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Abu Dhabi, UAEMonday 17 December 2018

Former Lloyds executives face the music over disastrous HBOS deal

Government was forced to bail out HBOS a month after Lloyds acquired it

Eric Daniels, former chief executive of Lloyds, arrives to give evidence in the trial looking into the 2009 acquisition of HBOS by Lloyds. Chris Ratcliffe / Bloomberg
Eric Daniels, former chief executive of Lloyds, arrives to give evidence in the trial looking into the 2009 acquisition of HBOS by Lloyds. Chris Ratcliffe / Bloomberg

When I was writing my book, Black Horse Ride, on the Lloyds takeover of HBOS three years ago, I talked to many of the senior executives of both banks on an unattributable basis, and also had access to a lot of the papers presented to HBOS’s board in those fateful days of September/October 2008 when the controversial deal was done.

For the past two weeks, those same executives have been defending themselves in the London High Court against a £550 million (Dh2.6bn) action brought by 5,500 angry Lloyds shareholders who claim they were never told of the parlous state of HBOS. The former executives fiercely deny the allegations, calling them “flawed at every level”, but are facing some pretty tough questioning by skilled lawyers who are delving into every nook and cranny of the deal.

Tim Tookey, former finance director at Lloyds, was first up last week, ably holding his own with the help of the detailed notes he incessantly scribbled in a notepad, and which he seems somehow to be able to find – and interpret – nearly a decade later.

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This week it was the turn of Eric Daniels, the American-born former Lloyds chief executive, who was until the merger, regarded as probably the most conservative banker in Britain. Alone among the big banks, Mr Daniels had kept Lloyds well clear of the sub-prime debacle and wild corporate lending which led to the bankruptcy of Lehman and the fall of RBS and so many others. Why then, he was asked, did he insist on going ahead with the takeover of HBOS, which was on the brink of declaring itself bust?

Before going ahead with the deal, Mr Daniels responded in his taciturn, measured way, he had carefully thought about the risks as well as the benefits – and the benefits won. “We would do it only for the benefit of shareholders. We are not a charitable organisation. We have a charitable foundation for that.”

There was, he added, “real value in HBOS. It depended on what we paid for it.”

The shareholders complain he shouldn’t have paid anything at all, which with the benefit of hindsight may be right. But that’s a judgement call and Mr Daniels and the others are not being accused of bad judgement, but of not revealing all they should have done to shareholders.

On the basis of my interviews and the papers I saw, I think they actually disclosed just about everything they knew. It was what they didn’t know that sunk them. Before the deal, Lloyds reckoned on writing off some £10bn of HBOS’s debts, and in the event had to take a hit of over £50bn.

Lawyers for the shareholders have been particularly keen to get to the bottom of the role played by Gordon Brown, the UK’s prime minister at the time, who personally intervened to allow the merger, which otherwise would never have been passed by the competition authorities.

At a now legendary cocktail party on September 15, 2008, the day after Lehman spectacularly failed, Mr Brown took aside the Lloyds chairman, Sir Victor Blank, and whispered something in his ear. Two days later, Lloyds announced it was taking over HBOS which, without being bailed out, would not have survived to the end of the week.

The implication, put to

Mr Daniels on Monday, was that the prime minister had basically strong-armed the Lloyds chairman into doing the deal. The only alternative, which could have sunk the Mr Brown government, would have been nationalising HBOS, which held the

savings of over 5 million British citizens.

Mr Blank himself will be in court over the next few days to give his own version of these events but I don’t expect him to be critical of Mr Brown’s role. The truth, as both Mr Daniels and Mr Tookey have now confirmed publicly for the first time, is that Lloyds had wanted to do the deal for some time, couldn’t get it past the competition authorities, and believed that the financial crisis would provide them with their only window of opportunity.

Several months earlier Mr Blank had asked Mr Brown to intervene and the prime minister sought the advice of both the Bank of England and the Financial Services Authority.

It was only when Lehman went down and the whole British banking system faced collapse, that he agreed. That was the news he passed on to Mr Blank at the cocktail party that evening.

The other issue which both Mr Tookey and Mr Daniels were asked about, and which will come up again when the former FSA chief executive Hector Sants gives his evidence, is the £7bn of new capital Barclays raised at the time, much of it from Qatari sources. Mr Brown required every bank to raise new capital that week-end and the government stood by to provide it – which it did for Lloyds, HBOS and RBS. Barclays got off the hook by finding it itself – and its chief executive and various other directors now face criminal charges as a result.

The Lloyds directors still seethe over that. In his witness statement Mr Tookey said that he was reassured by financial regulators that all the banks including Barclays were present for emergency funding talks so Lloyds was not singled out, or “stigmatised”.

Mr Daniels says he would not have not gone through with the HBOS deal if he had known Barclays was not also in the government net.

Former Barclays directors including former chief executive John Varley, now facing criminal charges for their role in the fundraising, must now wish they had taken the easier option.

Ivan Fallon is a former business editor of The Sunday Times