Covert bank loans revealed
It’s the sort of cheque any of us would love to receive in the post. Signed off by the Bank of England Governor Mervyn King a cheque for more than £36.6bn of emergency support went to Sir Fred Goodwin of RBS. And another cheque for £25bn to Andy Hornby of HBOS. At its peak, total support was nearly £62 bn – and all of it kept secret until today.
Now to be absolutely clear this is an entirely different, new, and secret form of funding from the myriad of government support schemes for British banks.
The fact of this additional temporary loan worth at peak as much as the combined annual budgets for defence and transport emerged in a memo from the Bank of England to the Treasury Select Committee. It was all repaid by January of this year.
‘Tough stuff’ and ‘a dire emergency’, is how Bank of England Deputy Governor Paul Tucker described this, and to be fair to him there was rather good reason to keep this support secret, at least initially.
The Northern Rock run a year earlier was triggered by leaked news of exactly the same type of loan to the Newcastle-based bank.
In the aftermath, Mervyn King argued for and got changes to City regulations, to allow what the Bank itself refers to as ‘covert operations’.
Vince Cable has been tabling parliamentary questions about why it took a year for the news to come out, saying that the public and parliament are ‘being treated like children’.
It’s Lloyds shareholders who are suing over the bank’s purchase of HBoS who might be the most interested in this revelation. The Government, the Bank of England, and knew about HBoS’s huge emergency loan when the deal was voted on.
Channel 4 News has been told by the City minister Lord Myners that the Lloyds board knew about it too. ‘The board of Lloyd’s were fully in the picture,’ Lord Myners told us tonight. But the shareholders did not, but for a vague reference from page 224 of the takeover prospectus:
“In the current market conditions, central bank and government facilities are an important tool in the liquidity management solutions for banks, including HBOS, and are in addition to other funding sources available to HBOS, such as retail and corporate customer deposits… As with many other banks, HBOS makes use of a number of these arrangements to assist with its funding and liquidity management… The HBOS Group expects that it will substantially rely for the foreseeable future on the continued availability of these government sponsored arrangements, including central bank liquidity facilities (such as those offered by the Bank of England) as well as HM Treasury’s guarantee scheme for short- and medium-term debt issuance…”
‘It may well be that the Lloyds shareholders have good reason to believe that they were seriously misled,’ says Vince Cable.
Now it doesn’t end here either. Buried on page 148 of the Lloyds prospectus for its megacapital raising is the news that it is still in receipt of around £165 bn in support from various official schemes. So it is really very likely that the loan which was ‘repaid’ by HBoS was actually just rolled into the Special Liquidity Scheme alongside mountains of HBoS toxic commercial property waste.
The Bank of England would argue that the actions stabilised a situation without the panic of the previous year. and the fact markets are stable enough to release information shows that there efforts are working. What we do now know is that HBoS and RBS were even more bankrupt in October 2008 than had previously been thought.
* Full Disclosure: Long ago, my father used to work for TSB, and bought me a small number of shares, which are now shares of Lloyds Banking Group. I don’t generally own or actively trade shares. These are a result of my father’s former employment.