Leadership

What if... Lloyds Hadn't Snapped Up HBOS?

By Richard Northedge

Updated on: September 21, 2009 / 3:41 AM EDT / MoneyWatch

If Lehman Brothers had been rescued rather than allowed to collapse in September 2008, the financial crisis would have developed much less dramatically. But the crisis is full of what-ifs.

What if, for instance, Barclays had not bid for ABN Amro in March 2007? Would Royal Bank of Scotland have counter-bid for the Dutch bank?

What if the two UK banks had not got into an auction that inflated the price from 40m euros and to at 71m. At the original price the subsequent write-offs would have been far less crippling.

And what if Barclays had not lost the auction? The London bank would have been left with this expensive timebomb while RBS, though still facing losses on its other business, would not now be government-owned and Sir Fred Goodwin might still be running it. Instead, Barclays might have been unable to avoid nationalisation.

But if Barclays had won, it would have been unable to snap up the best bits of Lehman when the Wall Street bank collapsed a year later.
However, what if both RBS and Barclays had walked away from their offers? They bid before the credit crunch struck but continued upping their offers even after the markets cracked and the deal was closed after Lehman's collapse. In that case ABN would be nursing its own bruises.
Then what if Lloyds Bank had not eagerly bid for HBoS, whose troubles turned from bad to worse after Lehman? Lloyds would still have needed extra capital in that post-Lehman world, but regulators asked for only Â£4.5bn of new equity and Â£1bn of preference shares, not the Â£13bn of equity and Â£4bn of prefs demanded because of the HBoS merger.
Even if Lloyds could not raise that privately, like Barclays, the Treasury would own only a small proportion of Lloyds, not the current 43 per cent holding that could rise to 65 per cent as it insures HBoS's toxic assets.
And what if Lloyds had not bought HBoS? It would not have written off Â£13bn of bad debts this year and seen chairman Sir Victor Blank fall on his sword.
HBoS, however, would have been fully nationalised without a rescue.

But let's turn back the clock a year earlier to the first domino that tumbled, Northern Rock in September 2007. What if Lloyds had been allowed to buy that mortgage bank? A weekend rescue deal by a larger lender is the traditional method of rescue as Bear Stearns and Merrill Lynch illustrated, but despite Lloyds' willingness, regulators barred it. If the Financial Services Authority was inexperienced in these matters, the Bank of England should have known better but muttered about "moral hazard" â€" banking's equivalent of "survival of the fittest".

If Lloyds had bought, it would have wasted the Â£1.7bn proposed price and wasted more as it injected new capital to Northern Rock. But that is peanuts compared with the HBoS losses.
The rival Rock bidder was Virgin Money but in the end the government preferred nationalisation. But what if Sir Richard Branson's group had bought? Where would he have found the extra capital and how could he bear the losses? Would the government have rescued Virgin Money?
But if Richard Branson had a lucky escape at Northern Rock, Lloyds's was less lucky. Buying Rock would have prevented it buying HBoS a year later: the competition issues would have been too great and it would have been too busy handling Rock's problems. It would thus have avoided the disastrous HBoS deal.
But let's put two what ifs together. What if Lloyds could not buy Rock and what if Barclays had beaten RBS for ABN Amro? Would Sir Fred have instead merged his bank with his Edinburgh rival to produce RBS-HBoS? Might he have jumped out of the ABN frying pan only to land in the HBoS fire, swapping one set of problems for a bigger set?

And what if the 'what ifs' had been thought through before all these mergers were plotted? A lot of banks would have avoided falling into a lot of traps.

(Pic: stephcarter cc2.0)