Phew! Due diligence done at last

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.

Kroes keeps up pressure

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.

Making a Monster Brokerage

CITIGROUP/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.

Deal spreads open wide


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.