Lloyds-HBOS deal begins to stink

Going back to basics, HBOS was Halifax - the UK's biggest mortgage lender - and Bank of Scotland - a large retail bank. The Halifax used to be a mutual building society. BoS was always a commercial bank. Halifax, in the terminology of the time, "demutualised." Later, expansionist tendencies led to the tie up with BoS to form HBOS (with the grammatically incorrect capital O).

Massively overexposed to high risk lending, and unable to raise capital to keep going, HBOS was eyed up by Sir Victor Blank, a friend of Gordon Brown. HBOS was heading towards the rocks, Blank's Lloyds TSB made an offer that, just a few days later, was obviously far in excess of the real value of HBOS. But Gordon Brown leaned on various government departments to cast aside all manner of safeguards including competition issues - the new bank has almost half of all UK desosit accounts, some reports say.

But equally, it cast aside regulatory supervision of the deal and the risks that it would pose to Lloyds.

Of course, at the time - less than six months ago - the world's treasuries were all trying to talk down the prospects of global collapse. They were either naive or duplicitous.

The deal was pushed through despite some shareholders even trying to prevent it by court action. The price offered went down - but it was still too high. No-one, it seems, knew just how much too high until last week when news came that HBOS had losses that far exceeded those made known prior to the takeover.

So much for due diligence, risk management and Basel II. Basically, someone stuffed up in the most royal way.

As shares in Lloyds Banking Group - which renamed itself in mid January after the deal was sealed - the Lord Turner, chairman of the Financial Services Authority, the UK regulator, appeared to say in a BBC Interview that palming HBOS on LTSB was not the only option. Lloyds TSB had made a profit of GBP1,000 million - only to find that swamped by the HBOS losses announced on Friday - ten times that amount.

The new bank was in financial trouble even before the deal was finalised and the Treasury said that it would put money in only if the deal went ahead. So it did, with the taxpayer now owning almost half of the enlarged group.

But Lloyds shares have falled more than 60% since the HBOS takeover was announced in October. And they were punched lower today as the scale of the problems at HBOS became clearer.

The government has said that more money can be made available - but if so, it will become the majority shareholder. Shareholders in Lloyds are incensed with some in England saying that this was a "Scottish Stitch Up" with Scot Gordon Brown trying to save face for the Edinburgh based BoS part of HBOS - and presumably also knowing that Royal Bank of Scotland (RBS) was also jumping from the same economic train crash without any idea where it would land.

Whilst the government is saying that it will not go for total nationisation of Lloyds Banking Group, the reputation of the government is not high and denials are often seen as confirmation.

Lloyds' latest advertising campaign is "Britain's most trusted bank." That's not saying much for the industry.