The Bank of England admitted on Tuesday it lent $102 billion to the Royal Bank of Scotland and HBOS in secret during last year's financial crisis, quickly adding that the cash had since been repaid. By adding that rider, it seems Britain's central bank is trying to pre-empt a storm of criticism from an angry public.
Bankers became very unpopular on both sides of the Atlantic after they had to be bailed out following the October 2008 market crash. But it is the authorities in both the US and Britain that are now taking flak over what is perceived as their total lack of due diligence in keeping track of public funds. The BoE will now likely be asked to explain what interest was paid on the quick-fire HBOS loan, and how this was subsequently booked.
HBOS was taken over by Lloyds Banking Group in December 2008, in a deal brokered by the British government, while the RBS side of the deal saw the British government take an 84% share in exchange for $61 billion, which by all accounts is a massive cash injection. Apart from effectively nationalising that business, which no doubt sent shivers down the spines of many in the City of London, HBOS shareholders are said to have not been aware of the BoE’s $41 billion loan when they backed the takeover by Lloyds, despite the government saying senior management at Lloyds knew about it. At best, this is a cardinal sin in financial markets, where shareholder value is paramount. It also shows to what degree the recession has compromised the much-vaunted notion of free markets both in London and New York.
While the Americans were much more transparent over who got what in the bailout, the public across the pond is also livid over the complete lack of accountability that followed the handover of their money. Again, issues such as interest payments, loan repayments and what the money was used for are opaque and moot – which is contrary to the way financial markets are supposed to be run. The timing of the BoE statement regarding the HBOS loan is also pertinent. BoE governor Mervyn King will now be grilled by a Treasury select committee hearing over why the nation’s bank said it felt the loan could only now be revealed. The Old Lady of Threadneedle Street says it’s because it judged that there was no longer a potential risk to the financial system. Markets don’t like that sort of thing, and the public even less so.
The UK’s junior finance minister Paul Myners defended the BoE move, but declined to say if other secret loans had been made to banks. One suspects that he will soon become as unpopular as his boss, British Prime Minister Gordon Brown, who said the HBOS loan showed how close the country’s financial system came to collapse. Finance minister Alistair Darling confirmed the Treasury had authorised the loans. It’s likely he, too, will shortly be hauled over the coals. Such is the nature of politics.
By Mark Allix