Royal Bank of Scotland’s purchase of ABN Amro was a colossally silly deal. We all know that by now – it’s been repeated over and over again amid all the Fred Goodwin-bating that’s been going on over the past month or so.
Sir Fred can take comfort from the fact that he wasn’t alone. Over-paying for a pup at the peak of a boom is a classic mistake. Lots of companies do it – mining giant BHP Billiton nearly did it with Rio Tinto for example. It seems that during a boom, your average chief executives’ veins get so flooded with testosterone and credit, that they simply can’t help themselves when an opportunity for empire building arises.
Now, what would be really, monumentally stupid, would be for a management team to buy a company that it already knows to be a dud, right at the start of an economic meltdown of historic proportions.
But who would do such a disastrous deal? Step forward, Lloyds Banking Group…
You can see why Sir Victor went for HBOS
Lloyds TSB (LON:LLOY) was about the only British-focused bank (so ignoring the likes of Asia-focused HSBC and Standard Chartered) that stood any chance of making it through the credit crunch in one piece. Derided during the boom as being boring and almost utility-like (in that its growth days were behind it), the credit crunch suddenly started to make Lloyds look very interesting indeed.
Lloyds’ shareholders, I daresay, might even have started to feel a little smug. Sure, the share price was falling, but once people twigged what a solid, dull little bank it was, the scene would be set for a nice rebound and the chance to snatch some top-quality business from its more devil-may-care rivals.
In fact, I’ll confess that I even considered buying Lloyds for about five seconds before my natural bearishness stopped me. I’m glad it did. Because then Gordon Brown stuck his nose into things.
Faced with the collapse of HBOS, hot on the heels of Northern Rock, the Government wasn’t sure what to do. But it didn’t want another bank on its hands. If only it could find a private sector partner to swallow it up.
Now Lloyds had offered to take Northern Rock before everything hit the fan, but at the time, dithering by the authorities meant the moment passed. There was no such dithering with HBOS.
Mr Brown waylaid Sir Victor Blank at a cocktail party in September, and suggested he might want to buy HBOS. He’d get a free pass with the Competition Commission, which would otherwise have kicked up a serious fuss about the fact that Lloyds was going to end up with so much control over retail banking.
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To be fair to Sir Victor, you can see why he went for it. Imagine it. You get the chance to attain a near-monopolistic position in some of your most important business areas. You get the chance to help the Prime Minister out of a hole. And most importantly, the backing of the Government to absolve you of any blame if it all goes wrong.
Of course, while you’re pursuing your personal ambitions, and the Government is trying to offload a dodgy bank on to someone else, the people who pay the price are the shareholders, and the ordinary consumers, who have to put up with less competition on the high street. But who cares about them?
The reality of the HBOS takeover
The trouble is, HBOS was in a worse state than (presumably) anyone involved in the deal realised at the time. So now Lloyds is being forced to insure £260bn worth of toxic assets (more than 80% of which came from HBOS, reports The Telegraph) in the Government’s asset protection scheme. To do that, it needs to pay a £15.6bn fee, which it will pay in “B shares”. The Government is also going to convert £4bn of its preference shares into ordinary shares.
In the end, the state is likely to end up with a 65% stake in Lloyds (from 43% now). And if the Government were eventually to convert those “B shares” into common shares, then its holding would rise to 77%.
This deal shows the dangers of politicians getting stuck in to any business sector. They turn over perfectly sensible rules for reasons of personal expediency. If this deal had been blocked, then all that would have happened is that HBOS, like RBS and Northern Rock and B&B, would be owned by the Government, but Lloyds TSB would have remained free.
As it is, as George Hay puts it on Breakingviews.com, “it is abundantly clear that the decision to do the state a favour by acquiring HBOS was a terrible disservice to shareholders.”
The key reason to avoid the banking sector
On another note, the other infuriating thing is that all this Government involvement is starting to hurt the genuinely competent players in the banking market. In an interview with The Telegraph, David Cutter, head of Skipton Building Society, points out that building societies now have to compete for deposits with the Government, which is desperate to attract savings so that the state-owned banks can lend them out again as mortgages. “National Savings & Investment has just changed its business plan to increase retail funding from £4bn to £11bn,” he says.
But of course, as savings are drained from the building societies, they have to cut back on their own lending. As Cutter puts it, “UK savers are the bedrock of funding UK mortgages.” It’s a classic example of the public sector “crowding out” the private sector.
It’s this political involvement with all its unintended consequences, which is the key reason why you should avoid the banking sector like the plague for now.
For an idea of which sectors you should be investing in right now, I suggest you keep an eye out for an email we’ll be sending later about The Price Report investment service, written by our regular columnist Tim Price. Tim’s focus on asset allocation means he’s not just restricted to discussing equities – he’ll also show you how to protect your wealth by spreading it across other asset classes, including bonds and commodities. He’s also under no illusions about how ineffectual government attempts to ‘save’ the economy are likely to be. Look out for it hitting your inbox later.
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