In the decade running up to the financial crash in 2008 every serious retail bank across Europe was on the look out for the Holy Grail: big, juicy cross-border takeovers that would turn them into European superpowers.
Every few weeks there would be fresh rumours about various bids being plotted by ambitious bank bosses. Every bank chief had his favourite wish-list of potential prey he wanted to buy. They were encouraged to do so by greedy M&A salesmen at the big US banks hopeful of fat fees.
To a man, they were obsessed with the huge cost-savings they hoped could be gained from cross-border banking tie-ups, and the supposed benefits of the single, continent-wide market in financial services across the EU.
British banks were among the most sought after, mainly because the profit margins from retail banking were so much juicier than those earned by most retail banks across the rest of Europe. I remember how the eyes of Michel Pebereau, the steely- eyed chairman of BNP Paribas, watered when he told me in an interview in 2001 that he had both Barclays and Lloyds in his sights.
In the event, most of the mooted mergers remained pie in the sky, mainly because bank chiefs could not decide on even the most prosaic issues such as where to base their HQ, or how the spoils were to be divided up. Many a deal never left the boardroom because the bosses could not decide which of them was to be chairman. Ego and economic nationalism beat ambition.
One of the reasons why bank bosses – particularly the British and the French – were so hungry for overseas prey was because they were constrained in their home market on competition grounds, specifically in the more mature retail banking and mortgage lending. There had already been a flush of mergers at the turn of the decade: RBS had launched the biggest bid in UK history with its £21bn takeover of NatWest while Halifax and Bank of Scotland merged to become HBOS, leaving four to five High Street megabanks dominating the industry.
That’s why both Barclays and RBS were so keen to gobble up ABN Amro – they had nowhere else in the UK to go. Ironically, RBS’s Fred Goodwin’s fatal attraction for ABN Amro nearly brought down the UK instead.
So when the then Prime Minister, Gordon Brown asked Lloyds Bank chairman, Sir Victor Blank, at a drinks party in September 2008 to rescue HBOS, he and the board jumped at the chance. For Lloyds this was a golden opportunity and a strategic opportunity to become a European superpower.
What’s more, Sir Victor told me at the time that he and Andy Hornby, chief executive of HBOS whom he knew from GUS days, had already talked about how natural a fit a merger would be between Lloyds and HBOS. But they both knew such a merger would not be allowed by the competition authorities. HBOS was already the UK’s biggest mortgage lender.
Now though, they had the Prime Minister’s blessing, and promise that the £12bn rescue takeover would not be investigated by the authorities because the merger was essential to saving the banking system from meltdown and avoiding the nationalisation of HBOS: a move which Brown was desperate to avoid. Even the Financial Services Authority gave its nod, saying the deal would “enhance finance stability”.
Which is why Lloyds and five of its former directors are emphatically denying the allegations being made in the High Court that they were bullied into taking over HBOS by government. This bullying claim is being made by 6,000 Lloyds shareholders who are bringing a £600m compensation claim against Lloyds on the grounds that they were not given a true picture of the financial health of HBOS when they voted for the merger to go through in November of that year.
They claim that Sir Victor, and former Lloyds chief executive, Eric Daniels, were forced into the deal on the basis that, if they did not comply, they would have to find £7bn of capital and be subject to a government bailout.
The shareholders are also claiming that other vital information was withheld from them, including an enormous emergency support package from the Bank of England and the Federal Reserve.
Far from being bullied into doing the deal, Sir Victor and Eric Daniels at Lloyds were keen to help the government – and their own long-term ambitions to grow the bank. They did their homework too. According to Sir Victor, 40,000 man hours was spent by Lloyds executives, lawyers and accountants trawling through the books.
Indeed, Sir Victor has always maintained that, as far as he and the board could ascertain, the figures presented to them were as accurate as they could be. As one banker close to the deal said at the time: “They seized this golden opportunity which was presented to them by government.”
But was Lloyds told the full story? That’s the bigger issue yet to be explored. Was the Lloyds board – and its team sent into to crawl all over HBOS – given the full extent of the lending horrors at the Halifax-based bank by HBOS chairman, Lord (Dennis) Stevenson and Hornby? As we know now, HBOS had billions of liabilities in commercial property lending, the full extent of which took years to uncover, and was lending far more than it had on deposit and was relying too much on the money-markets. It subsequently needed a £20.5billion cash injection from British taxpayers to prevent its collapse.
Not enough attention has been paid to the HBOS debacle. Stevenson and Hornby themselves stand accused of putting a “favourable gloss” on the bank’s capital strength, financial position and prospects when HBOS tried to raise £4bn from shareholders in a rights issue in the summer of 2008.
It’s common knowledge that HBOS had funding difficulties from the beginning of 2008, despite the bank’s executives telling shareholders in the rights issue prospectus in June that year, they were a ‘well-capitalised bank.” At the time the HBOS chairman said: “The rights issue is absolutely right and will put us in a competitive position.” That’s not what HBOS or Lloyds shareholders now believe to be the case.
We still need to hear more about what went on at HBOS – and whether there was a a cover-up before and after the Lloyds takeover. Hopefully, more of the details of those explosive few months in 2008 will emerge from the court case now that the Judge has ruled that secret government documents can be used in the trial. For the first time, documents containing detailed advice and regulations from the Bank of England, the FSA and the Treasury sent to each other, and to the banks, through those tricky months during the financial crisis are to be opened up to the public. There is much yet to uncover – particularly the contentious issue of the emergency support packages from the Bank of England but also the Federal Reserve.
Also due to appear in court giving evidence over the coming weeks will be most of the main Lloyds directors including Sir Victor – who has probably unfairly been made the main scapegoat of the Lloyds affair – Daniels, the former finance director, Tim Tookey, the ex-head of retail, Helen Weir, and the former boss of wholesale banking, Truett Tate. Lord Stevenson and Andy Hornby should also be called as witnesses if Lloyds shareholders really want to get the full picture.