Alistair Darling has today been defending the Bank of England’s “lender of last resort” loan to HBOS last October and November.
He has, rightly, said that this type of loan is a key duty of the Bank of England. He also pointed out that HBOS provided collateral for the loan, and that the loan has since been repaid in full. He also defended the decision to keep the loan secret, saying, “The Bank’s assessment at that time was that it was vital that their emergency liquidity assistance operations remained confidential.”
When similar “lender of last resort” support to Northern Rock had been leaked, it had caused a run on the bank, and its collapse. So Mr Darling’s arguments that the loan had to be made, and that it had to be kept secret, are persuasive.
The government are on less solid ground, however, on the issue of the Lloyds takeover of HBOS. Lloyds shareholders, remember, were voting on the takeover at a time when those loans had been taken out by HBOS. However, they were not told about the loans. The existence of them was very clearly material to the takeover.
We have been told that the circular to Lloyds shareholders referred to the bank’s reliance on Bank of England liquidity facilities. This is completely untrue. In fact, the circular specifically stated:
“Save for the £4 billion net cash proceeds raised by HBOS in its rights issue in July 2008 and as disclosed in the sections headed ‘Group Overview’, ‘Divisional Review’ and ‘Outlook’ in Part XIII (‘‘HBOS Interim Management Statement 3 November 2008’’) of this document, which sets out the current trading, trends and prospects of the HBOS Group, there has been no significant change in the financial or trading position of the HBOS Group since 30 June 2008.”
The government have claimed that the Lloyds directors knew about the loans. If that is true, it implies serious allegations about the conduct of those directors. For they continued to back the takeover, and kept the loans secret from their shareholders.
If the government are not telling the truth, and the Lloyds directors did not know of the loans, then the spotlight would move to the HBOS directors. They clearly did know about the loans, and in that case did not disclose those material facts when opening their books to Lloyds.
I am not a lawyer. However, it is clear that either the HBOS directors or the Lloyds directors, or both, were in clear infringement of takeover rules at the very least. The government itself, I presume, was not in breach of those rules since it had no duty of disclosure to the Lloyds shareholders.
I believe the Bank of England were right to provide those loans. I believe the Bank and the government were right to keep them secret. But they, and more especially the directors of HBOS and/or Lloyds, were dead wrong to allow the takeover to proceed.
The takeover could have been very simply stopped by the government. There was no need for them to disclose the loans; they could simply have said that the situation at both HBOS and RBS was so serious that an immediate capital injection by the government was required. Then Lloyds could have simply walked away.
Of course the most serious concern of the authorities was to prevent a meltdown of the financial system. But they could have done that without stuffing the Lloyds shareholders.
The authorities have been very keen to prosecute mortgage and insurance brokers for “miss-selling” endowment policies and pensions.
And all the while they were themselves guilty of miss-selling an entire bank.











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