Rights and wrongs at Lloyds Banking

November 25, 2009

If you’ve ever wondered how the big-shot investment bankers “earn” their bonuses, the document launching Britain’s biggest rights issue will give you a clue. Lloyds Banking Group is issuing 36,505,088,579 new shares, to add to the 27,161,682,366 currently in issue.

The new shares will raise 13.5 billion pounds, of which 500 million pounds will disappear in the expenses of the offer. Much of this is paid to the banks which are guaranteeing that Lloyds gets its money, a reward for the risk they are taking that the shareholders will fail to take up their rights.


So just how big is this risk? Here’s one way to look at it. The rights price is 37 pence, and as long as the Lloyds share price remains above that, the risk is minimal. At 37 pence, engorged Lloyds, with 63,666,770,945 in issue, would be capitalised at 23.5 billion pounds, including the 13.5 billion pounds of new money. On Tuesday, the day the issue was priced, with Lloyds old shares at 91 pence, the business was valued at 23.5 billion pounds.

 In other words, for the underwriters to pay up, the value of old Lloyds would have to slump from 23.5 billion pounds to 10 billion pounds – and all by December 11, the day on which the new money is due.

 This is a grotesque parody of the role of underwriters. The risk is minimal, the rewards absurd. So who are these lucky businesses? Atop the document are those two fine investment banks, BofA Merrill Lynch and UBS. The usual suspects appear further down the notepaper.

 The Lloyds shareholders, as they cough up to keep their business out of the state’s intensive care, might recall that both these banks have themselves had hugely dilutive and expensive refinancings, and ask who benefits from this mutual back-scratching, since it’s clearly not the battered shareholders in UBS, BofA or Merrill Lynch.

 The answer, of course, is that this is how the bankers’ bonuses are generated. Bank A’s rescue gets underwritten by Bank B, and in turn Bank B underwrites Bank A. The costs, in each case, may not reach the 500 million pounds of the Lloyds issue, but enough will stick to the shovels wielded by those Masters of the Universe who organize the issues to pay eight-figure bonuses to the fortunate few.

 Of course any company is welcome to try and break the cartel, and see where it gets them. Just don’t expect a bank to try. Their bankers are worth every penny.







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