Bank stupidity

I'm finding it a bit difficult to understand the fuss created by Friday's announcement from Lloyds Banking Group that losses at its newly-acquired HBOs subsidiary are bigger than expected. Sure, the sums involved are huge -- about £10.8 billion -- but that's "only" £1.6 billion more than Lloyds had estimated back in November. In normal times it would surprise no-one that Lloyds was putting a high estimate on the losses; do that right after the merger and you can blame previous management, but do it a year later and it's going to be your fault. And what do you suppose would have happened if Lloyds had suddenly turned around and said the losses were lower than previously thought? Without doubt, the same politicians who are castigating the Government for engineering the Lloyds-HBOS deal would instead be criticising it for giving too much away to Lloyds shareholders.

The suddenly ubiquitous head of the Treasury Select Committee, John McFall, managed to get the new CEO of Lloyds to admit that Lloyds didn't do enough due diligence on the HBOS deal. That's largely disproven, though, both by the fact that Lloyds twice insisted on better terms before agreeing to the deal and by the relatively small increase in estimated losses that has now been revealed. Shadow Industry Minister Ken Clarke says the merger is a "disaster" for Lloyds. Good Lord, Ken, the deal only closed on January 19! LibDem money guru Vince Cable says Lloyds may well have to be nationalised.

Well and good, gents, but if you had been in Messrs Darling and Brown's shoes back in September, what would you have done instead? Nationalise HBOS right away, thereby placing all of the risk onto the taxpayer's shoulders, rather than trying to find a private sector partner to take on some of the risk and provide the expertise needed to fix HBOS? Put HBOS under, risking Lehman-style consequences for the UK financial syatem and putting tens of thousands of jobs at risk? The merger looked like a deal worth pursuing at the time, and it's still too soon to say it won't work, given time and patience, though the latter seems to be in very short supply.

So what happens next? Voices in the media are agreeing with Vince Cable that Lloyds will wind up in public hands. Alastair Darling hasn't explicitly ruled that out, but his comments seem to suggest that the Government is looking to get some of the bad assets off the books of all the banks in order to get lending going again. Yes, it's the good old "bad bank" again. And thanks to Friday's announcement, at least we have a better idea of how many bad assets there are at Lloyds Banking Group.