Lloyds shares plunge 29% amid fears EU will force bank to 'unstitch'
HBOS merger forced through by Gordon Brown
By Simon Duke
20th May 2009
Shares in Lloyds bank tumbled by almost a third yesterday after it
issued a warning that the EU could dismantle its controversial rescue
of Halifax Bank of Scotland.
Brussels regulators could order Lloyds to sell huge chunks of the
business following its taxpayer bailout last year, the group admitted.
A break-up of the superbank would be another massive blow for Gordon
Brown, who orchestrated the takeover of HBOS by Lloyds at the height
of the financial crisis in September.
Enlarge
Struggling: Lloyds Banking Group has launched plans to raise £4billion
from investors
The deal was hatched at a City cocktail party, where Brown gave Lloyds
chairman Sir Victor Blank the green light to swoop on the stricken
HBOS.
Desperate to avoid nationalising HBOS, Brown agreed to tear up the
competition rule book to rush through the deal.
The rescue operation was the centrepiece of the Prime Minister's
efforts to avert a meltdown of Britain's financial system.
But the hastily-arranged deal has proved disastrous for the once
resilient Lloyds, which has since received hundreds of billions in
state support and is now 43pc owned by the taxpayer.
Michael Fallon, the Tory vice chairman of the Treasury select
committee, has called it 'the most expensive cocktail party in
history'.
Lloyds is expected to lose money for the next two years due to
multiplying losses from reckless loans, while a threatened shareholder
revolt forced Blank to resign earlier this week.
Enlarge
Stepping down: Hapless Lloyds chairman Sir Victor Blank with his wife
and Marks & Spencer chief Sir Stuart Rose
Lloyds has been one of the main recipients of the £1trillion in aid
the taxpayer has pledged to Britain's ailing banking sector.
But Britain's myriad bank support packages have yet to receive
approval from the EU, which has strict rules on state aid to private
companies.
In a letter to shareholders, Blank warned that the EU could move to
shrink the enlarged bank back to size.
The price for EU approval would be 'likely in particular to include
the obligation to reduce significantly the size of the group's balance
sheet'.
This could be achieved by selling 'non-core' assets, like its overseas
operations.
However, the EU could even order Lloyds to sell 'core' businesses,
which would be 'materially adverse' to its future prospects, Blank
warned.
This raises the prospect that Lloyds cold have to part with the
Halifax or Bank of Scotland businesses, or its Scottish Widows
insurance division.
A carve-up of Lloyds would be welcomed by consumer rights groups, who
believe that the bank is big enough to crush competition in the
banking industry.
The so-called Bank of Britain controls around 30pc of Britain's
mortgage market.
Even if it doesn't enforce a break up, the EU may impose stringent
restrictions on Lloyds due to its dominance of the High Street, the
bank said yesterday.
It could also outlaw the UK government's insurance scheme for toxic
bank assets, where Lloyds is dumping around £260 billion of high risk
loans, Blank said.
A Lloyds spokesman said: 'We're working closely with the government on
this issue. We believe that the success of our company is in the
interests of our shareholders, and the stability of the UK banking
system.'
Fears that the EU will crush its dominant position in High Street
banking triggered a 30 per cent crash in the Lloyds share price to
70.5 pence.
A £4billion fund-raising move compounded the turmoil, City traders
said.
Blank was writing to shareholders to drum up support for the cash
call, which will see more than 10 billion new share created.
Jonathan Pierce of investment bank Credit Suisse said it was
'difficult to know whether (Blank's warnings) are a serious issue,
given the bank must highlight even low probability risks in the
context of an open offer (of new shares)'.
However, Blank's admission that the EU could break up Lloyds
underscored the 'political risks associated with government holding a
large part of the capital base and ... providing substantial liquidity
assistance,' said Pierce.
Vince Cable, Treasury spokesman for the Liberal Democrats, said:
'Lloyds can't remain at its current size once it has been returned to
the private sector, but any forced premature deal would be bad for the
British taxpayer.'
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