We now seem to have got to that point with HBOS, as the Lloyds flag was hoisted over the building on the Mound on Monday. The saga is also made all the more topical by the way that it both illuminates, and is illuminated by, the current travails of RBS. But the has already generated a whole new set of Nationalist myths, making it ideal fodder for this blog.
Let's think back to autumn 2008. Fears about the viability of the banking sector were crystallising – in public at least – around HBOS. Its shares led the sector in the downward plunge, reflecting the fact that it had the second-highest exposure to short-term wholesale funding after Northern Rock. Short-sellers naturally began to focus on the stock, although it subsequently appeared that their influence was much less than supposed at the time. As the shares plunged, a run on HBOS deposits also threatened, with a number of large depositors reportedly clearing their accounts.
In short order, HBOS announced that it had agreed a takeover by Lloyds TSB, and the Government announced a £37bn recapitalisation programme for the banks. £20bn of this was for RBS, making for a state holding of around 60%. £11.5bn was for HBOS and £5.5bn for Lloyds, to be implemented after their merger and amounting to a state holding of over 40%. The Government said that it welcomed the LTSB/HBOS merger and intended to override the competition concerns which would normally have prevented such a move, on the grounds that the stability of the banking system took precedence.
For the next few weeks and months, much of Scotland appeared to go bonkers. Strangely, the majority-nationalisation of RBS seemed to cause little stir. On the other hand, the prospective “loss” of HBOS was greeted with consternation and outrage. Some of this was had a rational basis: the prospect of branch closures and job losses arising from the substantial overlap, the likely loss of head office functions in Edinburgh, the reduction in banking competition and a possible reduced focus on the Scottish corporate sector.
On top of this, however, was overlaid a froth of emotion – something reacting to the apparently “iconic” status of HBOS. It seemed important to some that the original Bank of Scotland had been founded before the Union, in 1695; that back in the 18th century it had been seen as a “Jacobite” bank while the younger Royal Bank had been “loyalist”; some seemed to think that some sort of “National Institution” was involved, rather than a medium-sized High Street bank.
The Scotsman launched itself on a “save HBOS” campaign. So did the SNP's “licensed unofficial rentamouth”, Alex Neil MSP, together with Tavish Scott's Lib Dems. Various shadowy alternative deals were mooted, one apparently brokered by Jim Spowart, founder of the HBOS subsidiary Intelligent Finance. Bank of China appeared, and quickly disappeared, as a potential buyer. No concrete alternative offers were ever presented.
One of the more loopy of these was the initiative of the “banking knights”, Sir George Mathewson and Sir Peter Burt, former bosses of RBS and BOS, respectively. Their proposal was that management of HBOS should be turned over to them. Why? On their say-so, apparently. One of the odder features of their approach was their emphasis on the fact that the £11.5bn recap of HBOS was proportionately less than the £5.5bn recap of LTSB, relative to their total capitalisations at the time of their last interim results, months before.
Which is a lot like saying that the patient who's just had a heart attack doesn't need surgery, because he seemed fine at the checkup six months ago.
All through this period, the stock market displayed what it thought by consistently valuing HBOS' shares at a discount to the Lloyds offer of 0.605 of their shares for one of HBOS. And so the deal has duly, eventually, completed, voted through by massive majorities of the shareholders of both banks.
Meanwhile, the CyberNatosphere flew into hysterics. Brown and Darling were castigated as traitors who were deliberately orchestrating the takeover of HBOS as some sort of blow against independence. (The relevance of the ownership status of a mid-sized High Street bank was never made clear.)
Jim Murphy's statement that he was meeting with Spowart to discuss his abortive alternative bid was blown up into some sort of spoiling tactic, as was the anonymous leak of Bank of China's possible interest. (As far as I know, this leak has never been sourced. And in any case, companies with a serious interest in a transaction do not run away if their name is leaked. They say “We do not comment on rumour” and get on with it.) Even the fact that the BBC's Robert Peston is the son of a Labour peer was given hysterical significance by the myth-makers of CyberNattery.
With the benefit of time and a little hindsight, however, we can now garner a better view of what was going on. The excellent BBC Panorama documentary on the issue included interviews with Chancellor Alistair Darling, Bank of England Deputy Governor Sir John Gieve, FSA CEO Hector Sants and Barclays CEO John Varley.
From this it is now clear that while the outside world was focusing on HBOS, it was actually RBS which was the biggest and most urgent concern, and the worry was that its probable inability to roll over its short-term funding could crash not only it, but the entire banking system. It was also clear that bailing out RBS alone would not solve anything, but that an initiative covering all the vulnerable banks was needed.
Thus the recapitalisation programme, the sums of which showed that RBS would become majority-nationalised. Recapitalisation of HBOS on a stand-alone basis would also leave it majority-nationalised, but there was an alternative here in that the Government was aware that Lloyds TSB and HBOS had informally discussed the possibility of a merger. (And there is nothing wrong or suspicious about this; companies do this all the time.)
So the options were:
Recapitalise RBS, HBOS and LTSB on a stand-alone basis. Most expensive option for the taxpayer. Results in two large state-controlled banks.
Recapitalise RBS, merge LTSB and HBOS and recap the merged bank. Cheaper for the taxpayer. Results in only one state-controlled bank, as the state share in the merged LTSB/HBOS would only be a minority.
Let the banks fail and nationalise them for nothing. Cheapest option for the taxpayer. Destroys the banking system, with all that's left of it in state hands, and probably wrecks the economy too.
It shouldn't be too hard to work out why option 2 was selected. By getting LTSB in to do some of the heavy lifting on HBOS, it not only reduced the cost of the exercise but also avoided the competition nightmare which would result from having two big state-controlled banks operating side-by-side, which balanced out the competition concerns which would flow from letting HBOS and LTSB merge.
The Treasury's reported reluctance to give any more than pro forma encouragement to any alternatives for HBOS also looks much easier to understand. The crisis in confidence in the banking sector was so great that nothing less than a fully-funded bid from a strong, existing player would be running great risks; any bids involving uncertain funding, management inexperience or unclear strategy would lack the necessary credibility to calm the market. This applied to all the putative alternative bids which were floating around.
The travails of RBS in the last week – share price collapse, and conversion of the government's preference shares to ordinary ones, taking the state holding to 70% - provide further support for the Treasury's view. Is there any doubt that, if HBOS had been “saved” and recapitalised on a standalone basis, it would not now be in an equally bad or even worse position?
It is also noteworthy that the now state-controlled RBS is embarking on a cost- and job-cutting programme, following in the footsteps of the state-owned Northern Rock, which is in the process of reducing headcount by one-third. Again, it seems pretty clear that a “saved” but state-controlled standalone HBOS would also be cutting costs and jobs – possibly even more so than the merged Lloyds/HBOS will do.
So with hindsight and better information, it looks pretty clear that there has been no machiavellian Nat-dishing strategy at work in the HBOS / RBS saga. Rather a rational attempt to balance out the various competing interests at stake while trying to limit the economic damage as far as possible.
There is, of course, plenty of blame to go round for getting us into the mess in the first place, and as the guys on the bridge at the time Labour have to share more blame than most. But all the other parties bar the Lib Dems were also signed up to the same policy approach – including Alex “light touch regulation” Salmond – and we as individuals have to take some responsibility too.
And we're not out of the woods yet. Continued turmoil in the bank sector could yet mean state control or even outright nationalisation for both RBS and the merged Lloyds group. Which would mean the nightmare of even more of the banking sector being run by the government, with all the competition and conflict-of-interest issues that would entail.
We can only hope.