Bill Jamieson: Lloyds heading for state control
Published Date: 06 March 2009
By Bill Jamieson
Executive Editor
A ferocious rearguard action is being fought by the Lloyds Banking Group against majority nationalisation as talks continue over the transfer of up to £260 billion in troubled loans to the government's Asset Protection Scheme.
An announcement had been due earlier this week and pressure has been building for an early statement given mounting concerns over the health of the financial system. Such is the plight of the banks that sweeping nationalisation of most of the banking sector now looks more likely.
Bill Jamieson: Lloyds heading for state control
This morning saw a small 2.4p rally to 42.7p on hopes of a definitive statement later today. However, no clear signal is being given this morning that such a statement will come before the weekend.
The government is believed to have proposed a plan under which it would raise its stake in the bank to 70 percent in return for insuring £258 billion of the bank's toxic assets
But Lloyds chief executive Eric Daniels was reported earlier this week to be vigorously resisting a rise in the government's shareholding from the current 43 per cent to above the 50 per cent level. But such an increase looks unavoidable given the scale of the transfer of toxic loans to the state.
This would mean government representatives on the board and a much tougher clampdown on executive pay and bonuses - restrictions that Daniels is believed to strenuously oppose. However, one compromise would be that the government would cancel its preference shares with their expensive 12 per cent coupon in return for a 50 per cent plus holding that would be in the form of non-voting shares.
A government stake of over 50 per cent will shock many of Lloyds' tens of thousands of shareholders who are already furious with senior executives for driving through the acquisition of HBOS. Lloyds had long been regarded as one of the UK's most conservatively run banks.
It is the problem loan book at BoS Corporate, embracing loans to property, housebuilding, construction and retail companies that accounts for the lion's share of the proposed 'toxic loan' transfer to the taxpayer.
Business secretary Lord Mandelson said talks over Lloyds' participation in the scheme, which would give the bank some protection against further losses on its risky credit-related assets, were difficult. "Obviously when you're making a change like this, introducing new measures or instruments to enable the banks to to recover, it involves a negotiation about the terms, the pricing and all sorts of conditions that are attached and that involves a fairly difficult, tough negotiation between the government and the banks," he told Sky News on Friday.
"We want to make sure there are real results, real improvements that people can feel around the country. We are not prepared to sign up to anything unless we can be sure that there really will be benefits and gains for the country as a whole."
An agreement could come before the weekend, but rumours of a deal being announced later today were being played down. But the market anxious to see some resolution and clarity. This is particularly needed now given the latest wave of apprehension over the stability of the banking system in the US and the impact of the worsening recession on Britain's financial institutions.
Yesterday shares in Barclays plunged 24 per cent on fresh concerns over write-downs and the group's balance sheet strength. Unless and until the huge problems in the banking sector are clarified and cauterised there is little prospect of an end to the latest savage downswing in stock markets world wide.
Hence the growing talk of sweeping, across the board nationalisation as confidence plunges.
