Top City watchdog Andrew Bailey put “significant pressure” on Lloyds Bank to extend a massive rescue loan to struggling takeover target HBOS, according to documents revealed in a £600m lawsuit currently being heard in court.
Lloyds took over HBOS in 2008 at the height of the global financial crisis.
Almost 6,000 shareholders are suing Lloyds and five former directors for damages, including former chief executive Eric Daniels and former chairman Sir Victor Blank. The claimants allege the directors should have informed investors of emergency assistance which HBOS was receiving from the Bank of England (BoE) and Lloyds itself.
The allegations are strenuously denied by Lloyds, whose opening arguments were heard in court today.
Representing the bank, Helen Davies QC said: “The claimant’s case is fundamentally flawed at every level… It is also legally unprecedented.”
The HBOS acquisition presented “great synergies” for investors, according to written evidence from Daniels presented by the defence. He wrote: “A combination of Lloyds and HBOS was therefore highly complementary and would have the leading market shares in multiple product areas.”
It was a “once-in-a-lifetime opportunity” after the government gave assurances it would waive competition concerns in the takeover, according to written evidence from Wolfgang Berndt, a Lloyds non-executive director at the time.
Richard Hill QC, representing the claimants, told the court that the directors misrepresented the risks of the acquisition by Lloyds to investors, without disclosing that HBOS was receiving assistance from the BoE and Lloyds. The court heard disclosure of the support to HBOS would have made investors unlikely to back the acquisition.
Lloyds gave the loan under "significant pressure" from the BoE, the claimants' documents claim. The BoE “effectively sought to hold Lloyds’ access to market-wide liquidity provision… hostage”, according to the written arguments.
On 10 October 2008 Bailey sent an email to Truett Tate, Lloyds’s then boss of wholesale banking, apparently linking the extension of a £7.5bn loan to HBOS to Lloyds’s receipt of vital liquidity support from the BoE, where Bailey was serving as chief cashier and executive director for banking.
Lloyds and multiple other banks were at the time relying on the BoE’s special liquidity scheme (SLS) as funding markets dried up.
In the email Bailey said: “Lloyds have submitted a request to draw under the SLS today. We have said that we expect the £7.5bn of funding to HBOS to be forthcoming as a condition of further drawing”, according to the claimants’ written opening statement.
In response, Tate asked Bailey if Lloyds was “being coerced into lending into a vacuum as a condition precedent to accessing our original [SLS] headroom”.
“Forgive the emotion but I am again amazed!... everyone is shocked”, Tate wrote, according to the documents. Tate is also a defendant in the case.
Bailey, currently head of the Financial Conduct Authority, is tipped by some as a top contender to succeed Mark Carney when he leaves as governor of the Bank of England in June 2019.
The case continues.