LITTLE wonder shares in Scotland's two biggest banks, RBS and HBOS, did not join in the big relief rally on the stock market yesterday.
The FTSE100 surged 324 to 4245.9, a gain of 8.3 per cent. But shares in HBOS slumped 27.5 per cent to 90p, and those of RBS by 8 per cent to a new low of 65.7p. Why?
This is a massive humiliation for Scotland's banks. The injection of government m
oney through preference shares that will yield 12 per cent crushes the interests of the ordinary shareholders.
The government support to Lloyds TSB and HBOS has been structured on the basis that the emergency takeover will go through, while the terms of that takeover have been renegotiated downwards, giving HBOS shareholders just 0.605 of a Lloyds TSB share for every HBOS share they own, compared with 0.83p previously.
This £37 billion bank "rescue" is riddled with inconsistencies, contradictions and unintended consequences from which we will suffer for years.
And I fear that, once the panic and hysteria that overwhelmed markets in the past month have subsided, this deal will create a blazing resentment among shareholders. They will see it as a Treaty of Versailles of finance, with the banks bent double by crushing reparations.
The conditions – seats on bank boards and limits on directors' remuneration – seem fair in the circumstances, but put a huge question mark over assurances that the government intends to maintain an arm's-length relationship with the banks. Bank executives and tens of thousands of staff have both seen their share bonus schemes rendered virtually worthless.
And how arm's length can this relationship be when, as part of the recapitalisation scheme, the banks commit to "maintaining over the next three years the availability and active marketing of competively priced lending to homeowners and to small businesses at 2007 levels"?
How realistic is that? So far this year, bank lending to the household and private non-financial sectors has been just 15 per cent and 39 per cent of the 2007 total. And how desirable, given that it was excessive mortgage lending in the first place that drove the banks to this disaster? Household sector debt servicing reached a peak of 12.8 per cent of income in the third quarter of last year, higher than the 12 per cent reached 17 years ago at the onset of the early 1990s recession. We need more cautious lending, not a commitment to previous excess.
In any event, with the economy suffering from excess debt, the commitment is blind both to the contraction of wholesale money markets and the sharply reduced public appetite for debt. It will worsen banks' balance sheets.
Shareholders in HBOS have particular cause to feel bitter: The downward adjustment of the terms not only renders previous assurances of commitment to the deal and terms worthless, but gives markets an incentive to try to drive the HBOS price down even further. Why stop at 0.6p a share?
And why was it necessary to assume Lloyds TSB and HBOS as one entity, rather than treat the needs of each bank separately? In this it is dismissive of the views of shareholders of both sides on the case for this merger.
As for competition – the vital element needed to maintain and improve customer service – that has been hurled aside as two effectively nationalised banks dominate the Scottish financial and business scene.
This may be seen as a rescue now. As time passes, we will view it as a financial Culloden.
The full article contains 602 words and appears in The Scotsman newspaper.
