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Gordon Brown steps in to secure HBOS rescue Gordon Brown has intervened personally in attempts to rescue HBOS, Britain’s biggest savings bank, which is in talks to be acquired by Lloyds TSB.
The Prime Minister spoke to Sir Victor Blank, Lloyd’s chairman at a City dinner on Monday night as the bank’s shares tumbled on fears it would be the next victim of the credit crunch.
Shares in HBOS rose as much as 15 per cent after it emerged that Lloyds was in talks to acquire the struggling lender. The Financial Services Authority (FSA), the City watchdog, was forced to issue a statement on the strength of HBOS’s business to stop a freefall in its share price.
Shares in HBOS dropped by more than 50 per cent to just over 80p this morning as panicked investors dumped their stock.
The shares have been savaged by investors since the beginning of the week after Lehman Brothers’ bankruptcy ignited fears about the UK bank’s exposure to the mortgage market and its ability to fund its business.
Both HBOS and Lloyds TSB refused to comment today but HBOS is likely to be forced by the UK listing authority to update the market later today.
Sources close to the situation said the two sides were locked in talks with their bankers with the hope of agreeing a deal today.
“After Northern Rock, the FSA, the Treasury and the Bank of England have really learnt their lesson and they are being absolutely ruthless…in intervening when a bank is in trouble and driving together this type of combination”, one of the sources said.
The FSA was known to be instrumental in the takeover of Alliance & Leicester by Santander earlier this year and Hector Sants himself, the FSA’s chief executive, personally engineered the rescue of Bradford & Bingley, the sticken mortgage provider, by its shareholders.
One of the sources said: “I think Lloyds is in the UK what Bank of America and JP Morgan were in America. They are one of the only well capitalised banks that are a safe haven for troubled assets.”
“The question is on what terms and with what support?” the source added.
Lloyds was lined up last year to step in and takeover Northern Rock but it walked away after the Government failed to offer it the financial support it had sought to press ahead with the deal.
“I don’t think the Treasury will make the same mistake this time,” another source said.
Shares in HBOS fluctuated wildly this morning, rising as much as 15 per cent after the talks with Lloyds TSB emerged. By mid-morning, HBOS stock was up 6.98 per cent to 194.8p.
Lloyds TSB has previously said that it would look at acquisition opportunities as other companies struggle in current torrid financial markets. Lloyds' shares rose 9.8 per cent to 307.35p.
Other sources said that Santander, the Spanish bank that acquired A&L and also owns Britain’s Abbey National, was also being considered as a potential acquiror.
In its statement today, the FSA said: “Since the beginning of the current extreme difficulties in the financial markets, the Financial Services Authority has worked intensively with all major UK banks to ensure they have credible capital and liquidity plans.
“We are satisfied that HBOS is a well-capitalised bank that continues to fund its business in a satisfactory way".
Last night the US Federal Reserve saved American International Group (AIG), one of the world's biggest insurers, from the brink of collapse after America's central bank agreed an $85 billion (£47 billion) bailout of the company.
The bailout sent London's FTSE 100 index of leading shares up 54.8 points to 5,0804 today after closing down 178.6 points yesterday before details of the AIG deal emerged.
The rescue gives the US Government a 79.9 per cent stake in the insurer. The central bank hopes that the rescue loan will halt plummeting financial markets, reeling from the collapse of Lehman Brothers and sale of Merrill Lynch at the weekend.
HBOS is the biggest private savings institution in Britain with £258 billion worth of deposits and 15 million savers.
While almost all banks have been targeted by worried shareholders since Lehman Brothers, the US investment bank, filed for bankruptcy on Monday, HBOS has been hit much harder than any others in Britain.
Standard & Poor’s, the agency that assesses the financial strength of thousands of companies, added to the bank's woes yesterday by saying HBOS was “less well positioned to manage the deteriorating operating environment” than its peers.
Deposits at HBOS are regarded by financial experts as safe because the Government has hinted, though never explicitly stated, that it would guarantee depositors of any British institution in trouble, as it did with Northern Rock last September.
This post has been edited by Bridget on Oct 15 2008, 11:28 AM
From Times Online September 17, 2008 UK unemployment rises to nine-year high Grainne Gilmore
The number of people of out of work rose by 81,000 to a nine-year high in August as the rate of Britons claiming unemployment benefits surged at the fastest rate since the UK's last recession.
Some 32,500 people signed on for jobless benefits during August, official figures showed today, signalling the largest increase since 1992.
Unemployment also rose, reaching 1.72 million people but business organisations said numbers could rise as high as two million by the end of next year to levels not seen since Labour came to power in 1997.
The CBI, the employers' group, said that the number of people out of work could rise by 450,000 by the end of the next year, while the Trades Union Congress said that the number of people out of work for more than a year could surge by 700,000.
Today's figures will add to Prime Minister Gordon Brown's mounting problems as he grapples to maintain control after a second minister quit yesterday while battling to keep a grip on Britain's slowing economy.
Figures also showed today that number of people in employment also fell for the first time in nearly two years as the deteriorating economic conditions took their toll.
Earlier this week 5,000 City workers lost their jobs as Lehman Brothers, once America's fourth largest investment bank, filed for bankruptcy.
Howard Archer, chief UK and of Global Insight, the economic consultancy, said: "It seems inevitable that very weak economic activity and deteriorating business confidence will exact an increasing toll on the labour market over the coming months."
The rise in both unemployment and benefit claimants will come as disturbing news for the Bank of England, which is hampered from cutting interest rates to shore up the economy by soaring inflation, which rose to a 16-year high of 4.7 per cent last month.
The increasing number of people losing their jobs will also raise fears over the future of house prices, which have tumbled by more than 10 per cent since last summer, according to Halifax.
People who can no longer keep up with their mortgage repayments will be forced to accept low offers for their property, dragging house prices down further.
Banks say they have made a fortune in recent years thanks to light-touch regulation.
But the banks may now be in trouble, and today we learned that Halifax Bank of Scotland is in advanced merger talks with LloydsTSB, following uncertainty about the strength of HBOS after a run on its shares.
But what would regulation achieve and would it go against the ethos of capitalism?
What exactly should regulators have stopped the banks from doing? And did banks, in fact, cause the house price bubble by excessive lending?
From Times Online September 17, 2008 Tempus analysis: The unthinkable Patrick Hosking, Banking and Finance Editor
In normal times a merger of Lloyds TSB and HBOS would be unthinkable.
Hammering together the number four and number five banks in Britain would create a superbank with totally unacceptable market power in areas like mortgages, savings and current accounts.
As one senior banker put it today, John Fingleton will be beside himself over this. Mr Fingleton is head of the Office of Fair Trading, which has spent the last few years desperately trying to inject more competition into retail banking, not allowing less.
In normal times, rival banks would be kicking up an almighty stink at this threat to their market positions. In normal times, ministers would hardly be giving their blessing to a deal that looks likely to trigger tens of thousands of job losses.
Financial stability is more important than anything to the economy and to business and consumer confidence. With Northern Rock fresh in the mind, regulators and ministers are determined never to allow things to get to the point where depositors are queuing round the block to pull out their savings.
With the terms of the deal not yet fully agreed, it is too early to come to any verdict about what it means for shareholders. But it seems likely the HBOS investors will salvage something from the wreckage with talk of an offer valuing their shares at a premium to yesterday's close.
If that is the case, it is imperative that no public funds are being put at risk. If HBOS shareholders are to walk away with anything, it's important that taxpayers are not left on the hook.
From the comments:
QUOTE
This is communism. The American Federal government taking over tha financial sector. The same happens in the UK. Milton Friedman will turn in his grave. This is not a solution. This is communism.
Looks more like Fascism to me: State + Corporatism
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^ How to suck eggs: A good indicator of the reality of the "communist" operation of the thing called capitalism is to ascertain precisely what is being socialised in a communistic way. If profits and rewards are socialised, it may well be communism or socialism. If, however, it is costs, debts and downsides that are socialised, it's Fascism.
With the current state of the world and financial markets, it seems like a bit of a no brainer.
Battered high street claims more victims as leading brands fight for survival
• JJB £10m in red; Roseby's calls in administrators • Householders squeezed as stores' costs escalate
* Julia Finch, city editor * The Guardian, * Saturday September 27 2008
The precarious state of the high street was underlined yesterday when the auditor of sports chain JJB warned it could not guarantee the business would survive, soft furnishings group Roseby's collapsed into administration and John Lewis, regarded as a bellwether of consumer confidence, blamed another week of poor sales on upheavals in the financial markets.
Out-of-town furniture specialist MFI is also trying to negotiate a financial lifeline before quarterly rent day on Monday - when store groups have to pay three months' rent in advance. MFI has some 3,000 staff and 185 stores.
Retailers are being battered from all sides. Household budgets are being squeezed and confidence undermined by the continuing financial turmoil and fears of unemployment. At the same time, stores' costs, from energy to imports, are rising rapidly.
The problems facing JJB, which made £8m profit a year ago, emerged as it slumped nearly £10m into the red in the six months to the end of July and its auditors, Deloitte Touche, attached a "going concern" warning about its financial viability. JJB operates 308 JJB shops, 24 Qube outlets and 63 Original Shoe stores.
The shares lost just under 50% to 52.5p, valuing the business at less than £130m, or eight weeks' sales. The chief executive, Chris Ronnie, backed by Icelandic group Exista, paid £190m for founder Dave Whelan's 29% stake in JJB in June 2007 and has been working on a turnaround plan. But like-for-like sales were down 4% over the six months and have since deteriorated further. JJB said the coming months would be "very challenging".
The retailer has a £60m loan facility with Barclays, a £15m facility with HBOS and has just negotiated a £20m emergency bridging loan with Icelandic bank Kaupthing, which it hopes to repay in three months' time from cashflow or asset sales.
The Deloitte warning pointed to several "material uncertainties". JJB, it said, had breached banking covenants and was likely to breach more, meaning its funding was not guaranteed.
The auditor also queried JJB's "ability to repay the bridging facility from asset sales or seasonal cashflows". It said there were doubts over whether JJB could sell assets "at the values projected" and questioned whether the business's forecasts and assumptions were achievable.
Yesterday Ronnie revealed the group had clashed with its bankers at HBOS and its auditors over its finances. JJB, he said, did not know about the auditor's warning until Thursday night, and the partner who signed off the warning could not be contacted.
JJB said it had "theoretically" breached a covenant earlier this year, but had informed Barclays, which had decided the technical breach was irrelevant. HBOS, however, had not been told. When the bank found out it insisted there had been a breach and demanded increased repayments, which will cost JJB an additional £450,000 a year. Ronnie blamed HBOS's demands on the bank's own parlous financial state. "Why do they do it? Because they want more money," he said.
The collapse of Roseby's threatens 2,000 jobs at its 280 stores and its distribution centre in Selby. The firm, which has an annual turnover of £100m, has called in administrators KPMG, which is looking for offers for the business.
Sales at John Lewis stores in the week to September 20 were down nearly 6% on last year, and the retailer said the number of customers visiting its stores dropped abruptly in the middle of the week - the day when Lloyds TSB agreed an emergency takeover of HBOS. Sixteen of the 24 outlets were down more than 12% on last year.
Analysts are braced for more bad retail news next week, when Marks & Spencer updates the market. Yesterday analysts at Investec said they expected "high single digit" sales declines in the fashion and food divisions.
Earlier this year M&S reported £1bn profits for the first time in a decade, but Investec expects the retailer to make only £660m profit next year and £505m the year after "as employment trends drive the consumer into a deeper trench". Investec also expects Sir Stuart Rose, the chairman, to cut the dividend. M&S shares lost 6p to 222p, their lowest level since a shock profits warning in July.
Even Tesco, which is due to publish half-year profits next week, is feeling the slowdown. While its business is still growing, it has put a new range of cheap brands into stores to try to halt the exodus of customers to discounters such as Aldi and Lidl. Spending on its clothing ranges is said to be well short of targets.
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Boom is Bust, - 2008 economic collapse
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