Shareholders count cost of bail-out deal

THE merger of HBOS and Lloyds TSB was dealt a blow yesterday after shareholders were told that they would receive less for their shares as the government announced plans to take about a 40 per cent stake in the new "superbank".

Questions were also being asked about whether the deal was still necessary and whether HBOS could instead survive as an independent institution.

Opposition parties expressed concern at the wisdom of merging the two banks after Gordon Brown, the Prime Minister, announced the government would spend up to £17 billion taking a stake of up to 44 per cent.

The Liberal Democrats said the merger should be reconsidered, while the Tory grandee Sir George Young also raised concerns with the Chancellor, Alistair Darling, about the "difficult commercial considerations" the merged bank would face.

Alex Salmond, the First Minister, expressed concern that the Treasury could lose massive amounts in corporation tax if future HBOS profits were compromised, while the SNP's Treasury spokesman at Westminster, Stewart Hosie, appeared dismayed that the merger was the only option on the table.

When the initial rescue of HBOS was announced last month, the government said it would waive City competition rules to allow Lloyd TSB to purchase the Edinburgh-based bank, as it avoided the need for a taxpayer-funded bail-out.

But this fuelled immediate concerns about branch closures, thousands of job losses and the effect on competition as the new institution would hold nearly one-third of the UK mortgage market and more than £300 billion of deposits. Under the deal announced by the Prime Minister yesterday, the government would take £3 billion of preference shares in HBOS and up to £8.5 billion of ordinary shares, depending on the take-up by private investors.

In addition, it would take a £5.5 billion stake in Lloyds TSB, of which £1 billion would be preference shares.

At the same time, Lloyds TSB announced that its offer to HBOS shareholders had been reduced from 0.83 shares for every HBOS share to 0.605 shares. This valued HBOS at around £6.9 billion.

Yesterday, the share price in both banks dropped by 27 per cent, with Lloyds TSB ending the day at 162p and HBOS at 90p.

Lord Thurso, the Lib-Dem business spokesman, told The Scotsman that the merger should be halted unless there was a compelling reason that it had to go ahead. He suggested splitting HBOS into its two parts and "nursing" the Bank of Scotland back to health.

He said: "If the rescue that has taken place over the last week had taken place three weeks ago, it's highly unlikely anybody would be trying to push HBOS and Lloyds TSB together.

"Given the importance of HBOS to Scotland's economy, we have to ask the question whether maintaining the merger deal is in the best interests of the country. At the very least it should be revisited.

"We would certainly be looking to see if there was any way in which it could be kept as an independent bank. If it proves to be absolutely necessary, that is a different matter. But I think it's absolutely right to relook at that in the light of the enormously changed circumstances."

Mr Darling yesterday made clear that the government investment in the banks was conditional on the merger proceeding. But he added: "The decision on a merger is a matter for those two boards and, ultimately, for their shareholders."

The First Minister wants to ensure that HBOS investors are protected, but is understood to have concerns about the long-term aspects of a merger – and the lack of competition with two huge banks effectively operating under state control.

The SNP hierarchy would have preferred to see the Treasury make clear that its offer to invest in HBOS and Lloyds TSB was available to both banks separately and not merely once their merger had been completed. "There is something very duplicitous going on," one well-placed source told The Scotsman.


So could independent Scotland afford £32bn banks bail-out?

THE case for independence has been critically damaged by the global crisis, opponents of the SNP claimed yesterday.

As Gordon Brown and Alistair Darling stepped in to save Scotland's two biggest banks, the Scottish Government tried to avoid questions over how an independent Scotland would have coped with the international crisis. A spokesman for Alex Salmond, the First Minister, said he would "not speculate on a theoretical future event" and refused to say whether he believed an independent Scotland could have bailed out its banks to the tune of £32 billion.

However, he insisted the SNP would still try to push through a referendum bill in 2010, even though if people voted Yes to independence, Scotland's two main banks would be owned by a "foreign" UK government.

The First Minister also refused to comment on the fate of Iceland, which, until the collapse of its banking system, had been held up by the SNP as an example of what Scotland should aim for. The Iceland "success story" is still featured on the SNP's website.

However, Mr Salmond said Norway, another member of the "arc of prosperity" hailed by the Nationalists, had been able to come up with a £35 billion rescue package for its banks and was protected by a £200 billion sovereign oil fund. "By contrast with the UK, Norway is a sea of stability," he said. "This crisis has taken place within existing UK constitutional arrangements. It is just fanciful and self-serving nonsense for anyone to pretend that large countries haven't been affected by this."

But opponents say the security offered by the UK being the fourth largest economy in the world is the best hope for the banking system to recover.

David Whitton, Labour's finance spokesman, said: "The SNP should recognise that sum (£32 billion] is the same as the whole of the Scottish Government's annual budget, and undermines Salmond's call for separation."

Anne McGuire, the Labour MP for Stirling, said: "The risks of independence have never been more starkly highlighted. While families, savers and businesses will be relieved that the UK government has stepped in to support RBS and HBOS, they only need to look at Iceland to see what would happen to an independent Scotland.

"Alex Salmond's fantasy economics held out Iceland as a model for Scotland. We can now see how dangerous that idea was. Scottish families, banks and businesses are far more secure as part of the fourth-largest economy in the world."

David Mundell, the Tories' shadow Scottish secretary, said that banks were more likely to seek security in large countries.

He went on: "Of course, Scotland could still be independent, but you have to ask what sort of independence it would be."