Monday, 13 October 2008

No, Mr Blank, I expect you to talk

It was revealed recently that Lloyds TSB was a predator of HBoS as long as two years ago - including the Chairman of Lloyds TSB apprently indulging in the speculation which he freely acknowledges brought down HBoS:
"I was with a business delegation that went to Israel and Palestine with the prime minister. On the plane back we were talking about the economy, the banking sector and so on, and I put to him that if there was a need for consolidation or a major rescue ... that we couldn't have a bank like Northern Rock that was sitting becalmed for nine months while the competition investigation went on,"

"The next one people were talking about was HBOS,"

Does he think short-sellers are to blame for the demise of HBOS? "I don't know
if it was a victim of short-selling but it does seem to have been the victim of
the most extraordinary market speculation, which didn't help them."

Quite. Gordon Brown's ponderous hand also weighed heavily upon the Scottish bank:
Blank attended a dinner where Brown was also a guest. The PM brought up the subject. "He said, 'if you think you want to advance on this, we will deal with the competition issues'," Blank recalls.

We now know that Lloyds TSB was not in any better position than HBoS, so the questions about who was behind the rumours that forced down HBoS shares and why become very pointed.

We need to be hearing from Mr Blank just exactly how much he used his position to murmur the bank which was his opposition and which, he freely admits, he would like to take over if only those pesky regulators weren't in the way. It would be interesting to know, as well, whether dealers working to or for Lloyds TSB were involved in the short-selling (or, indeed, whether any HBoS dealers were involved).

Before any merger gets the "I'm not looking" treatment from the regulators, we have to have a look at the real machinations behind the farce.

We currently have the quite extraordinary position where the Government has offered a deal to the two banks - but only if the merger goes through. Is this because the investors had looked at the 'merger' and thought it to be less than a good deal? Is this the UK Government blackmailing institutional shareholders into giving HBoS over to Lloyds TSB after those shareholders have said 'that will be chocolate, mate'?

Part of the deal includes the removal of senior management - except Victor Blank, why would that be?

Another part of the deal is that the banks must return to the dodgy lending practices that got them into this trouble in the first place. Who's the genius who thought that that was a good idea?

Rather than us having to wait 30 years to get the records out of the vaults and then condemn a Government that will seem to have been photographed in sepia (or use Freedom of Information legislation just to bang our collective heads against the wall of the poor UK legislation), let's get all the details out in the open now, before this dodgy deal goes through, and let's make sure that the deal is properly scrutinised by the regulators.

Most important of all, let's have a guarantee from the Chancellor that HBoS will receive the same considerations as other banks if the deal is not approved by its shareholders - if Government is to involve itself in business deals then it must do so with an equitable hand.


Scott @ loveandgarbage said...

"We now know that Lloyds TSB was not in any better position than HBoS"

The capitalisation proposals today, and the valuation of shares in both companies suggests that while Lloyds TSB is seeking some support HBoS is more poorly capitalised, and as the auctions of credit default swaps will crystallise - is more heavily exposed to liabilities on these (given the heavy use of CDS and securitisation by HBoS in comparison with some other lenders). I wondered if you could explain this particular statement.

Calum Cashley said...

Well, a worse Tier 1 ratio:

Plunging share price:

Lloyds TSB had to follow HBoS in securitisation in June:

Lloyds TSB's Fitch ratings are on the slide:

HBoS Fitch ratings aren't good but are stable:


Scott @ loveandgarbage said...

Thanks for those links.

It's worth noting that securitisation is not of itself an ill so the securitisation by Lloyds is not a bad thing of itself. Securitisation is a good way to raise money. Small business does something similar regularly through debt factoring or invoice discounting. However, the factor will pay at a discount to take into account the risk of bad debt and to give a de facto interest payment. Securitisation is glorified factoring on one view: a mechanism whereby the rights to payment are packaged into products that can be sold to investors. Where the loans packaged up are good loans (and can be shown to be such) this is a good deal for investors and the financier arranging the securitisation. However, where the debts are not good - investment will be at a lower rate (taking the discount similar to the factor) or require insurance. It is the latter that causes the big problem for HBoS. because HBoS has high CDS liabilities which are about to crystallise. This is the exposure that seemed to make HBoS more of a market risk than Lloyds TSB to most financial commentators.

Calum Cashley said...

Nope, you're entirely wrong there in a kind of total way. Any decent Scottish conveyancing lawyer will be able to explain securitisation to you - because it's what we use rather than the poor version of mortgages used in England.

Here in Scotland the Standard Security is used - the creditor owns the heritable property until the debt is discharged (Conveyancing and Feudal Reform Act 1970) which allows the creditor to use the Heritable Securities Act 1894 if necessary. In England it's "a charge by deed expressed to be by way of legal mortgage" where the debtor owns the property and the creditor only has negotiated rights - which is why court actions in England to recover property are so much more bruising than actions in Scotland (in part).

Mortgages in England are shakier debts than mortgages in Scotland, by and large, and LTSB holds a higher percentage of its mortgages in England than does HBoS (a parallel being that Halifax mortgages pre merger are held more in England than BoS mortgages pre merger).

When the institution seeks securitisation of assets they are basically remortgaging on a grand scale in the Scottish style - or they are borrowing PFI style depending on what means they use. If they use the assets as collateral against borrowings then they're in the mortgage area.

The other method involves selling the assets to a Special Delivery Vehicle, isolating the institution from the income stream of the assets, the SDV will sell debt securities and use the money to pay the original institution for the assets.

You may have heard about this method as a way of spreading sub-prime lending...

Scott @ loveandgarbage said...

Mr Cashley

As you have not approved my comment relating to bank securitisation considering aspects of your reply I have posted same on my livejournal at



Calum Cashley said...

How rare for you.

I've approved all of the comments you left here.