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HBOS: Recession Bites

Robert Peston | 09:12 UK time, Monday, 3 November 2008

This is what struck me from today's announcements by Lloyds TSB and HBOS on how they are trading and on Lloyds' planned takeover of HBOS.

Halifax and  LloydsTSB1) HBOS is reaping a bitter harvest from having piled into lending to property and housebuilding businesses. Its corporate lending impairment charge (a charge for loans that are going bad) has risen by £1.3bn in just the three month to September 30 and is £1.72bn for the first nine months of the year.

2) The charge for mortgages that are going bad remains quite low at £440m for the first nine months of the year. However the trend is distinctly worrying, since the charge for the past three months of £227m is more than the charge for the whole of the first six months of 2008. The biggest contributor to this rise in the impairment charge has been the fall in house price prices (as and when the value of security backing a loan falls, banks are forced to take a charge). The value of impaired mortgages rose 9.4% to £5.1bn, equivalent to 2.4% of the value of its mortgage book.

3) So HBOS is beginning to suffer from the inevitable difficulties that borrowers face when the economy shrinks (what follows is fairly technical. So those who bore easily may want to jump straight to point 5). The only bit of good news is that these rising losses on conventional loans probably come as losses on subprime and other ostensibly tradeable debt-securities may have reached a peak. Those losses due to "market dislocation" were £1.8bn for the first nine months of the year, with just over £700m being incurred in the last three months. They included £457m of losses on exposure to the two bashed-up US banks, Lehman and Washington Mutual. And there's a £150m charge relating to credit extended to Icelandic banks.

4) Another reason why time has been called on massive losses on notionally tradeable debt-securities is that accounting changes mean that banks can now assess in a more conventional way the realistic prospect of borrowers repaying debts, and take charges accordingly, rather than taking the whacking loss implied by the fall in the market price of these investments.

5) There has been a 50% rise to more than £1.5bn in Lloyds TSB's estimate of the cost savings it can make from buying HBOS. That's good news for holders of Lloyds TSB and HBOS shares, since it means bigger dividends in years to come. However it will be profoundly worrying for the 140,000 employees of the two banks, because it implies there could be job losses of perhaps 20,000.

6) Lloyds TSB says it has been told by the Treasury that it will be a "value investor" in the enlarged group (you'll remember that the Treasury has agreed to inject £17bn of new capital from taxpayers into the two banks). That implies the Treasury as a shareholder will neither interfere very significantly with the way that Lloyds lends (as some investors have feared), nor place restrictions on the cost cutting and job reductions planned by the bank.

7) The Treasury has bent over backwards to reassure Lloyds TSB's and HBOS's existing shareholders that they won't be spanked too severely for needing to take capital from taxpayers. In particular, the Treasury has "indicated its encouragement" for Lloyds TSB to redeem as soon as 2009 all of the £4bn of preference shares being bought by taxpayers. What would that mean? Well, Lloyds TSB would be able to resume paying dividends in cash to its shareholders as soon as next year (and see my note, "Bank dividends" of October 15).

8) The assurances Lloyds has won from the Treasury about its commercial freedom and ability to pay dividends may further upset shareholders in Barclays, some of whom feel that Barclays' horror of taking money from British taxpayers prompted it to raise capital on terms that are too expensive from the royal families and state funds of Qatar and Abu Dhabi.

9) The momentum behind the takeover of HBOS by Lloyds TSB looks unstoppable. The top jobs have been divvied up (most of them going to Lloyds executives, as you'd expect in a takeover). Peter Mandelson, the business secretary, has given his approval. And there's a formal timetable for shareholder votes on the deal. The unnamed overseas bank that is allegedly mulling a rival offer for HBOS needs to pluck up the courage to reveal itself if it's to have even the faintest change of frustrating Lloyds (that it hasn't even disclosed its identity to HBOS perhaps suggests that it's more spectator than potential bidder).

Comments

  • Comment number 1.

    Thank you for using the word "takeover". I cannot be the only one being increasingly frustrated by the contiunal use of "merger" (which isn't even allowed anymore under IFRS).

  • Comment number 2.

    Interesting that the idea of conditionality seems to be fading away - the conditions on lending to small businesses and homeowners which were going to be imposed in return for recapitalisation.

    However, perhaps the Treasury has realised that the housing market does not need any additional lending with prices declining; and they have arranged money from the EIB which possibly will substitute for a decline in small business loans from bank's own capital. (http://www.knowingandmaking.com/2008/10/4bn-for-small-firms.html%29

    Do we know whether Lloyds TSB HBOS will have access to the EIB money? Barclays apparently already has it.

  • Comment number 3.

    As experienced with Northern Rock you cannot expect the Government to act honorably.

    The govt provided a loan to Northern Rock that was being repaid but due to political pressure ended up nationalising the bank and then abused its power to set compensation terms to shareholders that were tantamount to theft.

    Now Lloyds HBOS are taking the governments money and all it needs is a political attack by Vince Fable and exactly the same outcome could arise.

  • Comment number 4.

    Robert

    And your point is?

    How much profit did Lloyds and HBOS make over FY 2006-2007 and 2005-2006?

    No Bank or other lender wants to repossess assets they just want the interest paid on the loan.

    Anything that will mean they don’t have to take the charge is what they will strive for.

    Thankfully the government has put the deal in place otherwise we’d be in big DUDU.

    Can’t you put a little more positive a slant on this?

    Or is it doom doom doom.

    You are prooving to be the Baldrick of Journalism

  • Comment number 5.

    I bet those 'overseas investors' [a phrase just guaranteed to provide reassurance in these troubled times..] will be oh-so-grateful to Jim 'The Mouth' Murphy for being unable to keep his trap shut...

    Good article, as ever, Mr Peston.

  • Comment number 6.

    Lloyds pledges to resume dividends in 2009
    Very good news for lloyds hbos ordinary shareholders and comparing what barclays got from gulf sovereign fund investment, Lloyds and HBOS capital deals with HMtreasury is best for the benefits of both UK taxpayers and the Banks. considering the Fareast sharp economic slow down and the possible losses faced by HSBC and Chartered Standand, one thing is clear that HBOS and Lloyds losses can be quantified and the others are still early days and an unknown quantity.

  • Comment number 7.

    It seems to me that the government are desperate to rush through this take-over for a number of reasons.

    1) Merely to make Gordon look good in terms of looking decisive in these desperate times.

    2) To avoid the embarassment of another Johnny Foreigner taking over of a national asset, following the Barclays scandal.

    3) To stick one in the eye of the SNP and Alex Salmond in the build up to the Glenrothes by-election.

    ......meanwhile riding roughshod over the petty concerns of thousands loosing their jobs and all monopolies and anti competition legislation.

    If this government are supposed to be working for the people it makes the mind boggle at what they would be doing if they had it in for all of us.

    BTW.....some Scottish papers are specuulating that there may be a third potential (foreign) bidder.

  • Comment number 8.

    Of course bad debts are rising.

    Brown's direct and indirect Taxes and his inflation policies have screwed the ass of anyone who looks like earning a bit of money or saving for an nest-egg or trying to build a decent pension.

    Economically illiterate Brown policies are focused on 'take' , as opposed to policies which are constructed around 'build'.
    His way leads to economic destruction.

    However the issue I want to raise is the RP comment

    'That implies the Treasury as a shareholder will neither interfere very significantly with the way that Lloyds lends (as some investors have feared), nor place restrictions on the cost cutting and job reductions planned by the bank.'

    Which implies that the Government appointee (probably number dyslexic Jowell) or a Mandelson appointee ( probably somebody with a Yacht)

    won't be running back and forth reporting to Brown.

    They will be doing it all day, just to justify their 'spy in the camp' wages

    'Mr Brown, they want to cut some jobs in Scotland, Halifax or Liverpool'
    'Oh no they won't, there are some marginal votes there'

    'Mr Brown, they want to invest in a new 'Outsourcing to China' project and get a 15% return on their lendings'
    'Oh no they won't, they will invest it in the UK and be hit with my Taxes just like everyone else'

    No Governent interference?
    It isn't in the nature of Brown's meddling, not to interfere

  • Comment number 9.

    In spite of wishful thinking from the unions this deal will lead to hundreds of branch closures, thousands of job loses and a considerably worse service for customers.

    Frankly, this partial nationalization is nonsense. Once government is involved the rules will inevitably change. As it stands, we now have a ridiculous situation with fully commercial banks are now competing with nationalized banks and guess who are lumbered with the toxic debt?

    This situation has thus just made matters worse, since banks know that they can get away with murder and at worst they can expect to be bailed out by the government, as Vince Cable rightly suggests they have nationalized the losses and privatized the profits.

    The problem is that no one is prepared to acknowledge that the system is beyond repair. We have a choice - either adopt a wholly free-market or a state-managed system. You certainly can't have both. A managed market is a nonsense and led to this mess.

    Better still we could start transforming our education system away from an obsession with academic achievement and towards imbuing morals, ethics and values, which are far more important. The system is just a tool and thus only as good as those who operate it.

  • Comment number 10.


    Just wanted to say how much I liked the impression of Peston on "Bremner, Bird and Fortune" last night.

    Superb.

  • Comment number 11.

    What! This un-named 'bidder' has not even revealed himself to Robert Peston?!

    OK let's start guessing..

    BNP Paribas?

    Deutsche Banke?

    Porsche?

    oh and one other name I shall for the moment keep secret (ha ha!)

  • Comment number 12.

    Robert

    I find your comments in point 4 above most concerning.

    "banks can now assess in a more conventional way the realistic prospect of borrowers repaying debts, and take charges accordingly, rather than taking the whacking loss implied by the fall in the market price of these investments"

    What you are saying is that there are further massive losses so far un-accounted for. If mark-to-market is abandoned on a piecemeal basis, bank by bank, just as they want, then where will that get us other than in more chaos.

    How on earth is it expected that confidence will be rebuilt by 'deceiving' investors and fellow banks? I believe that full transparency must be maintained to rebuild confidence and that means full mark-to-market valuation of all assets and liabilities (at least in a note to the accounts.)

  • Comment number 13.

    Good Robert Peston impression by Rory Bemner on last nights show!

    Not enough "ums", perhaps!

  • Comment number 14.

    Bankslickerminusther:

    You missed point 4 - ensuring that certain loans made by HBOS are given favourable restructuring, as per certain taverna discussions.

    Cryptic? Yes.

    Don't ever reveal a person, as slips kan accumulate :o)

  • Comment number 15.

    Who cares about the financial state of the country?

    Peston has finally 'made it', being taken off on Bremner, Bird & Fortune.

    Excellent!

  • Comment number 16.

    #1

    The reality is, there never has been such a thing as a 'merger'. Halifax called the shots from day 1 in their so-called merger with the Bank of Scotland, so the emergence of the Lloyds Banking Group should provide no surprises north of the border.

    Thank goodness Robert says that losses on tradeable debt securities have peaked. The game of 'pass the parcel' supposedly stopped long ago, when the parcel carefully wrapped by Leyman Bros in A3 paper unravelled to reveal an empty box. How long does it take for RBS and HBOS to draw a line under this fiasco. Should we ask the auditors?

  • Comment number 17.

    #12

    The real danger is that the Bank will believe its own accounts and go spectacularly bust 'unexpectedly'.

  • Comment number 18.

    "6) Lloyds TSB says it has been told by the Treasury that it will be a "value investor" in the enlarged group (you'll remember that the Treasury has agreed to inject £17bn of new capital from taxpayers into the two banks). That implies the Treasury as a shareholder will neither interfere very significantly with the way that Lloyds lends (as some investors have feared), nor place restrictions on the cost cutting and job reductions planned by the bank."

    So that's alright then.

    Hands up all those to whom what this implies is that the Treasury has made an announcement of exactly what it would like people to believe, but that it would be most unwise to give it credence unless the Treasury is prepared to put in place irrevocable guarantees that it will be met.

  • Comment number 19.

    Another guess for this 'international financial services company':

    Hong Kong and Shanghai Banking Corporation - our good old Midland bank.

  • Comment number 20.

    "losses on subprime and other ostensibly tradeable debt-securities may have reached a peak. "

    I think, Robert, that is hope over experience speaking.

    HBOS hid the true damage that Grampian, theStructured Investment Vehicle (SIV) created by HBOS to hold the toxic debt it had acquired in the US. It may be moving this stuff around the balance sheet it is still toxic debt, until the US housing market actually bottoms out. I can't see that until May/June 2009.

    This new 3rd Quarter disasters: Lehmans and Washington Mutual, a mere £457M

    4th Quarter disaster:Icelandic banks, "Further impairment losses of around £150m are expected to be taken in relation to Icelandic banks."

    Yes and I still believe in the tooth fairy: I would be pleasantly surprised if that turned out to be only £300M

  • Comment number 21.

    RBS is expected to unveil a further writedown of at least £3 billion in the second half of the year, but RBS is sitting on a possible winfall of £5 billion worth of Bank of China shares which will be available dispose next month.

  • Comment number 22.

    #9 "Better still we could start transforming our education system away from an obsession with academic achievement and towards imbuing morals, ethics and values, which are far more important."

    Oh no !! We can't have that !! It will result in an elitist class and demean the yobs and the spivs !! It will also destroy the jobs of all those people handing out ASBOs like sweeties !!

  • Comment number 23.

    I simply don't understand why the governments hasn't brought in regulation to control the banks.

    They should separate commercial banks and investment banks.

  • Comment number 24.

    #16 "Halifax called the shots from day 1 in their so-called merger with the Bank of Scotland"

    I am sick of this myth of the poor innocent BOS mugged by the evil English! BOS was an aggressive expansionary bank - remember the hostile takeover bid for NatWest? Those who live by the sword...

    We are all in this together - Jobs are at risk all over the UK. Without the prospect of this takeover, HBOS would already have ceased to exist.

    Unfortunately, the huge amounts of public and private money involved in the rescue mean that there will be less for schools, hospitals and other essential investment - all over the UK. We actually need less jobs in the parasitic banking and financial services industries, and more in the productive economy.

  • Comment number 25.

    So what happens to Scottish bank notes issued by RBS and BOS (as well as Clydesdale of course)?

    What if an 'overseas' investor offers substantially more for HBOS and shareholders vote for that solution instead?

    RBS and HBOS having been in part nationalised (when the cash arrives of course) and taken the BoE's shilling, isn't there a case to rationalise (nationalise?) the issue of Scottish notes away from retail banks?

    It would make sense to ensure that the issue of notes is in independent hands, whoever owns the banks.

  • Comment number 26.

    Trouble in the Grampians (he he). Its about time 'Scotland' was removed permanently from the banking lexicon. Ever since 'Derian' they have been screwing things up, jumping on bandwagons that end in the merde.

    By the way, HM Goverment are very busy hedging and qualifying the absurd '2007' condition on banks that accept its pledges - this makes us even more suspicious about the true motives of Barclays over the past week.

  • Comment number 27.

    Robert, Why didn’t the government include residential rental prices in their inflation figures? That would have prevented the whole financial crisis in my view. Rental prices have risen over the past ten years above inflation. If they were included in the Retail Price Index, interest rates would have had to have gone up, slowing the buy to let growth, and preventing the debt and property bubbles.
    This whole financial fiasco was caused by government meddling with the market by excluding THE most important cost factor. If you are going to steer the economy by an RPI compass, the RPI compass must be true. For the compass to be working correctly, ALL the every day costs people have to pay must be included, not just a basket of goods which changes every five minutes depending on what suits the government.
    Rental prices go up and down due to market forces caused by the true supply and demand of property, whether it be bought, sold, rented or left vacant. Property is the biggest cost to a person throughout their life whether the cost be rent, mortgage repayments or opportunity cost if the person has paid off their mortgage.
    In my view, there is currently an intellectual gulf between property and finance that must be bridged for the economy to run smoothly. The” City Boys”, and “Property Boys” have never seen eye to eye. I have been both. By including residential rent in the RPI, the property and banking industries will be linked in a way where this sort of crisis will never happen again.

  • Comment number 28.

    quote "Another reason why time has been called on massive losses on notionally tradeable debt-securities is that accounting changes mean that banks can now assess in a more conventional way the realistic prospect of borrowers repaying debts, and take charges accordingly, rather than taking the whacking loss implied by the fall in the market price of these investments. "


    So creative number shuffling is again going to make the Banks look good............It would appear some things dont change !!!!!

    And as for no government interference, there damn well should be with the amount of money they have committed us all to pay to keep the toxic banks afloat.........

  • Comment number 29.

    As an accountant and ex-banker, I wouldn't take too seriously the exact write-offs and provisions. For a start:
    1. You look at things very carefully when being taken over, as you can be sued if it all looks very different when the new owners are in charge;
    2. I am sure that Lloyds wants them to write off as much as possible so that it writes off as little as possible next year;
    3. No auditor is going to stop write-offs in this climate if the bank wants to make provisions;
    4. Most of the provisioning will be done on the basis if ratios/computer programmes (e.g. percentages of people more than 90 days in arrears), not on the basis of individual assessment of each loan.
    Last, but definitely not least, the idea that accounts are accurate is naive in the extreme. As a fellow of the institute of chartered accountants, it galls me to say it, but the fact is that modern accounts are incomprehensible and very misleading. I don't believe a word of it any more except the cash flow. Profit and loss accounts can be fiddled easily, balance sheets are even worse, so I would stick to the cash if I were you and ignore the rest

  • Comment number 30.

    #27 If Robert Peston had the power to do such a thing, he wouldn't be a "mere" financial editor. He'd have ousted Gormless Gordon as the Chancellor of the Exchequer !!

    #28 I believe that statement was for the consumption of the Middle Easterners whom Gormless Gordon is currently courting !! However, being avid hunters, the Middle Easterners will know all about leopards and spots !!

  • Comment number 31.

    Why cant rebort preston take on the issue of with profits policies that way he can really do something useful ,instead of talking down the markets and banks down every day he has not commented at all on the insurance companies failure to keep promises and goverment is doing nothing about billons lost by same tax payers whose money they are going to use to bail out the banks who in turn owns part of those companies.

  • Comment number 32.

    There's an intersting little aside from all of this talk of the mega-millions which has leaked out of our economies in the West, largely, in our (UK) case through banks. Its no secret that we have all now got a big hole in our pockets; banks and punters alike. This quote from the Indy gives a clue to who is now holding all the pies : Gordon Brown speaking in Saudi Arabia : " He said he thought the Gulf states would now hand over some of the $1trillion (£620bn) windfall they have reaped from soaring oil prices. ".
    Do you SEE the number ??Its more like the stars in the heavens.

  • Comment number 33.

    Point 5 - Robert's estimate that there will be at least 20,000 job losses may end up being accurate BUT let us not forget that banks like all businesses do not keep staff 100% of the time each year.

    All businesses have staff attrition rates - and if the banks have say an attrition rate of say 10% then in Year 1 alone that would mean 14,000 staff will leave - and they don't have to be replaced.

    So let's make this clear - 20,000 does not equal redundancies...

  • Comment number 34.

    #27 bodgitt wrote:

    residential rent in the RPI (or indeed the CPI)

    I had this argument in writing with the Treasury and Bank of England several times (and the related argument of including house price inflation). All I got back was nonsense. Essentially the only excuse was that to be compatible with other developed nations who did not include these things the UK would not include these things. (They found this situation very convenient!)

    As far as I can see, the whole developed World found it very convenient to ignore this aspect of inflation. This kept interest rates too low and the subsequent bubble in asset prices (accompanied by artificial liquidity enlargement via synthetic financial instruments (now more properly recognised as Toxic debt!)) gave rise through equity release to a boom in the economy which of course all governments liked.

    I don't think it was a deliberate conspiracy I think it was stupidity, incompetence and ignorance on a grand scale. The problem is that all of these so-called experts are still running things - the technocrats must go!

    That is the Heads of The Bank of England, The Treasury, The FSA and The Office of National Statistics - all should fall on their swords, if they had any understanding of what they have done by ignoring the often expressed warnings that have received about their policy errors over the last decades.

  • Comment number 35.

    I know this is terribly naive but am I missing something? The business of banks is to secure deposits from investors then lend it out to potential creditors. If they do not lend it, there is no income stream and therefore no business. Surely the continuing reluctance to lend amounts to shooting themselves in the foot in the long term.

  • Comment number 36.

    #24

    I cannot recall saying that BOS was mugged by the evil English, don't be so sensitive!! After the so-called merger my current a/c with BOS was closed and transferred to the Halifax without so much of 'by your leave'.

    I have no remit for those who created this mess in the banking sector. As far as I am concerned some of them should (for the sake of the country) never be allowed to work in banking again!!

    I'm not sure that further investment in schools and hospitals are necessarily wealth creating, but check it out with cousin Jeremy, he will put you right.

  • Comment number 37.

    Savings of £1.5bn or so means huge job cuts.

    That will go down really well in Glenrothes.

  • Comment number 38.

    #29 Financehero

    I wonder how many other ACAs and FCAs there are on this blog? (Rhetorical question! - don't ask don't say!)

    I do also wonder why the Institute has not itself put up any resistance to the dubious accounting methodologies that have become so widespread. As far as I can detect all they have done in recent years is to put up the fees to bail out the staff pension fund!

    Why have the members (of the Institute) let the agenda be set by the big audit firms and their big clients?

    Is it possible that the excessive concentration of accountancy professional businesses and combined auditors was a contributory factor to causing the bubble?

    Should a number of the large audit firms be looking at themselves very much as though they are part of the problem?

    Just as in Enron, accountants may be culpable! Accountants are supposed to exercise professional standards or independence and judgement not only as Auditors, but also as employees of businesses. Why didn't they speak out? Why are they not speaking out now?

  • Comment number 39.

    Regarding points No:6 and No:8 in the article------

    If being a "Value" investor (ie a non-interfering investor ) is such a good idea why wasn't the Government doing it in lots of companies when the Stock Market was doing okay rather than now?----

    It also seems that if "non-interfering" is actually the implied meaning of 'Value Investor', then as a definition it would also seem to suit a "dozy" or "negligent" investor just as well.

    With £17Billion invested in companies run by people who without my help would be insolvent; I think I'd be rather more inclined to reserve the right to 'interfere'.

    Point No:8 shows that even as a 'value' investor the Government can't help but affect the business eco-system ---- perhaps not quite as poetic a vision as the disruption to the climate when a Butterfly's wings flapping in the Tropics directly cause dramatic blizzards in the Arctic-----

    But all the same; the statement: "Don't worry----keep paying the big bonuses guys!" from a 'Value Investor' in one Bank --- causing an anguished chorus of "If we'd only known that we wouldn't have gone to Quatar !!" in the other---is pretty similar.

  • Comment number 40.

    I presume the HBos Union is kicking up a big fuss about the potential job losses?

  • Comment number 41.

    Presumably, everyone is now going to buy Premium Bonds ?

    Pity the prize fund has such a low yield !

  • Comment number 42.

    No closure for B and B shareholders yet ?

    Presumably it will be announced as completely without value in a discreet way sometime.

    And of course where do the Building Companies stand?

    Does the Govt plan their Nationalization ?

    They've spoken about that possibility.

    And why not Nationalise homeowners rather than repossess ?

    Instant Council House with the tennants not having to move, go on lists, etc.

  • Comment number 43.

    I cannot help feeling that if I was a Lloyds TSB share holder I would be particularly upset, mind you with the state of shipping recently maybe they are wise to seek a partner. With the recession only just really biting in and the banks already in a poor state I can see more money being required from the treasury. We will off course have a new expensive government entity which will represent the government’s interest in the banks. With the banks saved for the time being will the focus shift to currency problems and whether the government can issue more debt only time will tell.
    A cynical summaryof Roberts 9 points might read as follows.

    1) HBOS made even worse decisions about lending to the corporate sector than to house buyers.
    2) House prices have not yet stopped falling so more people will be in negative equity and expect even bigger loses.
    3) Sub prime is last weeks news and all sorts of other lending is going pear shaped now.
    4) Even with new rules to allow creative accounting the banks has been unable to hide the losses.
    5) They are going to sack a load of people to save costs.
    6) The government will not stop them closing headquarters in Scotland.
    7) Pensions will dump all their shares in the bank because they no longer pay dividends.
    8) Barclays cannot afford to renegade on deal to pay bonuses to Lehman staff, so gets properly ripped off.
    9) Morgan Stanley might be interested in HBOS.

  • Comment number 44.

    As the banks creditability has seriously declined over the past few months should we really rely on the figures quoted in para 2 & 3 on todays blog ?. No doubt during the past 12 to 18 months, the banks have been suffering from lack of effective management at the top and lack of any prudent guidelines by the ones in charge, so is it sensible to believe that these figures appear to have only deterioated so much in the last few months. Could it not be a case of, now the dire situation is in the public domain they are having to come 'clean' and can no longer hide the fact they have been irresponsible and 'extremely poor' at managing the job and our money, for a long time!.

  • Comment number 45.

    #35 They are still lending. It is just that they are not making any more *NEW* loans. It does not mean that their old loans have magically disappeared. Those loans are still there and their interests still have to be paid and the banks are still(?) making money on those interest payments !!

    However, since they will be making far fewer new loans, they will not need that many people to "sell" these loans and they can save money by getting rid of these salespersons. They still need the tellers, counter clerks, back office people, etc. !!

  • Comment number 46.

    slightly off topic - At least under Sir Fred - RBS shareholders and worker didn't have to be beholden to someone who has completely lost the plot and lost touch with the current plight of the average citizen.

    http://www.dailyrecord.co.uk/news/scottish-news/2008/11/03/exclusive-new-head-of-royal-bank-of-scotland-goes-foxhunting-and-hosts-posh-ball-86908-20864852/

    I don't see any coverage of this in the "national" press?

  • Comment number 47.

    # 39

    I'm a bit surprised about the implicit equating of "value investor" with passivity too. In my experience, value investors are anything but passive. Such investors typically buy shares in bombed out companies, and then set about driving through changes to improve the company's value. Typically, they're looking to take steps that will increase the P/E multiple on which a company trades.

    What sort of steps do they take? There's a whole range of them. Divest businesses that earn below the company's average return on equity; reinvest sales proceeds in growing sectors; or just return cash to shareholders via share buy backs if there are no attractive investment opportunities; cut costs (eg outsource production overseas, reduce support function costs by outsourcing such functions); restructure the capital base (eg increase debt/reduce equity); take companies private.

    One thing value investors tend not to do is just sit around and hope the management that got the company its bombed out rating somehow turn it around. If HMG really does want to be a value investor, it should really think of outsourcing management of its portfolio of banks to a successful fund management firm that has a value bias, or even to a private equity firm. They won't though, as such an entity would probably make changes that would be politically distateful, eg higher staff reductions, branch closures, widening margins, removal of "free banking" etc

  • Comment number 48.

    The whole situation gets more interesting by the day. HM Government are a player in international banking now whether they like it or not:

    On one hand, they try to drag banks into the ridiculous New Labour target culture (2007 lending promise, please ease off on reposessions etc etc), whilst on the other, supporting bonuses for banks that repay the treasury as quickly as possible!

    Scope for even more contradiction, absurdity and general hilarity can only increase as they are drawn further and further into the mess, and pretending to be non-executive 'value' shareholders.

  • Comment number 49.

    You say: "assurances Lloyds has won from the Treasury about its commercial freedom and ability to pay dividends may further upset shareholders in Barclays, some of whom feel that Barclays' horror of taking money from British taxpayers prompted it to raise capital on terms that are too expensive"

    Yes, but what other restrictions might the Treasury have put on Barclays ? Discontinuing tax schemes, for example ?

    It's not all about bonuses and dividends.

  • Comment number 50.

    Amazing isn't it. More write-downs in HBOS. They really are trying to chuck out all the rubbish from their balance sheet. Bet they wouldn't have done that in normal times! Now they are going to treat the staff in the same way, and the public , again, will have to pick up the bill.

    As for Barclays, they are a classic case of the Company being run for the staff and not the shareholders. I wonder what the true write downs on the Woolwich and Barclaycard are? They also seem to have bought themselves considerable time with the Government in order to recapitalise.

    HSBC appears to be the only British bank relatively unscathed.

  • Comment number 51.

    #48 TheNewPonzi

    All Northern Rock staff are getting 60pc of salary bonuses over the next 2 years as a reward for paying the Treasury back by aggressively repossessing people's homes.

  • Comment number 52.

    No 38 John from hendon

    The whole accounting profession has got its head well and truly down. The government won't do anything about that because:

    1. It has only got four accounting firmes left;
    2. The government doesn't understand the extent of the mess that the accounting firms are making of accounting;
    3. As soon as Arthur Andersen lost a single, state-sponsored lawsuit, it went bust almost overnight;
    4. The suggestion that banking accounts cannot be relied upon is just too frightening to contemplate.

    Although the bankers have had all the criticism over the last few months, I would ask:

    1. What is the point of the rating agencies if they obviously cannot assess risk?
    2. What is the point of the accounting profession if it cannot audit accounts? For those of you who think it works OK, you can buy any bank for a massive discount to net assets right now, which tells you all you need to know about the reality of the balance sheet.

  • Comment number 53.

    #35-threnodio

    "I know this is terribly naive but am I missing something? The business of banks is to secure deposits from investors then lend it out to potential creditors. If they do not lend it, there is no income stream and therefore no business. Surely the continuing reluctance to lend amounts to shooting themselves in the foot in the long term. "

    Here's my simple interpretation of the "something" you may be missing. I am not an accountant or banker or ever have been, so please bear with me ...

    A bank only needs a fraction of the money it "lends" (or creates, would be more accurate). Let's say for example that it is a tenth. So if someone deposits 10k, the bank can create up to 90k of debt - or 90k of money that it can "lend". If it lends that to someone at say 10% it is making 9k for doing very little. Nice work if you can get it!

    The 90k it has lent is balanced/backed-up by the "asset" of the signature on the loan agreement . . . the promise to pay or possibly with a call on the collateral pledged, if the debt is not paid back.

    But if the value of the collateral (eg: a house) falls below that of the loan (or the borrower can't pay) then the bank's balance sheet suffers. I has has created more debt than it has assets to back that debt up.

    Let's say, for example, that the collateral falls to 85k in value. When this loss is subtracted from the 10k it has in deposits, the bank's 9 to 1 ratio has gone out of the window. It will then need to raise 5k from somewhere - shareholders, government, sovereign wealth funds or wherever. Alternatively the bank could simply fail.

    I agree that they appear to be shooting themselves in the foot by not lending money. But they may just see it as being preferable to shooting themselves in the head :o)

  • Comment number 54.

    #50 The Hongkong and Shanghai Banking Corporation is a Far Eastern bank with a raggae rhythm (being registered in Bermuda). The Midlands part had long been subsumed into its international operations. As such, it will be less affected by the woes in Britain.

    As a Far Eastern Bank, it can also tap into one of the largest pots of personal savings in the world so they have less problems with liquidity. Far Easterners are well know to save for the rainy *year*, not merely the rainy day !!

    Barclays have also focused on the Middle/Far Eastern money pots.

    All that's left is to see how much the Scots can dig out of their sporrans to prop up RBS !! 5 million Scots at 10,000 quid apiece might *just* keep RBS afloat !! Failing that, Gormless Gordon will grab a hold of it and use it for his political agenda !!

  • Comment number 55.

    #38

    What you must understand is that there really isn't any sort of living to be made, let alone a comfortable one, from outside the mainstream. It's just no good suggesting that auditors and accountants have been negligent for allowing fantasy figures to have been produced.

    If they wanted to be employed in the mainstream, they were bound to tolerate mainstream practices - and the mainstream practice for 20-odd years has been that any perception of value that cannot be totally disproved may be allowed to be assigned that value.

    So we have moved from assets having to be proved to be real, to where they merely have to be not capable of being proved to be unreal. Specifically, in this current fiasco, because no one could prove that house prices were going to fall, the required assumption became that they weren't going to fall, and this led to the masses of overvalued security-backed loans from which the provision for default losses had been removed and declared as profit.

    The tragedy of the times is that it has become too difficult to stand for anything that runs contrary to the mainstream. And majority intolerance is reaching new heights now, as the mainstream, psychologically incapable of accepting that the responsibility is theirs, scour the earth for scapegoats.

  • Comment number 56.

    You have to imagine that since this merger /takeover/ semi nationalisation is being reccommended by Brown, Darling, and the dark one, there is a serious flaw somewhere as far as benefit to the taxpayer is concerned. If not, then it will be the first time the unholy trinity have managed something without shafting the taxpayer. Maybe there are potential subscribers to the Nu labour party funds hidden away in the bowels of Lloyds and HBOS. Nothing would come as a surprise where the " sons of the manse and son of Dracula " are concerned ; from these three no untruth or dodgy dealing is beyond possibility.

  • Comment number 57.

    Thanks to the chronic over-pricing and reckless lending on property in the last few years, whoever takes over HBOS will be taking on a mountain of bad debt that is bigger than the GDP of half the countries on the planet.
    So all I can say to them is...good luck.

  • Comment number 58.

    #36
    #24

    "I cannot recall saying that BOS was mugged by the evil English, don't be so sensitive!! After the so-called merger my current a/c with BOS was closed and transferred to the Halifax without so much of 'by your leave'.#

    I do apologise! :-) But there has been some of this about from north of the border - as well as unpleasant gloating from the south. Most of us have family ties all over the UK, and broadly speaking, what unites us in terms of values is far more important than what divides us - unless you look to create divisions for political reasons.

    "I'm not sure that further investment in schools and hospitals are necessarily wealth creating."

    A decent education system is certainly necessary for wealth creating, as is a healthy population. I will never forgive HMG for allowing prestigious chemistry departments to close down, while rubbish courses proliferate. Less chemists but more MBAs (not necessarily a rubbish course) - where has it got us?

  • Comment number 59.

    I see that NR and B&B are getting worse by the week.
    A story in today's Times suggests that another £3bn of taxpayers money is needed and the more they foreclose the greater the amount required.

    If house prices fall by 30% over 2 years, those that went for a 125% mortgage will have a house twice the value of the mortgage. Who pays?

  • Comment number 60.

    The current situation Halifax Bank of Scotland is of little surprise.Their business plan is as flawed as Northern Rocks was.

    As an aside i was ready to issue a Winding Up Petition against HALIFAX PLC last year having served a Statutory Demand in November 2006.

    The Board of Directors ignored the Statutory Demand and only responded when a draft petition was faxed to head office.

    The current Board are unfit to operate a bank,this is proved by their trading policy.

    An Administration Order would be more appropriate to a takeover by Lloyds TSB,
    who lets face it have too many problems of their own.

    Alexander Curzon

  • Comment number 61.

    Al Jazeera Monday November 03, 2008

    "After a three-hour meeting with Abdullah late on Saturday, Brown said: "The Saudis will, I think, contribute so we can have a bigger fund worldwide."

    A senior British government source, who declined to be named because he was not authorised to comment, said that during the talks the Saudis had been concerned about becoming a "milk cow" to prop up "basket-case" economies in other parts of the world."

    Notice the use of the terms "milk cow" and "basket case" !! They will not blindly offer money to prop up the Western economies without extracting their pound of flesh !! There will be a changing of the guards at IMF soon !! Out marches the arrogant old guards and in marches the wealthy new guards !!

    Perhaps Barclays was wise to have got their deal before the rot began !!

  • Comment number 62.

    #46

    Sorry, I don't understand.

    Is this the same Sir Fred Badloss who has marched the shares to the top of the hill, and marched them down again? What of the plight and misery he has created in the doing of it? He has not even seen fit to apologise to staff and shareholders.

    As a member of the Institute of Chartered Accountants was he not aware that assets and losses, though both debits, are different? Did he honestly believe that the astronomical profits he was posting each year were real?

    If this is your example of a local hero, you are seriously in need of a real role model.

  • Comment number 63.

    [03/11 18:43] US registers huge dip in air importsAMSTERDAM, Nov 3 (GCTL) US air imports declined 15.3 percent in August 2008, compared to the same month in the previous year.

    Seabury Cargo Advisorys analysis shows that this is the largest decrease in US air imports since November 2001. Prior to August 2008,...

  • Comment number 64.

    One major problem that has not been addressed is the major drop in competition in much of Scotland. In most towns and high streets we have Clydesdale, HBOS, LloydsTSB and RBS. As HBOS vanishes then we loose 25% of our local banking competition - even more in some areas where one of the main 4 banks isn't a major player.

    Re the Scottish bank notes - it has always struck me as being unhelpful to visitors to have 3 different lots of Scottish notes and BofE notes in circulation up here. One cannot help but speculate as to why the chance has not been taken to sort this out - unless of course its wait until we all join the Euro in a few years time. Incidentally the new BOS notes have bridges on them!

  • Comment number 65.

    Call me cynical but the Barclays' 'deal' looks even worse now that Lloyds/HBOS terms are clear. Perhaps the Barclays' board didn't instinctively want the help/interfence from the government but it would seem then that having refused such 'help' they singularly failed to achieve any better terms and had to take what they could. Call a spade a spade.

    It seems to me that Barclays' shareholders should now be asking for the board to resign having it would seem to of failed to act in the true interest of the shareholders so spectacularly!

  • Comment number 66.

    Uncle Victor of Lloyds TSB fame is on a silly EGO trip.
    What goodies will Messrs Brown Darling and lord Mandy hand out?

    I WONDER?


    Alexander Curzon.












  • Comment number 67.

    #54 not sure you understand the relevance of a registered office, HSBC is a UK company that pays UK Tax on profits they make globally, they may have a registered office in Bermuda but that will be a legacy from them buying Bank of Bermuda and it suits that type of business to maintain a registered in Bermuda for regulatory reasons. Due to the Global nature of HSBC’s business they have registered offices all around the world such as Curitiba, New York, Hong Kong, Dubai and London.
    The Holdings Company is registered In London and has been since the early 90's where they relocated from Hong Kong (which at the time was also part of the UK) due to uncertainty of changes under Chinese rule.

  • Comment number 68.

    #61 I think that you are correct it is obvious the middle east is sick of being mugged by Western Banks, this was always going to be a cash cow that that no longer wanted to be milked when they saw their main asset depriciate. I aslo agree with your point on the changing of the guard although I am not sure this will fall to the middle east they have been undeniably wealthy for decades now but as royal families in each of these states have got richer and richer the average people have seen very little, I suspect given this that they are not about to start introducing global reconstruction and development plans. A much more likely source will be the Far East, with China leading the way they may initially struggle as their economy shifts from servicing Western manufacturing requirements to being an industrial leader but given that most of their industry and Financials are well capitalised and they are surrounded by entrpenurial economies such as Korea, Taiwan, Japan, Indonesia, Malaysia as well as the fact they have taken massive steps to distribute wealth internally to foster a growing domestic economy that has created a middle class roughly the same size as the entire US Population. Compared to this the cash rich Middle East are more likely to invest in more personal Jets/Jumbos and see who can build the biggest building in the desert, they may possibly makie a stab at turning Dubai into the new Aya Napa. Although as has been seen recently in the papers I am not sure the people of the Middle East are ready for those kind of holiday makers.

  • Comment number 69.

    #52. Financehero
    #55. ExcellenceFirst

    The Institute of Chartered Accountants is in the hands of its members. The members get the policies that they want. If the members want to produce accounts that are virtually meaningless that is what the members will get! (notwithstanding the Companies Acts!)

    The point about there being only four auditors is absolutely true, but in the end professional accountants (just like anybody else) must be prepared to resign if they are asked to take part in what they consider is deception, misrepresentation or false accounting.

  • Comment number 70.

    John_from_Hendon @ 34

    Many people might have wondered precisely why rents and house price inflation were not included in CPI/RPI.

    The omission was so glaring that the Torygraph has devised its own 'real' cost of Living Index.

    I personally had thought that these rents or mortgages, which virtually everybody has to pay unless retired (somebody will have to explain the 'opportunity cost' aspect of that to me) were not included because various costs that the Government bears, such as pensions and public sector wages, are linked to these indexes.

    However, you tell us that the Governments' reasons for the omissions are because 'nobody else {in Europe} does this'.

    That is not a very good reason at all.

    You must do what is honest and true, and therefore ultimately produces a fair and in this case a stable economic outcome, even if nobody else is doing it.

    Wearing my 'good European' hat, I'd say that the EU needs to produce a 'better' CPI as a matter of urgency.

    Although an organisation that year-upon-year cannot produce audited accounts is pretty unlikely to define an honest and true CPI any time soon - if ever.

  • Comment number 71.

    # 62

    One bad leader - however bright a light he may have seen himself as - who chased after the city and then pursued his own interests .. replaced by someone who pursues his own interests ... and foxes .. clawing in big bonuses along the way - all endorsed by the city.

    Even if the new fat cat is interested in his trees on his 350 acre estate (see profiles on other sites) should the staff have to have the differentials between shopfloor and board repeatedly forced down their throats?

    At least Sir Shred lived in Edinburgh and the workers could point at his house ...

  • Comment number 72.

    #68 Logic may say that that should be the case. However, when has logic got anything to do with appointments to positions of power !!

    The Americans will do anything to keep the Chinese off the IMF. The Europeans fear the upcoming Asian manufacturing powers like Korea, Taiwan, Singapore and Thailand. India blocked Pakistan's attempt to affiliate with Asean (for trade purposes) after it did the same !!

    Fear and self-interest wins every time !!

    Everyone talks of globalisation and the global village but as far as I can see, it is still full of tribalism and clannishness !!

  • Comment number 73.

    @ 34 and 70

    The cost of living where you live should be in the inflation index, of course it should - it is, after all, the biggest item in most people's budget. Trouble is, is that if you include it in the form of mortgage rates, you'd be hiking interest rates to bring down inflation and at the same time increasing inflation by the very act of increasing rates. Something wrong about all this, isn't there? ...

  • Comment number 74.

    "4) Another reason why time has been called on massive losses on notionally tradeable debt-securities is that accounting changes mean that banks can now assess in a more conventional way the realistic prospect of borrowers repaying debts, and take charges accordingly, rather than taking the whacking loss implied by the fall in the market price of these investments."

    Time has been called, but the losses have taken place. If they had to sell now, they would not get much. That means holding to maturity. That means backing them with capital and making realistic loss provisions. I do not see much realism out there.

  • Comment number 75.

    #50
    "HSBC appears to be the only British bank relatively unscathed."

    You mean the "Hong Kong and Shanghai Banking Corporation"

    Beautiful British name, you know the rules, beer for the men and a fruit based drink for the ladies.

  • Comment number 76.

    #71

    and presumably aim.

  • Comment number 77.

    #4. the1beard wrote:

    "Robert

    And your point is?

    How much profit did Lloyds and HBOS make over FY 2006-2007 and 2005-2006?

    No Bank or other lender wants to repossess assets they just want the interest paid on the loan."


    Actually no. Do you know how a bank works?

    For experiments sake - The USA and the FED with it's fresh faced, wet behind the ear transparency, due to it's relatively recent creation is a lot easier to dissect :

    "The total amount of expansion that can take place is illustrated on page 11. Carried through to theoretical limits, the initial $10,000 of reserves distributed within the banking system gives rise to an expansion of $90,000 in bank credit (loans and investments) and supports a total of $100,000 in new deposits under a 10 percent reserve requirement"



    An obscene amount of money was being lent out to willing borrowers by the banks using Modern Money Mechanics, (see expansion of money) where deposits made by the customers enabled the banks to create this 'money' for the borrower, who would then have to find real wealth to pay back over various terms and conditions.

    Begs the question. How?




  • Comment number 78.

    Robert - your point 4 - is that the same as saying that instead of having to show the real worth of these mortages in the current market they can make the figures up based on what they guess they might be worth at some stage in the next 25 years?

  • Comment number 79.

    re 29 Financehero and 38 John_from_Hendon --

    The whole exchange makes sense and I couldn't agree more ---- Accountants and Auditors seem to have been able to back quietly away from the scene of the crime and drift away into the night.

    This withdrawal from the scene by auditors...and the increasingly unedifying spectacle of the contortions of those at the top of the Financial services industry and Govt to back away also --- contrast markedly with the actions of Lesley Douglas in resigning her post as controller of Radio 2 over 'phonecallgate'.

    Her speedy assumption of executive responsibility, accepting fully and without hesitation the responsibilities of her position contrats with what we see again and again at present in the Financial Sector.

    Where it seems no-one ever accepts blame nor responsibility for anything---- only the bonuses .














  • Comment number 80.

    #73

    So include asset price inflation by using house prices instead of the cost of financing them - that way you avoid the undesirable feedback loops you describe when mortgage rates shift, but you still get interest rates hiked to stave off housing bubbles.

  • Comment number 81.

    Is it really true that Andy Hornby (current CEO of HBOS and still receiving a salary?) is being paid £60k a month by Lloyds, for six months, to act as a 'consultant' to the acquisition. Given that the government have sanctioned every other aspect of this takeover I assume they sanctioned this as a means of paying Mr Hornby the bonus he was barred from recieving as a condition of the government bailout. Confusing! Perhaps the 1000s of HBOS employees who'll lose their jobs, also sanctioned by the government, will be offerred similar opportunities by Lloyds!

  • Comment number 82.

    "Lloyds TSB has confirmed reports that HBOS' chief executive Andy Hornby has been employed as a consultant at Lloyds TSB on £60,000 a month." 4 Nov 2008.

    How Hornby has the cheek to accept such a contract is shameful. There's 20,000 people facing the axe thanks to Hornby's total mismanagement of HBOS. Make that 20,020 now. Hornby should do the honourable thing and go immediately after the takeover is complete.

  • Comment number 83.

    Correct me if I am wrong but don't RBS hold a stake in Bank of China, and Sir Fred is on that board?

 

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