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Blank's exit won't end Lloyds' troubles

IT was always Sir Victor Blank, one of the Labour Party&rsquo;s favourite businessmen, who was most likely to be Lloyds Banking Group&rsquo;s sacrificial lamb. It was he, after all, who was the main driver of Lloyds TSB&rsquo;s ill-fated takeover of HBOS; he first discussed the idea of the deal with Gordon Brown over drinks in St. James&rsquo;s, an event later described as the most expensive cocktail party in history for investors and taxpayers by one Tory MP.<br /><br />While Blank may eventually be proved right that &ldquo;it was the deal of a lifetime&rdquo; in that the super-bank will one day be extremely profitable, it also meant a sound bank became a troubled bank and a disastrous dilution of shareholder value for Lloyds TSB&rsquo;s investors. Blank hoped his purchase of HBOS would be seen in the same light as JP Morgan&rsquo;s takeover of Bear Stearns and Barclays&rsquo; brilliant acquisition of Lehman Brothers US; instead, it soon started to look like Bank of America&rsquo;s destructive purchase of Merrill Lynch.<br /><br />Instead of having to nationalise one giant (RBS) and the smaller HBOS, the taxpayer ended up having to take over two behemoths. The world&rsquo;s perception of the City of London would be very different today had Lloyds TSB remained private and independent. Blank should have done proper due diligence; for that he is now paying the price. So his decision to step down, which had become all but inevitable with shareholder outrage mounting, is welcome; but he should leave the company as soon as possible and not wait until June 2010. His staying on in a lame duck capacity is hardly likely to help Lloyds regain its direction and will continue to irritate angry shareholders. A successor must be appointed quickly. Regrettably, this may well rule out Lord (Mervyn) Davies, the trade minister, who would make a great chairman. The Labour government has another year to run so the timing is not quite right, though it may be possible to ask Lord Leitch, now vice-chair, to step in as interim chairman until the election.<br /><br />Eric Daniels, Lloyds&rsquo; CEO, may be next to go, though he should stay at least until a new permanent chairman is appointed. Daniels is a superb banker, having spent most of his life building sustainable and profitable businesses around the world, especially for Citigroup. We shouldn&rsquo;t forget how much good he did for Lloyds when he joined as head of retail banking in 2001 when it was struggling with its purchase of Scottish Widows.<br /><br />Lloyds faces several other challenges. It must get through the next year of recession, impairments, repossessions and asset write-offs. Then it will have to build better relations with its shareholders to allow it to start raising capital privately again and for the government to start reprivatising it.<br /><br />And then there are competition problems. The Tories say they don&rsquo;t want banks to be too big. They are unlikely to wish to break-up HSBC or Barclays; Lloyds, which is state-controlled, would be a much easier target. Daniels has spent the past few months trying to integrate both businesses in such a way that they cannot be separated; but another way of shrinking Lloyds could be devised. And even if the Tories don&rsquo;t legislate, the other big banks are watching the situation closely and will complain to the authorities if they feel the market becomes uncompetitive. In a couple of years&rsquo; time, the clamour to restrain Lloyds is likely to become deafening.<br />allister.heath@cityam.com