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Trading Lessons

Will HBOS Bankrupt Lloyds TSB into Nationalisation?

Companies / Nationalization Feb 13, 2009 - 10:27 PM GMT

By: Nadeem_Walayat

Companies Best Financial Markets Analysis ArticleThe shot-gun wedding between HBOS and LLoyds TSB last September in the amidst of the financial markets panic following Lehman's bankruptcy to prevent another Northern Rock nationalisation is increasingly blowing up in Lloyds TSB's face as yet again the reassuring words that bankers say one week turn out to be completely untrue. The Lloyds Chairman was congratulating himself barely 3 weeks ago of how the takeover would result in cost savings of £1.5 billion per year. With today's announcement of a £10 billion loss by HBOS for 2008 shatters the Chairman's illusion and Lloyds TSB's balance sheet, as ever it will not be the bankers that pay the price but the tax payer. Already the UK Tax payer has pumped in capital injections of £18 billion into the LLoyds TSB HBOS group.


The Lloyds TSB share price crashed by nearly 50% on the news to close at just 61p valuing the bank at just £10 billion, which is set against UK Tax payer capital injections of £18 billion which therefore values tax payers £18 billion investment at just £4 billion, or a £480 loss suffered by every UK tax payer. As I have warned several times over the past 6 months, the government propaganda of actually making a profit on these capital injections into bankrupt banks is an illusion which is now being borne out.

Given the size of the HBOS and Lloyds TSB loan book, then that £10 billion loss is just the tip of the ice berg as 2009 will turn out to be a worse year than 2008 in economic terms as £10 billion of share holder equity cannot hope to defend against a loan book well in excess of £1 trillion, where even a further 1% loss due to bad debts would equate to more than total shareholder equity, and given the crash in UK house prices of 20% to date with a further 18% expected as per the UK housing market forecast, I cannot imagine how the bank can hope to survive in its present form.

Bankrupting Lloyds TSB

Lets get one thing straight, LLoyds TSB / HBOS is to big to be allowed to fail, therefore in this crisis there are two measures of bankruptcy without loss of banking operations and they are a. Nationalisation, where in effect the shareholders lose all off their holdings and in effect the bank is bankrupt as far as they are concerned, and b. Capital injections that dilute existing shareholder equity and increase tax payer exposure, in this regard the governments current holding at 43% of the group is pretty close to the magic 50.1% majority shareholding level that to all intents and purposes means nationalisation by the backdoor, and given the £10 billion loss it is only matter of time before further capital is injected into Lloyds TSB / HBOS, therefore it is highly probable that the bank will be effectively become bankrupt as far as shareholders are concerned sooner rather than later as has occurred already with the Royal Bank of Scotland where the governments holding now stands at 78% which is just a stones throw away from full nationalisation and as Northern Rock shareholders have found out, nationalisation results in the 100% destruction of shareholder equity as I warned of before Lehman's went bust (09 Sep 2008 - BANKRUPT Banks Wiped Out by Tulip Backed Securities).

Back on September 18th 2008, the shotgun wedding between Lloyds TSB and HBOS (Takeover) was hailed as a smart move by the mainstream press, but as I voiced at the time ( Lloyds TSB Takeover of HBOS for £12 billion, £2.32 per share ) that Lloyds TSB may come to regret the decision as the economic slump unfolds, which is now coming to pass.

Lloyds TSB / HBOS Depositors

Many customers holding accounts across the two banks are worried that they are now unnecessarily exposed in terms of the FSCS £50k guarantee per financial institution. In this respect I have some good news in that the guarantee is per licence, and as HBOS retains a separate licence to Lloyds TSB which means that savings are guaranteed at £50k per person per bank i.e. a £100k guarantee across both banks.

LLoyds TSB / HBOS Service

The 30 million or so customers of the giant UK retail bank will experience a deterioration in the quality of service as costs are cut and the number of staff that services the client base is significantly reduced this means less branches and less counter staff and therefore longer branch queues and greater difficulty in resolving account issues. Also the merger of the two has yet to be processed in terms of combining operations that was purported to save £1.5 billion per year, therefore expectations are for much disruption in client account operations especially where queries requiring manual intervention to be resolved.

Nationalisation - The Only Solution

The reason why bankruptcy and defacto nationalisation is inevitable us due to economic deflation, as the ongoing credit bubble deflates it leads to deleveraging of liquid asset holdings which drives down asset values further and hence increases the losses on bank portfolios of properties and debt. Especially as during the current severe recession bank losses on corporate loans will multiply as companies go bust.

My own solution as I highlighted last November ( Bankrupt Britain Trending Towards Hyper-Inflation?) is for the systematic nationalisation of all of the retail banks, where each bank is quickly restructured with new management and re-privatised with clear limits on its business plan so as to avoid trading in any Securitized debt and a ban on any money market borrowings which are the prime reason the banks are now exposed to bankruptcy. Other controls should be placed on pay limits across the group so as to prevent the culture of bonuses that has destroyed the banks. Also retail banks should always be limited to operating within the means of their depositor base, which is how 99.9% of the public assumed was the way they operated.

The question that now needs to be answered is how bad will the recession get? My indepth forecast for the UK recession is underway, to receive this in your email in box on the date of publication subscribe to my always free email newsletter.

For more on the impact of deflation, download the world's foremost expert on and proponent of the deflationary scenario, Robert Prechter's FREE 60-page Deflation Survival eBook or browse various deflation topics like those below :

As a closing thought, it was not so long ago that politicians and commentators would ridicule Robert Mugabe for his printing money solution to Zimbabwe's economic problems that has led to the hyper-inflationary collapse of the currency and economy. Now, we hear the politicians, and the Governor of the Bank of England who in a matter of fact way suggest "Quantative Easing" aka "Printing Money" as the solution to Britain's economic crisis, and if you watch the news bulletin's such as the BBC 10 o'clock news, that in a matter of fact way announce the policy of printing money as though it is acceptable economic practice, one gets the impression that the financial and economic situation has reached such crisis levels that pressure is being put on the BBC to downplay the crisis as Money Printing IS the last act on the route towards an hyperinflationary collapse. For possible answers of what to do see my recent article UK Interest Rates Crash to 1% New Record Low - as well as subscribe to my free newsletter for the next article that will expand on how to protect your wealth.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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