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Is Lloyds the new Enron?

Updated October 29th, 2009 (first published October 9th, 2009)

Lloyds Banking Group has been given the go-ahead to proceed with a £13.5bn rights issue as part of a wider capital-raising. Given their knowledge of the extent of the challenges facing the bank, were the tripartite authorities (the FSA,  Bank of England and H.M. Treasury) well-advised to sanction this cash call? Ian Fraser investigates.

How gullible are people in the City? It’s a moot point but one worth exploring given Eric Daniels’ apparent belief that investors can be persuaded to inject a further £13.5bn into Lloyds Banking Group’s shares through a rights issue as part of a planned £21bn monster capital raising, after which the bank would remain 43%-owned by the UK government.

The chain-smoking Lloyds boss, pictured above with his Blackberry (or is it an  iPhone?), needs the money because of the dire state of Lloyds balance sheet, the need to recapitalise (again) and because he is so keen to avoid having to participate in the government’s Asset Protection Scheme. Much of this stems from his catastrophic decision to buy HBOS last September.

If the bank were to fully participate in GAPS, the government’s stake in LBG would rise from 43% to 62% — which would be equivalent to full nationalisation and  would make Lloyds much more susceptible to being fully broken up by the European Union.

Yet one would have thought that savvy investors would, at the very least, be sceptical of Daniels’s proposals. However there may still be a few out there who are prepared to give him the benefit of the doubt. This post is mainly for their benefit.

If such investors were to allow themselves be soft-soaped by Lloyds’s disingenuous spin machine (its P.R. and investor relations departments), they risk sleepwalking into disaster. Here are 13 reasons why they should avoid this cash call like the plague.

  1. Since its disastrous acquisition of HBOS last September, Lloyds’ balance sheet has not only become dangerously toxic; it has also largely become a work of fiction. The labyrinthine series of joint ventures that former BoS Corporate boss Peter Cummings entered with property and other business tycoons, often with limited paperwork and due diligence, are almost certainly over-valued in the accounts. Some of the myriad of firms acquired or part-acquired by BoS in this way, such as Inverness-based builder Tulloch Homes (in which Cummings paid £27m for a 40% stake in April 2008), have only just filed their 2007 accounts. I know there have been some “mark downs”, but given poor visibility one wonders whether Lloyds is correctly valuing such stakes in its own accounts? The valuations put on the equity stakes the bank acquired through HBOS’s “pig on pork” integrated finance model may also be inflated through the widespread use of “mark to make-believe” accounting. I suspect that Lloyds’ current auditors, PWC, will be more rigourous and conservative than their predecessors KPMG when it comes to valuing such things.
  2. Bank insiders tell me that internally Lloyds is in a state of chaos. Owing to internal turmoil and because disgruntled insiders in Edinburgh and Halifax have been throwing the odd spanner in the financial works, the “superbank” is struggling to come up with anything resembling accurate financial data. My source suggested this was the case during the compilation of the H1 2009 results. More and more people are wondering whether, just like Enron before it, Lloyds’ accounts are riddled with inaccuracies and even fraud.
  3. Even seasoned banking integration experts are agog at the size of the challenge the “superbank” faces as it struggles to eke out synergy savings by integrating Lloyds and HBOS. Lloyds still hasn’t even fully integrated the TSB business it acquired in 1995 for heaven’s sake! UKFI has apparently told the “superbank” that its favoured route to making cost savings of £1.5bn a year — circa 30,000 sackings and the offshoring of jobs — are politically unacceptable. So the bank is trying to get a quick hit from merging IT platforms and systems between the Lloyds and HBOS legacy sides of its business.  The task is so massive Lloyds has hired four leading IT consultancies — Accenture, Deloitte, Ernst & Young and IBM — as it struggles to integrate legacy systems. People with inside knowledge of the situation say their fees will amount to at least £1bn over the next three years. I am told this makes the £1.5bn cost savings target first mentioned in November 2008 “pure fantasy”.
  4. Eric Daniels has claimed that the impairments on Lloyds’ corporate loan portfolio peaked in the first half of 2009. However few analysts or investors believe this. Given the dire state of the BoS Corporate loan book — where reckless loan was piled on reckless loan during the go-go HBOS years — analysts and investors are right to be sceptical. Daniels may be in denial, but the toxic chickens will keep coming home to roost from Cummings’s radioactive legacy for many years to come, particularly from commercial property lending.
  5. Lloyds Banking Group is dependent on £165bn of loans and guarantees from the Bank of England and other central banks around the world — without which it would collapse tomorrow. In its rights issue prospectus the bank admitted it remains “heavily reliant” on government funding and admits it would face “materially higher refinancing risk” were this to be removed. The funding, sourced from the Bank of England’s special liquidity scheme (SLS) and credit guarantee scheme (CGS), mostly matures in 2011 and 2012. “A lot of things trouble us about LBG, in particular the funding structure,” says Credit Suisse analyst Jonathan Pierce.
  6. Several major court cases are pending in which former HBOS customers who were fleeced by the bank are expected to secure compensation stretching, possibly, into the billions. The chancellor of the High Court recently consented to cases against BoS relating to shared application mortgages (Sams) being dealt with on a class-action basis and the same concession can be expected to be applied to the other cases. The scores of business customers affected  by the BoS Reading scandal are making some progress with their legal action. I also understand the alleged fraud is also finally being investigated by the FSA. Imagine if LBG were to be found guilty of fraud and some of its former executives were sent to jail. In such a scenario, would Lloyds shares have any value at all?
  7. It is possible that HBOS’s former board, led by chairman Lord Stevenson of Coddenham, chief executive Andy Hornby and finance director Mike Ellis, fraudulently misrepresented their bank’s financial position at the time of their June 2008 capital-raising. In particular, they seem to have “buried” any information about the £260bn of toxic assets accumulated by Cummings. See my Independent on Sunday article from November 8th, 2009. Lloyds admitted it could be liable in its November 4th rights issue prospectus.
  8. Lloyds Banking Group was always a deliberately oligopolistic construct which Gordon Brown only promoted to get himself out of a hole. However, the resulting superbank is clearly anti-competitive and probably a danger to its clients. Chancellor Alistair Darling has been seeking to post-rationalise his stance, finally agreeing with EC competition commissioner Neelie Kroes that a break-up is called for. The bank has been ordered to sell at least 600 branches (20% of its branch network), comprising 185 Lloyds TSB Scotland sites, 164 Cheltenham & Gloucester branches and 250 Lloyds TSB branches in England and Wales. Should these gestures prove insufficient, the Office of Fair Trading, Competition Commission and a future Conservative government could step in at a later date and demand further divestments. Doesn’t this mean the whole raison d’etre for the Lloyds / HBOS merger — including proposed cost savings of £1.5bn a year — evaporates?
  9. In 2004-08 the FSA had succumbed to “regulatory capture” and invariably sided with banks like HBOS and Lloyds TSB against the banks’ customers. This enabled the banks to sweep wrongdoing — including the alleged Vavasseur fraud and the apparent theft of customer assets at BoS Reading — under the carpet. In today’s tougher regulatory climate, the banks are going to find such cover-ups harder to pull off and they’re more likely to be prosecuted and forced to compensate the victims.
  10. Lloyds’ board remains dysfunctional and lacks credibility in the City — not least because of its failure to address the issues described above. The arrival of Sir Win Bischoff, the German-born banker who retained a self-destructive course while chairman of US bank Citigroup, including sanctioning an £8bn loan to Dubai in December 2008 (well after it was known the emirate was bust), has not improved things. Unlike RBS, Lloyds failed to sack the management team responsible for its catastrophic deal.
  11. The “superbank” will have to pay the UK government an estimated £2.5bn to extricate itself from the government asset protection scheme.
  12. If it does manage to carry out a rights issue, Lloyds will have to pay some £500m in underwriting and other fees to its investment bankers. The firms involved are Merrill Lynch, UBS, Citi, Goldman Sachs, HSBC, JP Morgan Cazenove, IMI, BarCap, Calyon, Commerzbank, ING, Normura, RBS Hoare Govett, Banco Santander, Macquarie, Natixis, RBC and Unictredit. How will lining these City boys’ pockets go down with the ‘red tops’ and the general public in the current climate? (By the way, why is the “superbank” using this many underwriters? Is it using taxpayers’ money to “buy” the support of investment banks/investors/sellside analysts?)
  13. There’s no certainty that the government of Irish Taoiseach Brian Cowen will permit the shockingly toxic loan portfolio assembled by Bank of Scotland (Ireland) to pollute the Irish government’s National Asset Management Agency (Nama). Why should Irish taxpayers be expected to pick up the tab for this poisonous legacy?

Given the above 13 points, I cannot see how sanctioning this proposed capital-raising can be in the regulator’s best interests — or how participating in it can possibly be in investors’ interests. Even on the strength of what the FSA already knows about the alleged BoS Reading fraud alone, let alone the other matters outlined here, wouldn’t the FSA be leaving itself wide open to being sued for negligence down the line if its green-lights this plan?

Short URL: http://www.ianfraser.org/?p=944

Posted by on Oct 29 2009. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

8 Comments for “Is Lloyds the new Enron?”

  1. Thank you for the depth of research you have clearly carried out in compiling this fact-rich article Mr Fraser. I would like to take this opportunity to try to reach the “about a dozen” casualties as they are referred to in the affidavit of BoS/Ernst & Young/Nursing & Care Associates which can be viewed via: http://www.cbr.me/index.php?page=The-Baker-s-Dozen. This so that you will soon be able to add yet another group to the Group Actions you mention. This new group made up of the casualties of the predator team: Bank of Scotland + the INSOLVENT/liquidated management company that BoS manager Gordon C Grieve advised at least one unwary customer to use, namely Nursing & Care Associates (N&C) + Ernst & Young, auditors of BoS and N&C! HOW’S THAT FOR CONFLICTS OF INTERESTS? I believe that such a conflict of interest may have been, be, a breach of their banking licence??

    All this during the period commencing on or about 1990 and in the Edwards case, dragged on until Feb 21st, 2003 when there was nothing left to steal, er…..better add, allegedly!
    Until the ‘dozen’ have contacted us and are made aware of the insolvency/liquidation of N&C, and other remarkable facts they may be unaware of I can only speak with certainty about the case I know i.e. that of my wife. However, from what the affidavit states the same evil BoS/N&C/E&Y plan may apply to all 13, or more – hence referring to them as “The Baker’s Dozen” cases.

    Mrs Edwards took the advice of Gordon C Grieve, BoS manager, to appoint N&C as her new management company (not receivers) then the scene was set for Ernst & Young to write a biased report designed to secure the 13th, or so, Court Appointed Receivership which gave all the assets on a Royal Courts of Justice plate for the businesses to be run down and an asset stripping frenzy to take place!

    If you were similarly treated or know someone who has then please email alanedwards4@hotmail.com.

    Only by working together will these criminals, who also committed PERJURY/CONSPIRACY to pervert the course of justice in the Royal Courts of Justice, which I believe carries a 7 year sentence, be brought before the Court system. That same system they deliberately (ab)used as part of their deceitful plan to steal at least one hard working nurse’s life’s work! There have been some 18 years when this was deemed by judges to be unbelievable. Thanks to people like Mr Fraser even once mesmerised judges are finally seeing through ‘the King’s new clothes’ of Bank of Scotland/HBoS/The Lloyds Banking Group!

    Thank you once again Mr Fraser for your diligence and so much more.

    Alan Edwards.

  2. Puzzled of Streatham

    Curiouser and curiouser ….. the billions and trillions were simply not enough and now poor little Lloyds Banking Group needs more please sir. It’s all getting a bit like the lira, why have a thousand when you can have a million and it’s still pocket change?

    So why did Lloyds buy HBOS in the first place? Where was the benefit to the Lloyds shareholders? For the British taxpayer? What has happened to the billions it has already had from the tax payer? And who engineered the bizarre scenario?

    You would think Mr Brown had done enough meddling in the banking system and that he had enough problems with his own popularity stakes, without digging himself a deeper hole.

    But no, the Times was able to report that Mr B (that’s B for Brown not for Bean) was having another of his soiree’s last Thursday with his drinking chums Eric Daniels and Sir Win and now, hey presto, Lloyds seems to be en route to another round of funding.

    But Mr Brown, leaving aside what the Regulators know about HBOS and why it is clear no one should be asked to put money into Lloyds until it has resolved the serious issues its toxic toy brought to the party, what about what you know? What do you, as Prime Minister know about HBOS?

    How can you or Mr Darling and your tripartite authorities sanction more funding to a Bank that sooner or later will have to admit its dark secrets? What happened to transparency and all that pseudo Presbyterian guff about knowing right from wrong?

    What happens if someone, somewhere manages to get the truth about HBOS out into the mainstream of public opinion and if that truth comes after another bunch of investors have been duped out of their cash? Will you change your name to Manuel Brown?

  3. The CONSPIRACY OF SILENCE is, finally, having its death rattle! i.e. it is so “in your face” that this time, with such explicitly HUGE imbalances, pretty soon the flood and the redressing of the balance will come, and these cheating, thieving and conniving bastards won’t know what’s hit them.

    The corruption wears the appearances of PROTECTIONISM, which has deep cancerous roots that pervade the rights, justice and interests of every citizen: these guys tgought they could be the referees in their own football game, but pretty soon their diseased team will be hoist by their own petard of deception.

    The MPs couldn’t give a damn — as long as the Banking Cartel continues to fund them (why do any of us even bother voting by the way? No wonder the BNP is doing to well in the polls! At least they are lending some balance to all the totally rigged set up).

    All the Insolvency Service and the SFO do is carry out these banksters ‘instructions’. But now the cosy stitch up which rides roughshod over the public good is coming to an end, by necessity — everything always retraces itself, when the balance is so hideously lost, as is the case here: so take heart. friends.

    We need to expose the hugely biased practices, the self-serving oligopoly, this culture of evil, which extends to the Bar Council going to any lengths to protect their own members, even where they have taken money for unfinished and inadequate work, especially the QCs. (They have stuffed their misnamed “complaints committee” with members of the Bar Standards Board on on ratio of 3:1 of laymen!!) .

    It is this self-policing disease, which stretches to every so-called profession in the land (including our utterly corrupt banking fraternity who grew accustomed to controlling the FSA) in the land, that MUST STOP.

  4. […] LLOYDS the new ENRON? Ian Fraser – Business and Financial Journalist Ian Fraser Blog Archive IS LLOYDS THE NEW ENRON? […]

  5. Completely agree with the mark to market valuation comment. Lloyds now have over a £330bn mortgage book. These assets are NOT priced correctly. A house gets repossessed in the UK every 11 minutes. Those houses are being sent to auction, and are not meeting anywhere near the the reserve price, then being pulled, and sent back to auction at a later date. [Lloyds dont have to sell being taxpayer funded]

    I have seen a £330k [2007 sold price] barn go to auction four times, and receive a high bid of £110k. What’s going to happen to the Lloyds balance sheet when it os forced to halve the value of their mortgage book?

    Which inevitably they will most definitely have to. It’s only a matter of time.

  6. […] might ask him about a few matters outstanding about his bank? I alluded to many of these in my Is Lloyds the new Enron? post dated October 9th, 2009, which outlined challenges faced by the bank, and explained why […]

  7. […] this near bankrupt “zombie bank” which must overcome a number of significant challenges if it is to survive until 2012 (including refinancing £165bn of ’soft loans’ from the […]

  8. […] first highlighted concerns about the Enron-esque tendencies of this deeply flawed bank in a blog post back in October 2009, just as it was tapping investors for a further £22.5 billion, in a capital […]

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