Scottish banks' secret £62bn bailout

TAXPAYERS were kept in the dark for almost a year about £62 billion in emergency loans given to Scotland's two major banks to save them from going under.

The money – nearly twice the annual defence budget – was given to Royal Bank of Scotland and Halifax Bank of Scotland (HBOS) last October and November. It was repaid early this year.

The Bank of England insisted there had been a need for secrecy to ensure there was no Northern Rock-style run on the banks.

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But yesterday's revelation prompted questions about whether other big sums of taxpayers' money had been used to prop up faltering banks.

Asked directly about this, City minister Lord Myners refused to rule out that other banks had received covert state support. "The very definition of covert is that is not a question I am going to answer," he told Channel 4 News.

The 25.4bn loan to HBOS was particularly contentious, as it was made at the same time as UK government ministers were encouraging a takeover of the bank by Lloyds TSB.

News about the clandestine deal could trigger a fresh revolt from angry shareholders, who lost out after the merger.

Lloyds chief executive Eric Daniels and former chairman Sir Victor Blank both knew about the secret arrangement, but did not tell their investors, whom they convinced to back the takeover of beleaguered HBOS.

Lord Myners confirmed: "The board of Lloyds were fully in the picture. The shareholders relied upon the board of directors to give them assurances that the acquisition of HBOS by Lloyds was in the best interests of Lloyds shareholders." He added: "The board of directors made all their proper legal disclosures."

The Financial Services Authority (FSA) changed its rules on shareholder disclosure following the run on Northern Rock, and this made it easier to keep potentially explosive information secret. Bank of England Governor Mervyn King made the shock disclosure about the secret loans to the Commons Treasury committee in a paper yesterday.

He said the banks had been in a "dire emergency" at the height of the financial crisis last year.

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The Bank had stepped in as a lender of last resort with emergency liquidity weeks after the collapse of Lehman Brothers in the United States threatened a domino effect in the global banking system. RBS received emergency cash which peaked at 36.6bn, while HBOS drew on 25.4bn of government funds.

It was also revealed that Chancellor Alistair Darling had agreed to underwrite any losses that the Bank may have made on the loans. He had already told MPs of a 37bn bailout.

Deputy Bank governor Paul Tucker told MPs that the additional funds in the form of the Emergency Liquidity Assistance for RBS and HBOS were necessary to buy time. "This was a dire emergency," he said.

"This was tough stuff, this was absolutely a classic lender-of-last-resort operation, where there is only any point in doing it if it bridges to something."

But Vince Cable, the Liberal Democrats' Treasury spokesman, called it a "shocking cover-up". He continued: "Given the sheer size of the support these two banks were receiving, it is astonishing that this was kept secret for over a year.

"The government has treated taxpayers like children, while expecting them to foot the bill for these banks."

He said ministers had pumped billions into HBOS "at the exact same time it was convincing Lloyds to take it over", adding: "The Chancellor knew he was selling Lloyds a lemon, but he did it anyway to save his own skin."

The chairman of the Treasury committee, John McFall, said that when he saw the amount, there had been "a little bit of an intake of breath thinking how many universities, how many colleges, how many jobs you could support with this".

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Some 800,000 shareholders would have been unaware of the bailout, while the government and Bank of England kept the details secret to maintain public confidence in RBS and HBOS.

The UK Shareholders' Association is to hold an urgent meeting this week to decide what action to take. Its treasurer, Stan Grierson, who owned shares in Lloyds and HBOS as well as in RBS, said the banks should have made a statement to the London Stock Exchange.

"It is disgraceful and dishonest that they did not make a statement at the time," he said.

In a statement, Lloyds Banking Group said HBOS had made reference to the loan in its capital-raising prospectus of 18 November, 2008. It did not appear to spell out the size of the funds, but a vague mention in the prospectus said that HBOS would "substantially rely" on "government-sponsored arrangements, including central bank liquidity facilities".

A Whitehall source told The Scotsman that the Bank of England had been bounced into making the announcement yesterday as it was about to be "outed" in a critical National Audit Office report due to be published a week on Friday.

SNP Treasury spokesman Stewart Hosie MP demanded to know who had known about the emergency loans. He said: "This revelation today offers up far more questions than answers.

"The Bank of England, the Treasury and the FSA must immediately be open about what they knew and when they knew it."

Next week's report is likely to include further disclosures about the loans.

How taxpayer-funded bailout ballooned by billions

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17 September, 2008: Treasury steps in to broker merger talks between Lloyds and HBOS.

1 October, 2008: Bank of England makes emergency loan available to HBOS.

7 October, 2008: Bank of England makes emergency loan available to RBS.

13 October, 2008: Chancellor Alistair Darling, below, pledges to look after taxpayers' interests after he discloses 37bn bailout – but not other 62bn funds.

17 October, 2008: Loan to RBS peaks at 36.6bn.

13 November, 2008: Loan to HBOS peaks at 25.4bn.

At the same time, HBOS chairman Lord Stevenson pleads with shareholders to back takeover by Lloyds.

19 November, 2008: Shareholders overwhelmingly approve takeover.

16 December, 2008: RBS repays its loan.

12 January, 2009: Lloyds given formal approval for takeover of HBOS.

16 January, 2009: HBOS repays loan.