After a week on Wall Street that made history for all the wrong reasons, we move to the UK today where the latest casualty is a major bank: HBOS, the biggest mortgage lender and largest savings institution in the country brought to its knees and forcibly told to offer itself up to a bigger, sounder rival.
It seems to Poms have learned from Northern Rock (maybe) because the problem with HBOS was the same as with Northern Rock.
And for the first time the global crunch has arrived in Australia in a direct way, not through the market or crippling hedge funds or sending shares lower, but through HBOS which owns BankWest here and a group of associated financial companies (one of which effectively killed off Gold Coast property group, Raptis last week by sending receivers into a $700 million project at Southport).
Now regulators here will be seeking assurances that BankWest is OK. RBA Governor Glenn Stevens yesterday said in the bank’s 2008 annual report that “there was never any doubt about the solvency of an Australian bank”.
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As in all the other cases, it’s the now familiar story. Regulators stand by giving assurance after assurance as the implosion happens before their very eyes. Short sellers blamed, of course, but the real culprits are complacent boards, poor management, inept regulators and inadequate controls, plus financial products and levels of risk no one questioned until too late.
In February 2007 HBOS was riding high, it was Britain’s biggest mortgage lender and was grabbing money from retail depositors and from the wholesale markets faster than nearly all of its competitors. It had 20% of the housing loan market, which was booming. Profits were soaring. It could do no wrong.
It was worth 44 million pounds (about $A100 billion). Yesterday it was worth 8 billion pounds, or around $A18 billion. The Commonwealth Bank of Australia with a reduced market cap of $A54 billion could have snaffled it, had it wanted to.
Instead, in a shotgun marriage, the British Government and the floundering UK regulators forced it together with the Lloyds TSB in a deal worth 12 billion pounds, or around $A27 billion.
The British Labour government turned a blind eye to competition concerns to allow HBOS to be absorbed by Lloyds and create Britain’s largest retail bank with around 28% of all home loans (not that is a nice asset given the continuing plunge in UK house prices and mortgages).
The merged bank will have a combined mortgage loan book of £335.1 billion (or more than $A770 billion), 28% of the UK home loan market and massive near 50% share of the country’s savings market.
The Labour Government was desperate to avoid another botched rescue of a big bank like the one they stuffed up a year ago when a run by depositors crippled Northern Rock.
There’s hasn’t been a retail deposit run on HBOS so far. Instead, it’s been a run by big wholesale deposits and investors in the stockmarket fleeing risk and looking for safety. They not only withdrew money, but wouldn’t roll over wholesale funding as it fell due, and the outlook was more of the same, meaning HBOS would be crippled and forced to go out of business if allowed to continue on its own.
Executives from Lloyds and HBOS finalised the deal early this morning, Australian time. Details of the takeover are set to be announced later today in London, although it is not expected to be fully done until the end of this year.
For Lloyds though, the risks are enormous. While it is the only UK bank rated triple A by Moody’s, and has the balance sheet to save HBOS, it will treble its exposure to the sliding housing market. That is an enormous risk and remains central to the problem, as does the US housing sector which continues to self-destruct.