Question from David Staff
How did the Government bail out the banks – did they take shares in them or was it by some other means?
Prof says . . .
1 In the case of Northern Rock, the Government just nationalised the Bank’s assets (buildings mainly and some value in its “toxic assets) and assumed its liabilities (to retail depositors repaid or guaranteed in full, and probably most wholesale creditors). The shareholders were wiped out – no compensation so far as I know since liabilities exceeded assets by a large margin.
2 In the case of HBOS/Lloyds, the exact details are not totally clear (to me) because the rescues of both banks were complicated by the fact that Lloyds was taking over HBOS in the critical week from 1st October 2008.
3 Under pressure from its shareholders Lloyds revised its offer for HBOS during the takeover from 0.75:1 to 0.61 Lloyds share : 1 HBOS share . The exact terms of the Government’s cash injection are therefore difficult to determine since the shares of both banks were zooming down in the days leading up to the announcement of the Government action on 8/9 October 2008. Nobody outside the special unit in the Treasury seems to know the exact prices on which the Government acquired HBOS and Lloyds shares.
4 My best estimate is that HBOS issued about 17 billion new shares to the Government at around 65 pence each (making an injection of £11.5 billion) and injected into Lloyds about £5.5 billion at a price of around 1.05 per share, meaning Lloyds issued about 5 billion new shares to the Government. After converting HBOS to Lloyds at 1 to 0.61, this left the Government with about 15 billion of Lloyds shares. Former HBOS shareholders (of whom I was one) held about 12 billion Lloyds shares after conversion. Original Lloyds shareholders seem to have held about 6 billion so that total Lloyds shares in issue after the Government bailout and after the HBOS/Lloyds merger were thus 33 billion, of which the Government’s share was 15/33 or 45%.
5 As a result of two rights issues in 2009 of 0.6:1 and 1.34:1 at 38 and 37 pence respectively, the Lloyds shares in issue now total about 68 billion. This indicates that the Government did not take up its rights (this may have been part of the original deal) so that it now holds around a quarter of the Lloyds current market value (£49 billion) but is still showing a loss of about £5 billion on its original cash injections. If and when Lloyds share price reaches about 110 pence (now 72 pence) the Government will reach breakeven on its original 8th October 2008 injections to Lloyds and HBOS.
6 The RBS story is similar I suspect, without the complexity of two banks merging at the time of the crisis. The Government’s share of the RBS stock was about 83%, even higher than it was in HBOS above and it will still be this proportion if there have been no RBS rights issues since.