Saturday, March 7, 2009

Lloyds Said to Cede Control to U.K. to Tap Government Insurance

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, will cede control to Prime Minister Gordon Brown’s government in exchange for tapping a guarantee program backing 260 billion pounds ($367 billion) of assets, two people familiar with the plan said.

Lloyds will convert preference shares into ordinary stock, paying about 16 billion pounds to participate in the program, according to the people, who declined to be identified before a formal announcement later this morning.

The bank, which will be up to 75 percent owned by the government, is the fourth to tip into the Treasury’s hands since the run on Northern Rock Plc in September 2007 prompted Brown to take unprecedented powers to seize failing institutions.

Brown has tightened his grip on British banks since October, when he pledged 37 billion pounds to recapitalize Lloyds and Royal Bank of Scotland Group Plc. While that cash kept the industry out of bankruptcy, it hasn’t bolstered lending to consumers, exacerbating the recession. Brown, his popularity tumbling, now says he wants to reshape the industry.

“What makes me angry is that good people, hard-working people are being squeezed by banking mistakes and that’s why we need the urgent clear-up and clear-out in our banking system,” Brown told supporters of the ruling Labour Party yesterday in Dundee, Scotland.

Lending Commitments

Lloyds today also will give legally binding assurances that it will increase mortgage and business lending, the people said. RBS already is majority owned by the government, and Northern Rock and Bradford & Bingley Plc were nationalized last year.

The company also may come under more pressure to limit pay and bonuses to executives and traders as RBS has agreed to do in exchange for government cash. Treasury officials are seeking legal advice on how to limit a 703,000-pound-a-year annual pension granted to Fred Goodwin, who resigned as chief executive of RBS when it sought a government bailout.

Parts of the Lloyds plan were still being worked out last night, according to the people. One person said the government voting rights will rise to 60 percent, though Treasury officials and bank executives had yet to agree an exact figure.

The Treasury held a 43 percent stake in Lloyds since it combined with HBOS Plc in January in a government-brokered deal aimed at preventing the collapse of the U.K. banking industry. The company posted 7.5 billion pounds of losses for 2008 but until now has resisted attempts to increase the state’s holding.

RBS Agreement

Brown’s government, which on Feb. 26 agreed to insure 325 billion pounds of RBS’s assets, is using the asset protection plan to increase lending and kick-start the economy. The Bank of England on March 5 said it would pump as much as 150 billion pounds of new money into an economy facing its worst recession since World War II.

Lloyds has declined 66 percent in London trading this year, making it the worst performer in the five-member FTSE 350 Banks Index. The lender is now valued at 7.1 billion pounds.

Chief Executive Officer Eric Daniels last month said the bank would have liked to have taken more time to examine HBOS’s accounts before agreeing to buy the bank last September. Lloyds wouldn’t have needed taxpayers’ money if it hadn’t agreed to the government-brokered deal, Daniels said.

About 80 percent of Lloyds’ potentially “toxic” loans come from HBOS, according to Sandy Chen, an analyst at Panmure Gordon & Co. in London. Those included 56 billion pounds of asset-backed securities and about 6 billion pounds of monoline- insured credit at the end of 2008, he said.

Lloyds’ Losses

Lloyds also has 89 billion pounds of commercial property loans, 112 billion pounds of lending to non-bank financial companies and a 372 billion-pound mortgage book.

The Treasury last week agreed to insure RBS assets in return for 6.5 billion pounds paid in the form of preference shares paying 7 percent interest. The government will also buy 13 billion pounds the non-voting shares, with RBS having the option to sell an additional 6 billion pounds.

The government waived competition rules to allow Lloyds to buy HBOS for about 7.7 billion pounds and create a bank with 3,300 branches, 140,000 employees and 28 percent of Britain’s mortgage market. The companies received a total of 17 billion pounds from the government last October, in return for the initial shareholding.

Lloyds may sell assets and cut jobs as it integrates HBOS and tries to reach a target of cutting 1.5 billion pounds of costs by 2011.