HBOS a ‘Once-In-a-Lifetime’ Deal for Lloyds

Updated on
  • Lloyds facing investor lawsuit over 2009 HBOS acquisition
  • Financial crisis proved ideal climate for deal, lawyers say
Photographer: Ed Jones/AFP via Getty Images

Lloyds Banking Group Plc’s takeover of the failing HBOS Plc during the global financial crisis was a "once-in-a-lifetime" opportunity, the bank’s lawyers said in dismissing investor allegations that the purchase was the wrong deal at the wrong time.

The day after the collapse of Lehman Brothers Holdings Inc. in September 2008, HBOS’s share price fell dramatically and corporate deposits were reduced by 9 billion pounds ($11.9 billion). In the weeks that followed, retail customers withdrew 19 billion pounds, leaving the bank perilously close to failing, lawyers for Lloyds said in documents prepared for the trial.

Lehman’s collapse and the bank’s over-reliance on wholesale lending meant Lloyds had a "once-in-a-lifetime opportunity” to expand with a deal that under ordinary circumstances would’ve been blocked by regulators, according to evidence from Wolfgang Berndt, a Lloyds non-executive director at the time.

HBOS failed in 2008 and was sold to Lloyds, which then required about 20.5 billion pounds of U.K. taxpayers’ money to prevent its own collapse. Around 6,000 investors are suing, accusing the bank’s executives of deliberately misleading shareholders into accepting the deal, which was completed in 2009. Lloyds denies the allegations, calling them "flawed at every level."

The U.K. government assured Lloyds executives that they would secure competition clearance if terms could be agreed with HBOS. "However, the government had only given us a short window in which to act," Berndt said in his witness statement.

"It was in-market and presented great synergies," Eric Daniels, Lloyds’s chief executive officer at the time, said in a witness statement for the trial. The combination "of Lloyds and HBOS was therefore highly complementary and would have the leading market shares in multiple product areas."

HBOS’s position was so critical that Lloyds executives recognized that no deal would mean the bank would have to be nationalized, the bank’s lawyers said in documents.

The trial, set to run until the beginning of March, will feature ex-CEO Daniels and former Chairman Victor Blank as key defense witnesses. Hector Sants, the former head of the U.K. financial regulator, is also expected to testify.

Legal first

The investor claim is a first in British legal history, according to bank lawyer, Helen Davies.
“There are very good reasons for that; The claim in these proceedings are legally unsustainable,” she said.

The bank is accused of working to keep secret a "covert" line of about 25.6 billion pounds in emergency funding from the Bank of England for HBOS in a bid to keep the bank functioning. While the bank agrees there was funding for HBOS, it denies the situation was in no way unique. All of the major U.K. banks accessed liquidity provided by the Bank of England between 2008 and 2009, Lloyds’s lawyers said.

The claimants have made "very little effort" to distinguish between "that which was clear at the time of the acquisition, that which was possible but unlikely," and "that which is now known," Davies said in court.

The investors’ arguments "are poorly structured, incoherent, and consist for the most part of excessive and tendentious detail," Davies said in documents prepared for trial. "The result is that even though these proceedings were commenced over three years ago, and despite the claimants having made a series of amendments to their pleadings, there is still no clear articulation of the case being advanced."

Lloyds CEO Antonio Horta-Osorio has strengthened the bank since the financial crisis, restoring the lender’s profitability and financial strength. The CEO has cut thousands of jobs and sold assets, helping him to restore dividend payments in 2015 for the first time since its bailout.

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