How stupid deals saved us from oblivion
The 2 worst finance deals in decades* that saved our bacon
Bank of America steps into save Merrill Lynch for just $45Bn
OK, firstly hindsight is always 20/20 and BoA’s Ken Lewis had no idea just how bad the punt he was going to take on Merrill Lynch. He had got hold of the best renowned sales force in the whole world at an absolute bargain price. It was happened next that must have made him regret his deal making prowess.
Warren Buffett, a man who has had his own fingers burned by credit crunch events has termed Lewis as the “Ironic Hero” as he talked over the fact that any buyer should have sat on his hands as Lewis dipped into his own in to shareholders funds. So gold medal to Lewis because the next day Lehman Brothers went belly up, and that made $45Bn for a firm in the very same market, with the similar problems and that was heading very much the same way seem $45Bn too much. So imagine if you could what would have happened if both Merrill and Lehman had gone west? What size of bailout is now needed? At the time there was much bandiment of terms such as a ’30s depression, perhaps it was only a company or 2 closer than we thought.
Lloyds steps in, at the governments prompting to buy HBOS
OK, firstly hindsight is…..ok with this one hindsight wasn’t needed. The fact that the government was willing to set aside any competition ‘details’ means that we all know how much it was needed, but when was the last time a politician kept any of the really large promises so why did Lloyds believe Gordon Brown? But let’s come back to that after we take a look at the numbers behind the deal.
First, I want to declare an interest, I was an HBOS shareholder and had watched the equity drain away as the market kept telling me that the way HBOS was set up didn’t match the new world situation. For me the Lloyds deal was painful, but not half as painful as what Northern Rock or Bradford and Bingley’s shareholders have been through. And more to the point it wasn’t as painful as the experience for the Lloyds shareholders.
Here was a well capitalised, conservatively run bank that should have been in absolutely pole position once the crunch finished. To give you an example, look for a buyer of Northern Rock, a bank whose mortgage book had to be run down and needed capital, but nothing like the losses and capital need that was HBOS and whose mortgage book whilst much derided has problems with 10%, or put another way 90% is currently good, how much would that cost, not £23bn in the first 6 months I reckon? No, a couple of years later Virgin pays just over £1bn ofr the good bit of the Northen Rock bank.
Also the EU as part of its pound of flesh for letting the Government pile cash in is making Lloyds sell brnaches (Project Verde) and Lloyds has a preferred bidder of Co-op, which is having a very hard time showing the FSA it is is in a place to do that. At this point a float of the branches seems more likely right now.
But Lloyds bought HBOS. And it only cost £12Bn and then lost a further £11Bn in the first 6 months so to flush quite that much shareholder value down the toilet so quickly is amazing, it took RBS and Fred Goodwin to do it better and keep Eric Daniels from general villification.
But what if HBOS had hit the wall. The largest mortgage provider and a bank that was pushing Barclay’s for 3rd place in the FTSE banking valuations before this began. Look at it this way, when you look down a street 1 in 4 of the people who bought their house with a mortgage had it with HBOS and that is every street in every town.
So let’s get back to the politics of the deal, if allowed to ‘mature’ over 10 years then Lloyds can look to deliver great savings and capital returns, however we are now 3 years and I dont see it happening yet. All pain no gain, so second place but only just to Lloyds.
To sum up.
These deals stink and those that made them have paid a price reputationally, but my point is without them our banking industry would be struggling with far more than it is just beginning to set behind it, and as we know when the banking industry sneezes our governments rush in with buckets of cash to wipe its nose.
* – the Time Warner/AOL deal is up there, but a quick comment on that, it was a bum deal because of the hubbris at the height of a bubble, whereas these deals we despite a bubble burst, even 20/20 isnt good enough some times!