HBOS - Lloyds TSB: Biggest Rescue Deal in British Banking History
Robert Winnett
he biggest rescue deal in British banking history was agreed last night as the credit crisis reached new heights.
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HBOS, the country’s biggest mortgage lender, accepted an emergency takeover from rival Lloyds TSB following the collapse of its share price. Details will be announced today.
Gordon Brown intervened to try to secure the deal in an attempt to prevent further market panic after three of the most tumultuous days witnessed on the stock market.
However, concerns were growing last night that the proposal may not be enough to quell the turmoil on the financial markets amid fears that other financial institutions could be vulnerable.
As investors continued to show their lack of confidence in the economy, the FTSE-100 index of Britain's biggest companies fell again yesterday, closing below 5,000 at 4,912, its lowest level for three years.
The American stock market also recorded sharp falls despite the Federal Reserve effectively nationalising American International Group (AIG), the world's largest insurer, to prevent it going bankrupt.
The share prices of the Wall Street investment banks Goldman Sachs and Morgan Stanley fell by 26 per cent and 44 per cent respectively as US financial stocks hit their lowest level in five years.
Shareholders have been warned to expect further upheaval on the stock market today.
And there were predictions that this week's chaos may just be the start of the crisis for ordinary consumers.
The bleak forecasts came as:
• Experts warned that the proposed takeover of HBOS would lead to higher mortgage costs;
• Staff at the bank were told that up to 40,000 employees could lose their jobs;
• Unemployment hit a 10-year high;
• The banking industry moved to reassure customers that their savings are safe.
Last night it emerged that the emergency deal had been put together after fears that HBOS customers would begin to take out their savings following the sudden drop in the bank's share price.
If completed the takeover would create Britain's biggest bank with assets of about £1 trillion which would control more than a quarter of the mortgage market.
In normal circumstances the so-called "super monopoly" would be outlawed by regulators fearful of the impact on consumers.
But the Prime Minister has agreed to rewrite competition laws to allow the deal to proceed. The Bank of England also announced that it would continue to offer tens of billions of pounds in government funds to mortgage lenders until at least next year.
City institutions may still attempt to block the deal while millions of shareholders have lost money on their holdings.
HBOS has 22 million customers and employs 74,000 people.
Over the past few days it has come under sustained attack from stockmarket speculators. Its share price has almost halved this week.
The bank and its regulators insisted that it was "solid" but yesterday it emerged that it has been locked in emergency takeover talks with Lloyds TSB.
Senior government officials feared that without help to secure a deal, HBOS might have run into difficulty - a problem that would far outstrip the crisis caused by the smaller Northern Rock.
Economic experts warned consumers to brace themselves for the financial fallout to reach the "real economy". Sir Alan Budd, the Treasury's former chief economic adviser and former founding member of the Bank of England's Monetary Policy Committee, said: "It is difficult to know what is going to happen next as people normally look at what happened last time. But when there isn't a last time what do you say?
"The big question now is whether consumers are going to lose confidence and stop spending."
Lord Lamont, who was the Conservative Party chancellor during the last serious economic crisis in the early 1990s, predicted that unemployment could rise by between 700,000 and 800,000. "I think it is a very serious situation," he said. "We are nearer the beginning than we are to anywhere else. This is like the early 1970s."
He added: "The causes of this are not all international; we have created our own bubble here. It has been obvious for three or four years that something like this was going to happen. I think we might now have a prolonged slowdown. People will struggle; it will be harder to get credit."
Alistair Darling, the Chancellor, said last night: "We are clearly going through a time of significant global turbulence in the banking system. The key thing is to maintain stability in the banking system banner. HBOS has 320 branches in Scotland.
The group has about 1,100 branches and employs 65,000 people across the UK, with a further 10,000 based abroad.
The union Unite warned that any merger could be "catastrophic" for the 17,000 HBOS staff in Scotland.
HBOS also has about two million small shareholders who have seen the value of their holdings drop by more than 80 per cent over the past year and now have little chance of their investments recovering in value.
Under the terms of the deal being discussed, shareholders are likely to receive about £2.80 in Lloyds TSB shares for each HBOS share. HBOS shares closed at £1.47 last night – compared with £9.87 last year.
Another bank, HSBC, is understood to have offered to take over HBOS without paying anything to shareholders.
The attack on HBOS came on another day of turmoil as:
• The FTSE-100 index dipped below 5,000 for the first time since 2005.
• Inflation rose to 4.7 per cent — a 16-year high — as the Bank governor Mervyn King said it may increase to five per cent.
• Alistair Darling said he would act against people seeking to manipulate markets.
• Home owners were warned that mortgage rates may start rising again after lending rates between banks rose to the highest level for six years.
• A warning was sounded that 100,000 jobs in finance and banking could go.
• The Bank of England pumped a further £20 billion into the money markets to ensure banks continued lending to one another.