Hitler, Gordon Brown and the Lloyds debacle

I noted in my previous post that Lloyds Bank shareholders were reported to be "incandescent" with rage over the fate of their bank. Lloyds, whose conservative approach to risk might well have seen it come through the financial crisis relatively unscathed, has been crippled, at least in the short term, by its takeover of HBOS. The government's stake in the bank is up to about 65%, and could easily reach 75% in the coming months. If I were a Lloyds shareholder (and it's the most widely-held stock in the UK), I'd probably be pretty steamed about it.

But from a taxpayer's viewpoint -- and there are a lot more of those than there are Lloyds shareholders -- is it the worst possible outcome? Iain Martin in the Telegraph certainly seems to think so, and he's amazed that Gordon Brown, who helped to see the deal through, isn't paying more of a political price. However, like many right-wing commentators on the financial crisis, both in the UK and the US, Martin is rather longer on spleen than on logic, and completely fails to offer any viable alternative.

Martin certainly doesn't hold back. He claims that the ultimate cost to the taxpayer of the Lloyds deal could reach £130 billion, and even suggests that taking account of inflation, the combined costs of the Lloyds and RBS deals could amount to more than a third of "the bill for seeing off Adolf Hitler"! There are two problems with this, though. First, Martin is assuming that everything possible will go wrong at Lloyds. If the value of the bank's toxic assets improves, there may be no additional cost to the taxpayer at all, and potentially a profit to be made when the time comes to return the bank to private hands.

Second, and more seriously, Martin is in effect assuming that the choice facing the government last November was between putting Lloyds together with HBOS, or doing nothing. HBOS was, as is now quite apparent, a midden of rancid assets. Should the government have let it go, in the manner of Lehman Brothers? We've seen how well that worked, though Lehman's assets seem to have been so toxic that the US Treasury may have had no choice. The HBOS mess had to be sorted out and paid for one way or another. Arguably, by getting Lloyds involved, the government secured private sector expertise in resolving the problems at HBOS, along with at least a smidgen of private sector risk sharing. It's in that sense that I'd argue that the deal may not have been the worst possible outcome from a taxpayer perspective. And you never know: it might work out well for Lloyds shareholders too, given enough time.