From The Times November 26, 2009
Lloyds directors under attack after disclosure of HBOS loans
Suzy Jagger, Alex Spence and Miles Costello Recommend? A fresh dispute erupted yesterday over the secret £62 billion loans to Royal Bank of Scotland and HBOS as MPs across the House condemned regulators for failing investors.
Lloyds shareholders said that the revelations strengthened their actions against directors of the bank. MPs expressed anger that Lloyds’ investors had been asked to vote in favour of buying HBOS on November 19 last year while being denied information about the additional bailout money.
The £25.4 billion extended to HBOS by the Bank of England has been widely perceived as evidence that the mortgage lender was far closer to collapse than was previously thought.
Alistair Darling was forced to deliver a statement in the Commons to explain why the bailout loan — which has since been repaid — was not made public.
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Later, Adair Turner, the chairman of the Financial Services Authority, and Hector Sants, the chief executive, were lambasted by MPs for failing to make sure that the loan was disclosed to Lloyds’ shareholders in a formal prospectus detailing the proposed acquisition of HBOS.
Lawyers acting on behalf of Lloyds shareholders who want to sue the bank for buying HBOS said that the disclosure of the loan added significant weight to their case against executives. Jim Rai, a lawyer for Lloyds Action Now, a shareholder lobby group, said that it would strengthen claims being prepared against the banks’ directors for failing to act in shareholders’ interests when they recommended that the lender acquire the near-bust HBOS.
Mr Rai said: “If a loan of this size was made, the bank’s clearly in trouble, yet nothing was disclosed in the prospectus. They allowed shareholders to take the bait.”
It emerged on Tuesday that the Bank of England had provided £36.6 billion in emergency loans to RBS and £25.4 billion to HBOS last year, in addition to the £500 billion of taxpayer funds used to bail out the banking system. The Bank of England had been so concerned about the ability of RBS and HBOS to repay the loans that it insisted on taking assets worth £100 billion to secure the £62 billion credit line.
The existence of the loans was made public by Mervyn King, Governor of the Bank of England, on Tuesday, as part of his testimony to the Treasury Select Committee.
While sources at the Treasury insisted that it had been made aware of Mr King’s intention to make the loans public, the Chancellor refused to be drawn specifically on whether the Governor had told him that he was preparing disclosure. When asked by an MP whether the central bank had told him, Mr Darling said: “We have a wide range of discussions all the time. We talk about these things very regularly. It is up to the Governor to decide when to make the disclosure.”
Michael Fallon, the senior Tory MP on the committee, said that the FSA had shown “breathtaking arrogance” in claiming that Lloyds investors should have read the newspapers rather than rely on a formal prospectus. The FSA said that Lloyds’ shareholders were warned in the prospectus that HBOS needed central bank support to secure the lender’s solvency and that it perceived such a catch-all comment to be adequate.
Andrew Tyrie, another MP on the committee, said: “What the FSA has said today makes a complete nonsense of putting out an offer document.”
Viscount Thurso, a Liberal Democrat member of the committee, said: “I agree with covert operations [for a central bank]. It is the best way to proceed. But to have a covert operation of this magnitude, that should be happening when there is a major transaction happening, and where participants do not know about it? Lloyds shareholders were frankly sold a lemon.”
RBS was also forced to defend the level of its disclosure to its investors yesterday amid fresh questions over its £36.6 billion secret loans. The bank insisted that its shareholders had not been misled, despite its failure to report details of the emergency loans at the time of the £20 billion bailout by the Government last October.
In its prospectus for the capital raising, at which existing investors were offered £15 billion of new shares, RBS reported that it was entitled to draw on more than 20 liquidity schemes in the UK, continental Europe and the US due to its presence in more than 50 countries. In its prospectus for the offer, published on November 5, RBS said: “As with many other banks, RBS makes use of a number of these schemes to assist with its funding and liquidity management.” It gave no details on any amounts drawn.
The prospectus was agreed in consultation with lawyers and advisers.
A spokesman for RBS added: “We would always make an appropriate level of disclosure in line with all of our obligations, and did so.”
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