting the combined Lloyds group.
Yet both bidders made the same mistake of continuing with their purchases when it was becoming clear they were overpaying. RBS proceeded with its offer for ABN Amro during the autumn of 2007 even though the signs of the credit crunch were evident – not least at Northern Rock. A year later, Lloyds cut its initial terms for HBoS but continued to bid even though its target’s shares were falling as fast as its problems were emerging.
The government did not twist Lloyds’ arm to buy HBoS, it merely facilitated the bid by removing competition obstacles. It was the Lloyds directors who initiated the bid and shareholders in both banks who approved it. Yet the government is now on the hook because it paid far too much for its own Lloyds shares in last year’s refinancing and is now doing so again.
To insure the combined banks’ toxic assets it is charging a £15.6bn premium and accepting a 20.9 per cent share stake that will take its holding to 65 per cent (75 per cent when the preference shares are converted). Yet the whole of Lloyds is valued at under £7bn. This is more money straight down the drain, but if it had accepted shares worth even a fifth of that insurance premium it would now own 100 per cent of Lloyds (and still have overpaid).
The RBS chief executive and chairman resigned under government pressure as the price for their expensive takeover. The government is now forced to endorse the heads of Lloyds because ministers have made the same mistake as them.
We know the ministers will lose their jobs in a year’s time but you might like to bet on the Lloyds heads rolling before then.
