Taxpayers set to hand Lloyds another £5bn

Published on 15/10/2009 01:32

LLOYDS Banking Group could be in line to receive up to £5 billion of taxpayers' money from Alistair Darling to shore up its finances.

The Chancellor is reported to be ready to hand the money over to the part-nationalised group so that it can escape the government's toxic asset insurance scheme.

Selling new shares worth up to 5 billion is thought to be part of a complex plan being considered by regulators to raise 25 billion of extra funds to reduce its exposure to the scheme, which is due to go live next month.

Lloyds believes its losses have peaked and the group is keen to escape paying multi-billion premiums for insuring its toxic assets.

The group – which has already received 17 billion of taxpayers' money – is 43 per cent owned by the state. It was rescued by the Treasury after its takeover of HBOS last year, when the world's financial markets collapsed.

The group has repaid 3 billion but is now believed to be asking for more taxpayers' money at a time when both Labour and the Conservatives are promising major cuts in spending to address the country's huge budget deficit.

No decision has yet been made by the regulatory authorities on Lloyds' plan to avoid the toxic asset scheme, which was announced in January when the banking system was in crisis.

But the prospect of more cash being handed to the group is likely to be seen as giving in to banks as they prepare to pay staff millions of pounds in bonuses, with markets around the world recovering.

The FTSE 100 Index soared to a 13-month high yesterday as traders in New York cheered the Dow Jones through the 10,000 mark. The FTSE rose another 2 per cent as stocks leapt after better-than-expected results in the US and positive economic signs in the UK and overseas. Meanwhile, the Dow Jones Industrial Average broke into five figures for the first time in a year.

And US investment banking giant JP Morgan Chase began the third quarter bank reporting season yesterday with a bigger-than-expected surge in profits. JP Morgan – the largest US bank – posted a forecast-beating 2.3 billion in net income for the three months to September – up from 330 million a year earlier.

Figures from Goldman Sachs to be released today are expected to put the group's staff on track for a reported 14 billion in pay and bonuses this year and there are worries that excessive rewards are already back.

The asset protection scheme was devised to restore confidence in the markets by assuring investors the government was standing by the banks bad debts.

In return for a fee, the government provides banks with protection against losses on risky assets and loans "where there is the greatest amount of uncertainty about their future performance".

Lloyds is thought to be planning to raise around 11 billion from its investors, and to maintain its share of 43 per cent the government would have to pay about 5 billion of that sum.

However, the Chancellor is demanding a fee from the group of an estimated 2 billion, which would be set against the government's subscription to the new share issue. Mr Darling will ultimately determine the final amount used to buy the new shares.

The group is be keen to get out of the protection scheme to keep the taxpayer's stake in the bank below the 50 per cent level and out of government control.

A spokeswoman for Lloyds last night declined to comment.