As usual, the news breaks first in the UK:
Lloyds Banking Group last night reached agreement with the government to insure £258bn of assets in a move that will see the taxpayer taking an economic stake of about 75 per cent in the bank.
Three interesting features worth nothing for their potential applicability on the left side of the Atlantic:
The government of a major country accepted the idea that one of its largest commercial banks is well and truly upside down, and has stepped in to take a controlling position. Perhaps this will indicate that you do not need to be some wild-eyed leftist to believe that entities that invest in businesses should get governance rights in exchange. On the other hand, one of the conditions of the deal might give all of us who advocate nationalization pause:
As part of the deal Lloyds has said it will increase lending to mortgage borrowers and small firms. It will offer a further £3bn of mortgage lending and £11bn of small business lending in the next 12 months. A further £14bn is committed for the 12 months thereafter.
The government, however, is making this investment – and its associated change in the government’s legacy preferred shares – outside of the bankruptcy process, and without touching any holding company debt obligations. The folks at Baseline and Mavercon have been commenting on whether the market is beginning to price in some risk of a forced (either through formal restructuring or merely some gentle regulatory pressure) conversion of subordinated debt to equity. Buiter has an impeccable argument, and it is so impeccable that so far the powers that be have avoided implementing it. Today continues the trend.
Thirdly – and this is not only a fun bit of schadenfreude but a lesson for those who preach the wisdom of “independent” boards – this is the UK version of Bank of America/Merrill. Lloyds was somewhere between boring and sleepy when the opportunity to buy HBOS (itself the product of merger that its name implies – Halifax/Bank of Scotland) presented itself. Instead of soberly assessing the future of HBOS’ assets, or even wondering whether, if there was a desire to suddenly become an aggressive lender, Lloyds couldn’t just relax its own standards and steal HBOS’ prospective business instead of buying hundreds of billions of unexaminable pounds of assets with a handshake, Lloyds decided to go all-in.
Once the deal had been announced, the government pressure to close became enormous, even though one would hope that two months’ access to HBOS’ books and two months’ further deterioration of the economy would have made clear to Lloyds’ management that they were making a massive mistake. From the BBC on the day of the shareholder vote:
When the deal was originally announced in September, the government backed the deal using a special national interest clause on the grounds that a collapse of HBOS would have had a disastrous impact on the UK.
Chancellor Alistair Darling said on Tuesday that attempts by any of the banks to renegotiate the £37bn bail-out of the banking sector could prove costly for shareholders.
Costly indeed. And if we grant that the management of a company has the right to destroy its shareholders’ wealth, why not the wealth of its debtholders?
