Some cheering news on an otherwise tough day for UBS - the Swiss bank has bagged key roles for both Lloyds and RBS, as the two British banks agree to a massive shake-up that involves taking 31 billion pounds more of government money. As Victoria Howley and Daisy Ku wrote earlier:

“UBS AG (UBSN.VX) has taken key roles on two landmark deals to shore up British banks — landing the Swiss bank a welcome boost in fees and prestige on the same day it shocked the market with worse-than-expected results.

“UBS is working alongside Bank of America Merrill Lynch (BAC.N) to raise 13.5 billion pounds ($22 billion) for Lloyds Banking Group Plc (LLOY.L) in the world’s largest rights issue.

“It is also working with Morgan Stanley (MS.N) to advise Royal Bank of Scotland Plc (RBS.L) on its participation in the UK government’s Asset Protection Scheme (APS). [ID:nL3540088]

“UBS’s advisory team is led by Alex Wilmot-Sitwell, co-chief executive of the investment bank, and Chris Fox, a managing director in the bank’s London financial institutions group.

“Lloyds is paying 500 million pounds in fees and expenses, of which 190 million pounds ($309 million) will go to the six banks underwriting the rights issue — UBS and Merrill alongside Citi (C.N), Goldman Sachs (GS.N), HSBC (HSBA.L) and JPMorgan Cazenove (JPM.N).

“As joint sponsors and global co-ordinators, UBS and Merrill are likely to earn more than the other four, implying payouts of more than 32 million pounds each.”

For the full story, click here.

For more on UBS honcho Wilmot-Sitwell, see this profile in the Times of London from April, with nuggets such as the fact his father is credited with inventing the “dawn raid”.

Elsewhere, Legal Week magazine has the skinny on the “Magic Circle” law firms working for RBS, Lloyds and the Treasury.

Mining group Xstrata did not support hopes of a more general M&A rebound on Thursday, announcing it had no intention of offering for rival Anglo American and that it continued to assess a range of alternative growth options. Read the Reuters report here.

OCBC , the smallest of Singapore’s three local banks, has agreed to buy ING’s private banking unit in Asia for $1.5 billion, a surprise outcome in a complex drawn-out auction.

CIT Group  is getting closer to finalizing the terms of a new loan that would give the commercial lender, trying to avoid bankruptcy, $3 billion to $6.5 billion, two sources familiar with the matter told Reuters.

In other news on Thursday:

The British government will not underwrite a planned rights issue by Lloyds Banking Group, the Financial Times said on Thursday.

Japan’s securities regulator is probing allegations of market manipulation in share trading by BNP Paribas, the Asahi newspaper reported.

The founder and other senior officers of hedge fund Cadogan Management LLC, who quit the firm two weeks ago, have now agreed to buy back the business from Fortis Bank, the Wall Street Journal said, citing people familiar with the matter.

British Prime Minister Gordon Brown plans to outline a sale of government assets on Monday aimed at raising 3 billion pounds, according to a draft speech provided by his office. The sale will be carried out over the next two years and include betting company Tote and the cross-channel rail link between the UK and France.

In other stories reported by the media on Monday and over the weekend:

British bank Lloyds has lined up a syndicate of investment banks to underwrite a 11 billion pound rights issue, the Sunday Times reports, without citing sources. The deal would be linked to Lloyds’ attempts to reduce its participation in the UK government’s toxic asset scheme.

Barclays is planning to spin off a 4 billion pound portfolio of complex credit assets as its presses ahead with a process to clean up its balance sheet, the Financial Times says, quoting people familiar with the matter.

Chinese state-owned metals conglomerate Chinalco does not intend to tale a stake in UC RUSAL when the indebted Russian aluminium company lists shares in Hong Kong later this year, the South China Morning Post reports. Last week a Russian newspaper had reported that Chinalco may be interested in acquiring a stake in RUSAL, citing unnamed banking sources.

For asset managers, the shedding season seems to have no end in sight.

More asset management units of financial institutions are likely to find their way into the market in the months ahead, as they look to separate distribution from product creation, Jefferies & Co’s financial institution group predicts. 

More than two-thirds of global asset management deal activity came from such divestitures in the third quarter, a record level in a three-month period, Jefferies said.

These included deals such as Bank of America’s agreement to sell the long-term asset management business of Columbia Management to Ameriprise, Bank of New York Mellon’s acquisition of Insight Investment from Lloyds, and the purchase by Sumitomo Trust & Banking of Citigroup’s 64 percent interest in Nikko Asset Management. 

“As larger financial institutions refocus on strategic strengths, we expect they will continue to separate asset management distribution from manufacturing,” said Aaron Dorr, a managing director.

There were 38 deals in the third quarter, down from  66 in the same period last year, but disclosed deal value climbed to $4.5 billion from $4.2 billion and managed assets transacted rose to $749 billion from $728 billion, Jefferies said.

If you see Sid, tell him. Tell him his help will be needed to swallow more UK equity than at any time since the flood of privatisations in the 1980s.

That’s the clear message from UK Financial Investments, the body that holds stakes in Royal Bank of Scotland, Lloyds Banking Group and nationalised banks. Those stakes are likely to be worth about 80 billion pounds.

“We will need to innovate, be imaginative in our approach and use the full range of sales methods available to us,” John Crompton, head of market investments at UKFI, says in a speech at Reuters offices in London.

Crompton says nothing has been decided on timing, price and how long the sell-down will take. But UKFI is expected to test investor appetite some time next year with an institution placing of several billion pounds. That could include structured transactions, including exchangeable debt issues.

Once markets stabilise, shares are likely to be offered to retail investors. That’s due to the scale of the disposal, but also to allow the public to share in any profit from the taxpayer led bail-out.

Still, “Sid” — the man on the street used to drum up interest in the privatisation of British Gas — may not be called on for another couple of years. UKFI will be keen to pitch any retail offer into stable markets to avoid repeating the BP share sale disaster, when shares were sold during the 1987 stock market crash. Taxpayers wouldn’t take that kindly.

A year on from the collapse of Lehman the newspapers are full of stories reflecting on the bank’s failure. A senior Bank of England official said he was “astounded” the U.S. government let the bank fall, but some might be more shocked by the rapid bounce-back of the stock markets, which is helping big M&A deals come down the pipeline.

For the latest Reuters deals news, click here.

And here’s a round-up of deal-related stories from Monday’s press:

* French Economy Minister Christine Lagarde plans to extend billions of euros of loan guarantees to France’s top banks for another year, and is calling on them to provide action plans on financing the economy, Les Echos reported.

* Tony O’Reilly is ready to give up his controlling stake in debt-laden Independent News & Media, following months of restructuring discussions. As part of a wider plan, bondholders will take cash and shares ahead of a rights issue, the Times of London reported.

* The British Conservative Party is looking at plans to sell shares in Royal Bank of Scotland and Lloyds Banking Group to retail investors, the Financial Times said. Shadow Chancellor George Osborne is examining options to offload government stakes in the two banks, the newspaper said. Reuters story here.

* Britain’s Resolution, an acquisition vehicle founded by tycoon Clive Cowdery, may buy a general insurer as part of its plan to shake up European financial services, Chief Executive John Tiner told the Times.

Lloyds’ deal to buy HBOS was sealed in the time it takes to sup a few cocktails with Gordon Brown. But poring through the gung-ho mortgage lender’s books took nine whole months and many thousands of man hours.

Lloyds Banking Group on Wednesday admitted it had finally completed due diligence on HBOS, after agreeing to buy it in a shotgun marriage last September.

“Nine months after agreeing to purchase HBOS, it has finally completed its review of the assets at HBOS. This means … it has completed its due diligence of HBOS,” said Hank Celenti, analyst at Royal Bank of Canada.

Investors were cheered when the bank said bad debts had peaked in the first half, after it took a knife to the value of the HBOS property portfolio. H1 bad debts jumped five-fold to 13.4 billion pounds, with 80 percent due to HBOS legacy assets.

It had taken a prudent view to impairments, it said, helping its shares jump 13 percent. But the shares are still less than half their value before the deal, which many investors said was good for HBOS investors and the broader economy, but not for Lloyds shareholders.

Lloyds CEO Eric Daniels admitted in February his bank had conducted 5,000 man hours of due diligence under the hurried deal, which was brokered by UK government, and he would typically have put in 3-5 times that if he’d had more time.

Neelie Kroes’ campaign to ensure the European Commission’s rules over state aid are respected has remained in a high gear over the last few weeks. Three times the Competition Commissioner has spoken publicly about how restructuring plans for shaky banks bailed out last Autumn should be agreed with the governments of those countries.

This Tuesday she told the British Banker’s Association the truth. Royal Bank of Scotland made the largest ever corporate loss last year and yet was still saved by the government with a massive £20 billion plus rescue injection. One might ask how such an institution, so fundamentally important for the economy, could not be?

Kroes does not dispute that. What she does insist on is that such aid cannot be effectively propping up the bank indefinitely, allowing the balance sheet, and hence the bank’s business, to remain bigger than it should be, if it were not for that aid.

EC rules state that a restructuring plan to set out how this should be rectified must be made within six months of the aid being administered. After a while there is a danger that smaller banks, without aid, will be disadvantaged by their larger protected brethren.

Kroes is clearly losing her patience with the UK Government. The two camps have yet to resolve how Northern Rock will be restored to independence over 15 months after a draft restructuring plan for the UK’s fifth largest mortgage lender was submitted.

It seems as if a similar delay could happen with RBS. However, that could be disastrous for Kroes as the UK government turns its attention to the forthcoming election. RBS is such a significant bank that there is a danger Kroes’ authority will be damaged irreparably if no agreement can be reached on possible divestments.

With Germany she acted decisively agreeing a dramatic restructuring of Commerzbank and WestLB within the EC timetable.

So the next month, before RBS updates on its internal restructuring plans with interim results in early August, will be critical. An announcement on the sale of various RBS Asian businesses, possibly to Standard Chartered and ANZ, is expected imminently.

However, that is unlikely to be sufficient to satisfy Kroes, who wants to see RBS’s dominant domestic position in UK corporate and smaller business banking broken up. Perhaps we will yet see NatWest and the Royal Bank separated. Bringing those brands together was disgraced former chief executive Sir Fred Goodwin’s key deal.

After that Kroes will aim her sights at Ireland and her homeland of the Netherlands. Both states are propping up key lenders there. Kroes is due to visit Ireland for two days on July 16.

In many ways, Citigroup has been the poster child for the kind of reform lawmakers seem to be talking about when they pump up the bullhorn and turn on the state taps. Too big to fail, losing staggering amounts of money, a product of the excesses of 10 years of low interest rates, Citi’s businesses are too numerous to recount, often competing with one another for clients.

It’s so big that plans to spin off its brokerage business into a joint venture with Morgan Stanley will create the biggest brokerage in the United States. A JV, expected to be announced this week, would have an estimated value of $16 billion to $20 billion, a source said, and would have more than 23,000 financial advisers, surpassing rivals Bank of America and Wells Fargo.

There are reasons for optimism that the making of a mega-broker could mark the beginning of a huge round of long-sought consolidation in the financial sector. It would certainly mark a huge divestment for Citi’s embattled CEO, Vikram Pandit. And it also comes as signs of more asset sales poke up through the quagmire of recession. South African billionaire Johann Rupert’s investment vehicle is looking at buying Lehman Brothers’ merchant banking business.

There are also reasons to worry that taxpayers are not done footing bills. Britain has had to pump more than $25 billion into Lloyds TSB and its takeover target, HBOS, after investors turned up their noses at a rights issue. Germany pumped 10 billion euros into Commerzbank last week.

And unless the promised recovery kicks in soon, having a stake in a giant brokerage might not prove as profitable as investors hope.

In other Deals News:

* Ford Motor has had talks with potential bidders for its luxury Volvo brand, Ford Chief Executive Alan Mulally said.

* Malaysia’s national car company Proton may sell a controlling stake to a foreign carmaker, company Chairman Nadzmi Mohd Salleh told the Business Times newspaper.

* African investment bank and asset management group Imara Holdings said it had formed an alliance with Nigerian financial services firm Chapel Hill Denham to give it a foothold in Africa’s most populous nation.

(Photo: A Citibank branch sign is seen behind a road sign in central Sydney REUTERS/Tim Wimborne)

Shares of HBOS and Lloyds TSB got a boost this morning in London as it appeared Lloyds was less likely to try to renegotiate its takeover of HBOS. Standard Life Investments, a top investor in Lloyds and HBOS, supports the planned takeover under the original terms, a person close to the investment firm said, and analysts suggested political and regulatory pressure would force the deal through, despite its chunky discount to the indicated offer price.

BBC Business Editor Robert Peston writes:

So if you believe that the terms of the deal won’t and can’t be changed, the current HBOS share price is an opportunity to buy £10 notes for £6.60.

That looks too good to be true. And the normal investing rule is that if it looks too good to be true, then don’t touch it even if you’re in a radiation-proof suit.

DealZone postulated yesterday that other big deals could head the same way because of falling prices - think Bank of America’s bid for Merrill Lynch. HBOS’ and Lloyds’ share price puts that deal at a 31 percent discount to its original price tag, compared with a discount of 16 percent for the Merrill/BofA deal.

The ban on short sales in the U.S. is making it tough to gauge just how much doubt there really is about that deal, though its current discount - even after yesterday’s rally - would normally raise eyebrows. That ban is set to expire tomorrow, but can be extended if the SEC deems it necessary for a maximum of 30 days in total.

If the government sees itself as being in the business of salvaging takeovers of distressed banks, a position it bolstered by backing Citigroup’s takeover of Wachovia on Monday, might the SEC seek to keep the ban in place for more than a month?

Deals of the Day:

** Anglo-Swiss miner Xstrata Plc dropped immediate plans for a $10 billion bid for No. 3 platinum producer Lonmin Plc but set the scene for a later deal by scooping up Lonmin shares as they fell.

** Iceland’s troubled banking sector witnessed further upheaval as Straumur-Burdaras said it would pay 380 million euros ($537 million) to buy assets from Landsbanki .

** Hewlett-Packard Co has agreed to buy LeftHand Networks Inc, a network storage provider, for $360 million in cash.

** Video-game retailer GameStop said it will acquire French video-game retailer Micromania from private equity fund L Capital for $700 million, including debt, to gain a presence in France.

** Struggling Finnish technology firm Elektrobit said it had agreed to sell its WiMax baseband software assets to Nokia Siemens Networks [NSN.UL] as part of its new restructuring plan.

** Royal Dutch Shell is poised to take a large stake in its Russian partner company Sibir Energy before the end of this year, the Financial Times reported.

** British instruments and controls maker Spectris Plc is buying LDS Test & Measurement from SPX Corp for $102 million, on a debt and cash-free basis, the company said.

** Nidec Corp <6594.OS>, the world’s largest maker of tiny motors used in hard disk drives, said it would buy a majority of Fuji Electric Holdings’ <6504.T> industrial motor unit for nearly 10 billion yen ($94 million).

** Indian vaccines maker Panacea Biotec Ltd