ONCE again, the government has got it completely wrong on Lloyds Banking Group. Chancellor Alistair Darling should be happy that the bank is trying to raise private funding to remove itself from the asset protection scheme, a flawed contraption which never really made any sense. Instead, however, the Treasury is turning the screws on the bank, trying to extract at least £2bn in break fees, a material sum given that Lloyds needs to find £25bn or so by printing new shares and selling assets.
The government’s explanation for its behaviour, while at first sight sensible, doesn’t stand up to scrutiny. It says it is acting as if this were a commercial transaction and points out that the announcement that Lloyds would enter the scheme – a deal which was never actually consummated – was tantamount to the state providing the bank with valuable guarantees during a difficult period.
The Treasury is therefore demanding payment for “implied insurance”, in part supposedly to assuage Brussels. Yet while Lloyds undoubtedly gained hugely from the guarantee, the argument misses the point, which is that the bank only needed this insurance in the first place because of a deal it struck with Gordon Brown.
Lloyds is only in the condition it is because – at the height of the panic – it took over the stricken HBOS, to Gordon Brown’s great relief. HBOS would otherwise have been completely nationalised by the government, something which Brown was desperate to avoid at the time. Lloyds TSB was a healthy bank and would probably have fared even better than Barclays and HSBC had it kept its own counsel during the crisis; it certainly would not have needed a bail-out.
It was a case of perceived mutual self-interest: Lloyds wanted to be allowed to transform its share of the UK market and thought it was in a position of strength to ask for a waiver from competition law, which it duly got; in return, the government thought it was getting rid of a hugely damaging problem. Both sides thought they were gaining a great deal; yet both miscalculated spectacularly. HBOS was in a worse state than Lloyds originally expected; and the government ended up having to bail-out two institutions rather than one.
Lloyds also made another terrible mistake: it trusted the government, which is now backtracking on all aspects of the deal and has singularly failed to stand up for the firm in Brussels. The only fair answer would be for the Treasury to cut a decent deal with Lloyds, accepting that it played a part in its troubles. A key consideration should also be to maximise the value of its stake in the firm.
So what now? Eric Daniels, Lloyds’ CEO, is right to be fighting to reduce the size of the break fee; but even at £2bn it still makes sense for the firm to go it alone if it can still raise enough capital. The government should accept a lower fee but try and ensure that it has to contribute as little as possible to Lloyds’ looming recapitalisation. If it were to maintain its 43 per cent stake, it would have to fork out around £5bn in a £11bn offering; it would be good to minimise this (ideally the government wouldn’t take part at all, slashing its stake). Daniels’ aim should be clear: he must ensure his firm is reprivatised as soon as possible. For the sake of his shareholders – including many pension funds – as well as the taxpayer, he must succeed.