Three years on and still no answers on HBOS

HBOS chief Andy Hornby, left, with Sir Victor Blank, centre, and Eric Daniels, right, of Lloyds TSB as the deal was announced. Picture: AFP/ Getty Images
HBOS chief Andy Hornby, left, with Sir Victor Blank, centre, and Eric Daniels, right, of Lloyds TSB as the deal was announced. Picture: AFP/ Getty Images
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FROM America, the thundering hooves of class action suits; in London, a three-year inquiry into a catastrophic mountain of bad debts, reckoned to hit £60 billion; and across the UK a downswing back into recession, or as near as makes no difference, with ever more business failures.

Three years on from the fateful “merger” of Lloyds Banking Group and HBOS, recovery has turned into a nightmare. US investors in Lloyds Banking Group (as was) are preparing to sue former chairman Sir Victor Blank and chief executive Eric Daniels, accusing them of making misleading statements about the benefits of the deal when in fact HBOS was technically insolvent.

In September 2008, Daniels described the deal as “fantastic”, spoke glowingly of the merged bank’s “robust capital position” and pointed to billions of pounds worth of “synergistic benefits”. But from the beginning of October, HBOS was insolvent, with emergency Bank of England assistance peaking at £25.3 billion in mid-November.

It could prove the humdinger of a case, and I am only surprised that the handmaiden of this shotgun marriage, ex-prime minister Gordon Brown, has not also been cited. This “merger” was actively encouraged and competition rules waived in the hope a deal would avoid HBOS having to be rescued by the taxpayer. As it turned out, the merged group still required rescue, with the state taking 43 per cent.

As for what went wrong at HBOS, how it amassed such a toxic loan book and why all the paraphernalia of prudential regulation and corporate governance failed so abysmally, a three-year inquiry by the Financial Services Authority is still to be published.

Shareholders must rue the day they took board assurances at face value and approved the deal. Shares in the group have gone from 279.5p on the day it was announced to 25.75p. And in terms of numbers who suffered, this was by far and away the biggest casualty of popular shareholder capitalism in modern British history, and an experience that will scar the banking profession for a generation. It only adds to the public despair over this debacle that three years on an official account of what went wrong has still not been provided.

Trusts kept their heads

Few investors escaped losses in 2011, however, several broad-based investment trusts featured here over the past 12 months not only beat the market but showed a share price gain over the period.

Invesco Income Growth Trust rose 9.5 per cent over the year and is still sporting a 4.5 per cent yield. Martin Currie-managed Securities Trust of Scotland was a notable strong performer, coming in close behind with a 9.1 per cent gain (current yield 4.09 per cent). Personal Assets Trust (gold, index-linked US Treasuries, tobaccos and Unilever) finished the year 8.1 per cent ahead, followed by Troy Income and Growth with a 6.8 per cent gain (yield 3.69 per cent). Finally, Aberdeen Asset Management’s Dunedin Enterprise Trust qualifies for honourable mention with a 5.7 per cent gain – one of a number of private equity trusts to stage a comeback in a miserable year.

And now for 2012…

Crystal Ball of the Year Award must go to the Centre for Economics and Business Research run by Douglas McWilliams. It got most of the 2011 calls right, helped by informed global trend-watching and micro information from clients for whom it now runs nine tracker surveys sifting through real-life data. However, its predictions for 2012 are not the most encouraging – including its prediction of a 60 per cent probability that the euro starts to break up this year.

The UK will hit a temporary recession, and some cracks will start to show in the Asian economic and political story, but America will see growth around 2 per cent, helped by continuing corporate profitability and technology application.

For the two big UK events in 2012, McWilliams predicts the Queen’s Diamond Jubilee will be a huge success but the Olympics a disappointment. Londoners, he says, will weary of the special “ZIL lanes” conveying IOC officials from the Games in the East End to their guest suites in The Dorchester.

Finally, as I watched Edinburgh’s magnificent fireworks display on New Year’s Eve, I felt a sad truth being borne out: the bigger our economic and financial black hole, the brighter and longer the firework shows of our municipal authorities. Happy New Year.