HBOS to be rescued by Lloyds TSB?

Once mighty HBOS, the country's largest mortgage lender, may be rescued by arch-rival Lloyd's TSB.

Last Updated: 31 Aug 2010

HBOS shares have lost some 80% of their value since last year, but it is the extraordinary – and largely irrational - freefall in the bank’s shares since the demise of Lehman’s at the weekend that has really had the market spooked. Daily share price losses of over 30% are unsustainable even for such a big and well-capitalised bank as HBOS. 

Dark mutterings of a state-financed bail out began to circulate yesterday, increasing the pressure on the share price even further. From trading at £3 last week, HBOS was down to £1 today, although news of the Lloyd’s deal – probably leaked by the FSA to stop the run on HBOS’s shares – has seen them bounce back a little.

According to the BBC’s Robert Peston (whom those of you with long memories will know is a former MT columnist) the talks may have been instigated by PM Gordon Brown himself getting on the blower to Lloyd’s TSB chairman Victor Blank. Big league stuff. The price? Well it seems it will be nearer £2 a share than last week's £3 trading level, although since the deal has yet to be confirmed this is all speculation.

Even so, let’s all hope the deal goes through – a trade sale is vastly to be preferred to another taxpayer-funded bail out, and one that would make Northern Rock look positively cheap by comparison. Not only does it save us all a lot of money, it also sends out reassuring signals to the market that the normal rules of business are still working – sort of.

And the deal looks like a winner for Lloyd’s – it will create a vast bank whose size and dominance should bolster it against the continuing economic storms, not to mention giving it a huge chunk of the UK market, far larger than it could ever expect to gain under normal trading conditions. Such a giant would not usually be allowed for competitive reasons, but in the circumstances this looks like very much the lesser of two evils. Attempts by the OFT to put the kybosh on the things thus seem unlikely – to do so would be to call down a cataract of opprobrium positively biblical in its proportions onto their own heads.

One final plus if the sale goes through is the punishing losses it is likely to inflict on all those traders who have been so ruthlessly shorting HBOS this week. If you’ve been betting the farm on the share price falling and it suddenly starts to go back up, it’s going to get expensive. Good.

Coming as it does on the same day that the US Federal Reserve nationalised the floundering insurance group AIG - to the tune of $85bn no less – it’s also a prime example of role reversal. Surely the state funded rescue deal is a European speciality, and the market based solution the preferred US model? Not any more it seems. Interesting times we are living in.

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HBOS to be rescued by Lloyds TSB?
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