The HBOS / RBS saga

One of the things about business stories is that it can be very difficult, at the time, to get a true picture of what is really going on. Simply because the people with the real knowledge are forbidden to talk about it until some time later.

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 18^th 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:

1. Recapitalise RBS, HBOS and LTSB on a stand-alone basis. Most expensive option for the taxpayer. Results in two large state-controlled banks.

2. 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.

3. 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.

Wrong number, ma'am?

Thought I'd celebrate my HTML victory over blogger putting up my comments in black-on-black with a quick post. This one is a bit trivial, but at least it's 20^th century.

Literally and mathematically speaking, Her Britannic Majesty Queen Elizabeth the Second of Great Britain and Northern Ireland, isn't. I.e. she is not the “Second” Elizabeth to hold that title, she's the first. Similarly, Edward VII and VIII were really the first and second, and William IV was the first.

What's going on here is that in all these case the “regnal numbers” used reflect the count of monarchs of England, not that of the UK or Great Britain. Why has this been done? Presumably because England has always massively outnumbered everyone else and the capital and court are usually there, so it was felt that starting the count again would cause too much confusion.

This has always annoyed some people in Scotland. Particularly Nats. To the point that in 1953, the then-leader of the SNP John MacCormick took the Government to court over it. This was the MacCormick v. the Lord Advocate case (1953 SC 396), some side remarks from which are often quoted in the context of the constitution (a matter we will leave for another blog).

The court threw the case out. Essentially they ruled that royal styles and titles are a matter of royal prerogative; in effect, Auntie Betty could call herself Elizabeth I, Elizabeth II, or Brenda Queen of Sheba if she liked.

The case also led to an exchange in Parliament, between a Glasgow (Tory!) backbencher and the then Prime Minister, Sir Winston Churchill:

“ROYAL STYLE AND TITLE

HC Deb 15 April 1953 vol 514 cc199-201 199

§ 46. Lieut.-Colonel Elliot

asked the Prime Minister whether, in advising the Sovereign to assume the title of Elizabeth II, he took into consideration the desirability of adopting the principle of using whichever numeral in the English or Scottish lines of Kings and Queens happens to be the higher.

§ The Prime Minister

The decision to assume the title of Elizabeth II was of course taken on the advice of the Accession Council and the form of the proclamation was approved by Her Majesty's Government.

Since the Act of Union the principle to which my right hon. and gallant Friend refers has in fact been followed. Although I am sure neither The Queen nor her advisers could seek to bind their successors in such a matter, I think it would be reasonable and logical to continue to adopt in future whichever numeral in the English or Scottish line were higher. Thus if, for instance, a King Robert or a King James came to the throne he might well be designated by the numeral appropriate to the Scottish succession, thereby emphasising that our Royal Family traces its descent through the English Royal line from William the Conqueror and beyond, and through the Scottish Royal line from Robert the Bruce and Malcolm Canmore and still further back. Her Majesty's present advisers would for their part find no difficulty in accepting such a principle. From this it naturally follows that there should not in their view be any difficulty anywhere in acknowledging the Style and Title of Her present Majesty.”

So Winnie was saying that although in theory the Crown can do what it likes, in practice the idea is that the higher of the regnal numbers deriving from either the Scottish or English counts would be used. So any future James would be James VIII, and a Robert would be Robert IV.

Sorted, then?

Almost.

I have a suspicion that this little exchange was a put-up job, that Winnie's words were chosen very carefully (lessons perhaps for Mr Salmond in how not to mislead Parliament), and that the real thought process was “just use the English number because that's what we've always done.”

However I can't see that it matters in practice. The matter has now been put on record in the highest forum of the land, and that ought to settle it.

It would be nice if we could see an actual test of the rule, say by one of Princes Charles or William taking the throne as, say, James VIII. Or they could be really daring and use one of the more outlandish Scottish names – anyone for Macbeth II?

Border barminess, part II – “Scotland's stolen 6000 square miles”

Might as well finish up on the “borders” theme, since I've started it.

Having dealt with Berwick and the eastern end of the land border, we now move out into the North Sea.

One can find various lurid Nat rantings about the “theft of 6000 square miles” of North Sea from Scotland – here is an example. Now if the rather hysterical-sounding claim that “In 1999 Westminster moved Scotland's Marine Boundaries from Berwick-upon-Tweed to Carnoustie. Illegally making 6000 miles of Scotland's waters English.” was true, then one might justifiably feel that it was a little unfair. So is it true?

First, we have to note that, as with Berwick, the Acts of Union don't actually say anything about the position of the border. So it is open for the UK Parliament to set its internal boundaries where it likes.

It appears that the situation is complicated by the fact that Parliament has set up (at least) two different sea boundaries for different purposes.

One was set up by Statutory Order in 1987, and defines in which sectors of the UK's surrounding seas Scots, English and indeed Northern Irish law will apply.

On the North Sea side, this line starts off at the coast and heads off north-east, continuing the line of the land border. Then it takes a jog south-east for a bit, before heading due east along the 55°50' latitude line until it reaches the international dividing line in the centre of the North Sea.

The reason for the south-easterly jog is not entirely clear but may well have been deliberately drawn around the Berwick Bank fishing ground, in order to keep that in one jurisdiction.

Another boundary was set up by a new Statutory Order in 1999, specifically intended to apply to fisheries regulation. This sets off on a similar (but not identical – see below) line to the 1987 one, but has no south-easterly jog, but instead gradually curves around to a roughly easterly heading, until meeting the international dividing line some way north of the 1987 line.

According to the then-Scottish Office Minister responsible for the Order, Henry McLeish, the new line was based on the “median line” methodology recommended by the UN Convention on the Law of the Sea (UNCLoS) to define international maritime boundaries – each point on the line is equidistant from the nearest points of the English and Scottish coasts. (I have to confess that I have printed out a map and verified this with a pair of old compasses.)

The new line provoked some genuine dismay and puzzlement since, despite being intended to apply to fisheries regulation, it somewhat less-than-helpfully cuts through the Berwick Bank area.

There is also something of a mystery in the inshore sector. A close examination of the co-ordinates given in the two Orders show that the two lines run almost, but quite, together – there is a gap of around 80m. As far as I know this has never been explained, and may simply be due to more accurate cartography in 1999 than in 1987, and a decision to stick rigorously to the “median line” methodology.

So, where are we with our hysterical Nat claims?

Clearly, the maritime boundaries have not been moved “from Berwick-upon-Tweed to Carnoustie”.

That is claptrap, or even a blatant lie.

“Illegally making 6000 miles of Scotland's waters English.”

Well it's not “illegal”, since the UK Parliament can set its internal boundaries where it likes.

The 1999 line does run well to the north of the 1987 line (except, bizarrely, in that odd little inshore sector where they don't quite run together), and the difference in areas covered may well be 6000 square miles.

But as long as Scotland is part of the UK it makes little or no difference to anything, and if Scotland does ever leave, then the line has been put in the place where international law would most likely put it anyway. So I see no “theft”, either.

There does remain the question of setting up a new boundary line for fishery regulation which isn't entirely suitable for the stated purpose, and which doesn't match up with the 1987 boundary even where it looks like it ought to.

Well, I can only think of it as a price of “devolution in action”. A corollary of the process means that the UK's internal boundaries become more significant than before, and the government of the UK ought to be impartial between its various parts. So applying the principles of international law to the internal boundaries can hardly be objectionable.

The inconsistency between the 1987 and 1999 lines is a bit ridiculous, though. Any chance of a new order to line them up?

Edited to add:

For background, a Scottish Parliament Committee Report and Briefing Note. There's also a full debate, but frankly I wouldn't bother.

Border barminess, part I – Berwick

It's taken me some time to get going on this blog, so I'd better make a start. I had intended to kick off with something just a little bit more modern and topical, but this one has come up recently so I thought I'd give it a go.

Believe it or not, there are nutters in the world who think the fair town of Berwick-upon-Tweed is still part of Scotland. I have no idea why these people think this is important, but they exist.

As usual, the myth is founded on a couple of grains of truth. The first of these is the 1237 Treaty of York, which defined the Anglo-Scottish border as stretching from the Solway to the mouth of the Tweed. This put Berwick on the northern, Scottish side of the river.

However, history moved on, and wars, skirmishes and general unpleasantness continued to occur. Berwick changed hands several times, and was captured by England for the final time in 1482.

There it has stayed ever since.

However, we now come to the second grain of truth which has fed the myth. For several centuries Berwick had a curious and anomalous legal status - “of England but not in it”, under the sovereignty of the English crown and parliament but not formally incorporated into the kingdom. This is reflected in references in legislation to, for example, “Great Britain, Berwick upon Tweed, and the Isle of Man” (from a law passed in 1841).

Indeed, there is one such reference in the English version of the Act of Union:

“to maintain and preserve inviolably the said Settlement of the Church of England and the Doctrine Worship Discipline and Government thereof as by Law established within the Kingdoms of England and Ireland the Dominion of Wales and Town of Berwick upon Tweed “.

There is no corresponding counter-claim in the Scottish version of the Act.

We thus have the English Parliament asserting sovereignty over Berwick, and the Scottish Parliament failing to. This suggests that the Scottish Parliament of the day no longer wished to pursue any claim to Berwick.

Other than this reference, the Acts of Union make no mention of the Anglo-Scottish border. Since the purpose of the acts was to establish a new state with, nonetheless, two separate jurisdictions within it, it might be thought a bit careless not to define exactly what the boundary between those jurisdictions was.

But since the Acts of Union do not define the border, it is thus open for the Parliament of Great Britain (or later, of the UK) to set its internal boundaries where it likes, by simple legislation.

The next significant development is the Wales and Berwick Act 1746, which explicitly stated that legislation applying to “England” included Berwick. (Apologies for sourcing to wikipedia, but sometimes it's unavoidable; making obsolete legislation available on-line is not a priority for anyone, understandably).

Then, in the 1880s the borough of Berwick was incorporated into the county of Northumberland by the Representation of the People Act 1884 for Parliamentary purposes, and the Local Government Act 1888 for local government purposes. (For completeness, the Local Government (Scotland) Act 1889 also defined the Scottish county of Berwickshire as not including the borough of Berwick.)

So, by 1888 we have Berwick legally incorporated into Northumberland for all political, administrative and fiscal purposes, as well as being subject to English law since 1746. Enough, surely, to conclude that by this point Berwick was most definitely part of England.

However, for good measure the Local Government Act 1972 made some revisions to the local government arrangements, and the Interpretation Act 1978 defined “England” as being:

“subject to any alteration of boundaries under Part IV of the Local Government Act 1972, the area consisting of the counties established by section 1 of that Act, Greater London and the Isles of Scilly.“

So if there were any doubts that being “in Northumberland” also meant “in England” these were now finally removed. The Interpretation Act could thus also repeal the Wales and Berwick Act.

The motivation for these final clarifications was no doubt the imminence of the first (abortive) attempts at Scottish and Welsh devolution, which meant that questions of boundaries between jurisdictions would become more significant.

So to recap:

• Berwick became de facto English in 1482;

• It became de jure – by an act of the UK Parliament – subject to English law in 1746;

• It was incorporated into Northumberland in two stages in 1884 and 1888, again by acts of the UK parliament;

• As if being “subject to English law” and “in Northumberland” didn't equate to being “English”, then this was given final legal confirmation in 1978.

Berwick is English.

Edited to add:

Later in 2009 the borough of Berwick is to be abolished into the new unitary county of Northumberland. Although this is in line with a national policy of promoting local government simplification, the actual option chosen was developed and selected locally, in Northumberland.

I'm sure, however, that this will not stop some from claiming this to be the latest Machivellian attempt to stop Scotland recovering "her" territory.

Further edit:

Inspired by some of the comments, I checked to see if the SNP have ever put up candidates in Berwick. They haven't.

The implication is that even the present-day SNP have accepted that Berwick is English.