Wednesday, 11 November 2009

A Sad Demise

Would you want to be a shareholder in Lloyds Banking Group right now?

Those who own Lloyds shares will wistfully remember the good times of a steady bank which paid good dividends, made some shrewd acquisitions and maintained a good share price. Theirs were a share renowned for a good long term performance and a company for its sensible management.

Just about a year ago, all that changed. From a peak of £8.20 the shares of the bank dropped to a low of 25p. In the face of the credit crunch, the bank made its most disastrous move in its long history when it made a bid for the beleaguered HBOS, who had been guilty of some of the most reckless corporate lending amongst other sins. As the bank suddenly realised the extent of HBOS' woes and the incredible strain on its own finances as the crunch took hold, it frantically tried to renegotiate the deal and even back out, despite the fact that EU competition rules were temporarily waived to allow the new group to own a whacking 28% of the UK mortgage market.

It was a collision of management incompetence and all consuming greed.

Then in stepped the final bunch of meddlers - the Government. It is widely believed that the PM himself personally intervened at the 11th hour to urge this merger to go through. Incredibly, the handshakes had barely stopped when Lloyds saw the folly of what they had done, tried to mess with the price of the deal and then went cap in hand to the Government to shore up the group's finances in order for the deal to go ahead and for the two companies to survive. As the whole mess unravelled, the taxpayer came to the rescue and took a 43% stake in the new group to stop BOTH banks sinking. The shareholders at Lloyds, after years of content, suddenly saw their investments collapse to virtually nothing.

So here we go again. Today, Lloyds launch the biggest rights issue in history. A further £21bn is required to shore up its capital which is only around £22b now, principally so that it does not have to join the Asset Protection Scheme (APS), the euphemistic name for the financial cesspit where toxic debt is to be parked and underwritten, in full, by the taxpayer - the premiums for which, Lloyds deem too expensive.

It's remarkable. They deem the insurance premium for APS too expensive - less than a year ago, they would have paid anything to be saved. As taxpayers, we should be happy, I suppose. Lloyds was always a dedicated stock market performer, so it would make sense to see it steadily rise again so that our 43% can be sold and returned to us. In the short term we will need to pay a further £4bn as our part of the rights issue so our stake rises but we would all believe it is money well placed?

That's if the management know what they are doing. Remember, the same bunch of individuals, which is a truism of all the management of all banks with the exception of RBS, the Lloyds Chairman and Andy Hornby of HBOS, are running the show. The daft investments they all made are being made again across the board as banks feed on the frenzy of a nicely depreciated market courtesy of the taxpayer. Across the globe, banks are accruing nice bonus pots for their good work and in the Sunday Times, the CEO of Goldman Sachs claims that his bank is doing 'God's work'.

Many economists are now coming to the conclusion that it would have been better and cheaper in the long term to have just guaranteed the deposits of savers, created a central mortgage bank and let the rest go down the swanny with the idiots who took them there with it. We would not be talking about bonuses and reforms now, we would have a new look banking system based around sensible criteria and practice.

I find the fact that genteel Lloyds shareholders having to stump up to pay for the whims of a management that nearly bankrupted the company abhorrent. Further, to pay for the suicidal practices that led to this sad demise of a once great bank, 5,000 staff at Lloyds will have to lose their jobs - people who were not involved in the abysmal decision making that got them to this point. That act alone has been described by unions as 'arrogance' and I agree. At all banks, we see low level staff paying the price while people like Stephen Hester at RBS accrue bonuses equivalent to the salary bill saved - in just one year at the helm of a company propped up by the taxpayer so that he could not possibly fail. Even then, he has us all pay more and been let off around £10bn of debt he owes us - for that he accrues £9.6m.

You could not write a script with such a plot as no one would buy the book - it would have been deemed too far fetched. The problem is that within a year, we will have all forgotten what and how it all happened. We will carry on and allow the whole process of rebuilding the house of cards again, ready for the next gust of ill wind to sink the whole lot.

Monumental hubris and arrogance at the most senior level in the banks, the regulators and the Government are at the witch's cauldron stirring up a foul future for the lot us. They will do nicely though, thanks to the taxpayer.

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