LLOYDS Banking Group was moving towards "inevitable nationalisation" last night after the banking giant announced a £10 billion loss and huge write-downs for its struggling HBOS arm.
Vince Cable, the Liberal Democrats' Treasury spokesman, said the bank was being "dragged under" by HBOS, as banking shares nose-dived by nearly a third after the dramatic profits warning was issued by Lloyds.
The news wiped about 4.8 billion from the value of Lloyds Banking Group shares, which closed down 32 per cent at 61.4p. The 10 billion figure is a record loss for a British bank and about twice the figure predicted three months ago.
In news that sent shock-waves through the City, Lloyds also announced 7 billion in write-downs at HBOS's corporate division, blaming it on assets hit by falling markets. The write-down was about 1.6 billion higher than it expected last November.
The results cast serious doubts on Lloyds' decision to take over HBOS before the government bail-out last year, described by one MP as a "shotgun wedding".
It also underscored the serious problems at HBOS's corporate division, which faced large exposure to the badly-hit housing and commercial property sector.
Taxpayers own 43 per cent of the group and Mr Cable said: "It looks increasingly as if Lloyds is being dragged under by the dead weight of HBOS, a financial disaster created by Andy Hornby and his predecessor Sir James Crosby. Obviously we need to digest the detail, but it looks increasingly as if Lloyds HBOS will now go into majority public ownership, followed inevitably by nationalisation."
Alistair Darling, the Chancellor, last night did not rule out the possibility.
He said: "I said in January there is a range of options that we will be deploying, a range of levers that can be pulled to help all banks, because I have made it very, very clear that the integrity of the banking system is very, very important.
"What we are focusing on at the moment is making sure that we can identify these bad assets and then deal with that problem. That's our focus at the moment and that will continue."
The taxpayer has pumped 17 billion into the two banks to shore up their balance sheets.
Despite the unexpected warning, Eric Daniels, the Lloyds HBOS chief executive, said the group had a capital position "significantly in excess" of its regulatory requirements. He said: "While we recognise that the short-term outlook is more challenging, Lloyds Banking Group has the largest UK financial services franchise, with excellent long-term earnings potential."
Lloyds is putting some of the losses down to its more stringent accounting practices.
Mr Daniels said the losses as were caused by "the market dislocation, which accelerated significantly in the last quarter of 2008, and the additional impairments required on the HBOS corporate lending portfolios".
Stewart Hosie, the SNP's Treasury spokesman, called for clearer language from Mr Daniels. "In the current banking crisis with the taxpayer putting in hundreds of billions in capital liquidity and guarantees, it's incumbent on banking bosses to explain in plain language where taxpayers' money is now going."
Mr Hosie added that the news also cast doubt on Lloyds' hasty decision to buy HBOS. "One does question if Lloyds management did undertake proper due diligence or whether they were simply allowing themselves to be used in the shotgun wedding between Lloyds and HBOS."
George Osborne, the shadow chancellor, said HBOS bankers such as Sir James should bear responsibility, as should the Prime Minister who, as chancellor, had "created the system of bank regulation that allowed this reckless risk-taking to run amok".
"The money pumped in through the first bail-out in October is all but wiped out by these losses and we still have no details of the government's plans for a second bail-out," he said.