UK Taxpayers to Own 77% of Lloyds Bank

Lloyds Banking Group is following Royal Bank of Scotland into a scheme that effectively caps its losses on dodgy assets. LBG could offload as much as £250 billion this way. If the plan is implemented in full, that means that UK taxpayers will own about 77% of the bank. The remaining 23% is presumably the difference between New Labour and Old Labour, not quite complete nationalization.

The bank's management is accepting the deal because, as its boss Eric Daniels said, it “substantially reduces” the bank's risks. In a written statement to the press he said, “Our significantly enhanced capital position will ensure that the group can weather the severest of economic downturns and emerge strongly when the economy recovers.” The way that works is Lloyd's pays an initiation fee of about £15.6 billion and takes a £25 billion “first loss” on the assets. After that, the government will eat 90% of the losses.

In exchange, the government's stake in Lloyds will rise from 43% to 65%. The bank is also replacing £4 billion of government-owned preferred with common stock. Shareholders can buy these for 38 pence each, and what they don't take the government will. If the “B” shares convert, that would take the government's share to 77%, voting rights capped at 75%.

Furthermore, the government has forced Lloyds to commit to greater lending, a £14 billion increase to homeowners and businesses this year and a similar increase next year. While it won't get the UK's economy out of recession, it shows that government-owned stock can get attitudes about lending to change, and when it does, the rest follows. Here, government action is a catalyst for recovery.

The fallout from this will have political ramifications. The next parliamentary elections must occur before June 3, 2010. The Conservatives lead Labour by 20% in the most recent polls. If this economic prescription hasn't kicked in by then, a reversal of banking policy by the Tories is almost inevitable. Reprivatization may put weak banking stocks on the market, or it may produce a windfall for the government depending on how the banks manage over the next year. At least, Labour will be able to say it saved Lloyds and RBS.

© Copyright 2009 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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