The Great Debate UK
Lloyds seems to be taking a leaf out of Vito Corleone's book: if you need someone to do something that they don't want to, you have to make them an offer they can't refuse. For the mafia boss in The Godfather, that meant decapitating a horse. For Lloyds, the UK bank whose logo is a black horse, it means threatening to cut off interest payments on your own debt.
Lloyds' plan is to convert subordinated debt into 7.5 billion pounds of contingent capital. These new-fangled securities pay out fixed coupons, but can be converted into shares in times of need. The exchange is part of Lloyds' efforts to avoid the government's asset protection scheme. Lloyds is likely to pull off this deal, but the jury is still out on whether this kind of capital will be widely used by other banks.
Regulators like the idea of contingent capital because it is better able to absorb losses than subordinated debt. The new Lloyds bonds are classified as lower tier two capital, but the Financial Services Authority includes them as part of the bank's core capital when conducting stress tests.
However, contingent capital is untested. It is not clear what price investors will demand to hold debt that carries a risk of turning into equity if things go wrong. The proposed exchange could also be problematic. Many fixed income investors aren't allowed to buy equity-linked debt.
There has been widespread questioning of what precisely it is many non-execs actually do, other than take home a sometimes handsome reward for attending a scattering of board meetings.
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
As the G20 ministers gather for their meeting this week, there should be no doubt about the item at the top of the agenda: the re-entry problem. At what point should the expansionary monetary and fiscal policy of the past year be reversed? And, if the answer is “not yet”, how soon does the re-entry plan need to be announced?
One of the challenges for bond investors over the coming years is how to deal with the enormous ballooning of government debt that is happening as a result of the credit crisis.
George Osborne’s plans to break the British addiction to debt have drawn protests from some business groups. He should not be put off. If a Conservative government with him as Chancellor can offer the quid pro quo of a cut in the rate of corporation tax, business should welcome the move.
Europe rarely features highly in European election campaigns in Britain. In the 2004 campaign the word Euro more often than not referred to a football tournament rather than the single currency. And for at least two reasons, we shouldn’t expect European integration to be much discussed.
- Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own. -
Is the crisis over yet?
In the last 3 months, the Dow and the FTSE have each risen by about 25 percent, the Standard & Poor’s 500 by a third. House prices appear to be stabilising in the UK. Stress-tested and backed by seemingly unlimited government funding, the banks are lending again (if only to each other), so that 1-month libor is down to only 0.3 percent.
Standard & Poor’s could have chosen a better day to kick the British economy, by placing the UK onto “negative outlook”, the usual precursor to a downgrade of S&P’s rating of an issuer’s debt.
Sir Victor’s Blank cheque has finally bounced. Drawn on the Bank of Gordon, it looked like a dodgy piece of paper from the start, and now it has been sent back, marked “Refer to Drawer”.
Shares in Lloyds Banking Group rose in relief that someone, anyone, has finally agreed to take the rap for the disastrous takeover of HBoS, at the behest of the UK government, during last year’s financial panic.
Dazzled by the prospect of a market position in the UK which the competition authorities would never have allowed in normal times, Blank and his chief executive Eric Daniels failed to look their gift horse in the mouth, and discovered it was really a broken-down old nag.
The acquisition obscured the fact that the Black Horse itself was hardly in shape, and even without the handicap of HBoS, would almost certainly have been obliged to limp to the government for help. That is as much Daniels’ fault as Blank’s, and he will have to pay once a new chairman has been found.
This will not be easy. It would surely be too venal, even for this government, to impose finance minister Alistair Darling on the suffering shareholders, once he finds himself out of a job next year.
Lord Sandy Leitch, the Labour luvvie elevated to deputy chairman at the weekend, might fancy his chances, but his background is in insurance. The fashion for bank chairman who know nothing about banking has, mercifully, been blown away by the crisis.
More sensibly, Lord Mervyn Davies seems to have little to do since he quit Standard Chartered Bank <STAN.L> for the administration, while Doug Flint from HSBC would be a fine, and popular choice as chief executive if he could face the challenge. He’s a Scot, which would also play well in the Brown bunker.
However, John Kingman, the civil servant in charge of UK Financial Investments, the government’s fig leaf covering its 43 percent stake in the bank, had signally failed to endorse Blank’s re-election at the forthcoming annual meeting. Perhaps he is showing signs of independence after all.
Philip Hampton, who was ousted as finance director from Lloyds five years ago for urging a cut in the dividend, would have been the ideal candidate. Unfortunately, he was tapped to chair RBS last January.
In “Verdict on the Crash” we argue that government failure and not market failure is responsible for the collapse in financial markets.