One rule for Lloyds, one for everyone else, signals Darling

ALISTAIR Darling yesterday effectively slammed the door on a rival bid to keep HBOS an independent bank, when he set tough conditions on any alternative rescue deal.

The Chancellor made it clear that the Treasury would not match its offer to buy shares in a stand-alone bank at the same rate as that for the takeover by Lloyds TSB.

In a statement to parliament, he effectively set the bar higher for alternatives to the takeover. He said there was "no automatic right of access" to the government's financial rescue package, which was only open to "credible" senior management teams with clear funding and a sustainable business plan.

The move was interpreted as a slap-down to the efforts of two of Scotland's leading financiers, Sir George Mathewson and Sir Peter Burt, to come up with an alternative.

Last night, Sir Peter said that the Chancellor's move, on the eve of today's vote by Lloyds TSB shareholders on the proposed takeover, made an alternative bid "effectively improbable".

He said the statement was "regrettable", as he and Sir George had been making good progress in raising £500 million – the gap between the £11.5 billion of new capital offered to HBOS by the Treasury, and the £12 billion its board said was needed to keep it independently afloat.

Sir Peter told The Scotsman: "For those seeking to keep HBOS independent, it (the Treasury] has raised every hurdle it could find to the highest possible level. Although ostensibly leaving the decision to shareholders, the barriers to any alternative proposal are now so great as to make any such proposal effectively improbable.

"It is particularly sad as we were making good progress, and were on course to raise at least the difference between the £11.5 billion and the £12 billion needed to keep HBOS independent.

"Although we are still looking at other options, it appears likely that the takeover, with the consequent loss of jobs and the anti-competitive aspects noted by the Office of Fair Trading, will come to pass unnecessarily. But what the government is determined to get, it has the power to ensure it gets."

Jim Spowart, another prominent businessman who had attempted to engineer an alternative rescue, was also furious. He said: "If George Mathewson and Peter Burt do put another offer in, that offer will be at a disadvantage to Lloyds TSB. How is that an even playing-field? That is an affront to democracy."

Under the terms of the £50 billion bank recapitalisation plan announced by Mr Darling on 13 October, the government will buy up to £17 billion of ordinary and preference shares in HBOS and Lloyds TSB at a discounted rate of 8.5 per cent (plus 1.5 per cent costs that the banks must meet).

The purchase price was set at 113.6p a share for HBOS and 173.3p for Lloyds. But shares in both have since fallen sharply and last night stood at 63p for HBOS and 131.2p for Lloyds. Mr Darling's statement makes clear that ordinary shares will in future be bought at a price that reflects any recent fall in value – offering a worse deal than a month ago.

In addition, the government could expect a 14 per cent return on bank preference shares – up from the 12 per cent it has demanded under the current takeover proposal.

One City source said there were now clear incentives for HBOS and Lloyds TSB shareholders to back the takeover as the alternative was far less financially appealing: "The Treasury is saying supporting Burt and Mathewson is like turkeys voting for Christmas."

The SNP and Liberal Democrats, who have urged a full examination of alternative rescues for HBOS in the wake of coverage in The Scotsman, repeated concerns about the effect on jobs.

MSP Alex Neil, of the SNP, said: "The Treasury seems to be doing everything it can to inject doubt and frustrate alternate plans that could keep HBOS independent and safeguard competition and tens of thousands of jobs. It is increasingly clear that the UK government holds all the cards in this deal."

Tavish Scott, leader of the Scottish Lib Dems, said: "Is the Chancellor really saying he will allow an independent HBOS to collapse? That is not a credible statement from the UK government."

But Accord, a union representing HBOS staff, said the bank could not survive as an independent entity and the Lloyds takeover represented the best deal for staff. General-secretary Ged Nichols said there was also a risk that the bank would be sold off piecemeal if the government was forced to take a larger stake and effectively nationalised it.

Mr Nichols said: "Because of the bank's reliance on the wholesale market for funding and its exposure to the UK housing and commercial property sectors, we do not believe that HBOS could have a secure and sustainable future on its own."

Shane O'Riordain, a spokesman for HBOS, said: "We reiterate our view that Sir Peter Burt and Sir George Mathewson have not provided either a business plan or a funding plan to take this company forward."

ANALYSIS - Bill Jamieson

Not so much a rout as a disaster, with taxpayer losing £10.5bn instantly

ANOTHER black day for Scotland's banks – and a deeply apprehensive one for all who use them or work for them.

Yesterday shares in HBOS sank a further 15 per cent to 63p, taking the fall from their peak last year to 91 per cent. At this level the bank is price-tagged at just £4 billion – £40 billion of value having vaporised this year.

It is little better at rival Royal Bank of Scotland. Yesterday its shares sank a further 6.7 per cent to a new 12-month low of 41.7p. This price-tags the group, which claimed a year ago to be one of the world's top five banks, at just £18 billion.

The latest falls have been driven by fears that the deepening recession will trigger even greater bad debt write-offs and writedowns than already provided for under the government's recapitalisation plan – and could necessitate yet more taxpayer cash injections.

As matters now stand, taxpayers stand to lose £10.5 billion instantly on the re-financing plans already under way.

For RBS, the government has underwritten a rights issue at 65.5p a share to raise £20 billion. At Lloyds TSB the rights price the government will pay is 173.3p. And for HBOS it is underpinning an £11.5 billion cash injection at 113.6p.

These prices are well above the level at which these shares stand now, and the aggregate gap between them is £10.5 billion.

Do share prices matter? Yes – on three counts. First, they are an alternative means for raising capital. But as confidence has drained from the banking sector, it is highly unlikely that anyone bar the government would put up money by buying new shares now.

Second, they are a barometer of confidence in the bank and in the wider economy. And even with the prospect of further interest rate cuts and a tax-cutting package to be unveiled next Monday, confidence is sinking by the day. Third, bank shares are a mainstay of pension funds. And many facing retirement will be hit.

As for HBOS, Alistair Darling has now raised the barriers for an alternative bidder to such insurmountable levels that there is no choice but for shareholders to accept the Lloyds TSB takeover.

The implied price last night was 79p – down almost 25 per cent in a week. This is no bank rout. It is a disaster.

Last-ditch legal bid could still thwart takeover, bankers hope

SENIOR banking figures are considering a last-ditch legal attempt to overthrow the controversial Lloyds TSB takeover of HBOS.

The plan is to lodge an appeal with the Competition Appeals Tribunal against the decision by Lord Mandelson, the Business Secretary, to set aside the Office of Fair Trading's (OFT) concerns over competition policy.

The tribunal, set up under the 2002 Enterprise Act, can review and overrule decisions made by the minister on merger and market references.

Cases are heard before a panel consisting of three members: either the president, Sir Gerald Barling, or one of the chairmen judges, and two ordinary members.

Lay members include the economist Professor Andrew Bain and the Scots advocate Peter Grant-Hutcheson.

A letter, seen by The Scotsman, has been drafted to the tribunal citing two grounds for appeal. The first is that Lord Mandelson failed to keep an open mind in arriving at his decision to put aside OFT concerns about the takeover.

It is claimed his discretion was fettered by pronouncements by Gordon Brown, the Prime Minister, and Alistair Darling, the Chancellor, when they declared that competition rules would be waived when the takeover plan was first announced. "In view of statements made by members of the Cabinet and the collective responsibility of Cabinet, we would argue that the previous statements of the Prime Minister and Chancellor about the merger have fettered the Secretary of State in reaching his decision," the letter states.

The second reason for appeal was that "the grounds for making the decision at the time the decision was made were not reasonable by the Secretary of State".

The letter argues that it was not the takeover bid that provided financial stability to the UK banking system, but the initiative launched by the government on 13 October to provide guarantees, loans and capital to banks.

"The Secretary of State should either refer the merger to the Competition Commission, as recommended by the OFT, or provide another reason as to why it is in the public interest not to refer the decision to the OFT," the letter states.

Bill Jamieson

Fuel factor pushes down inflation to 16-year low

CHEAPER fuel prices sent inflation falling at its fastest rate for 16 years during last month and paved the way for more interest rate cuts.

The Consumer Prices Index – the government's official benchmark of the cost of living – slowed to 4.5 per cent in October from 5.2 per cent the previous month.

The bigger-than-expected 0.7 per cent decline is the largest monthly drop since April 1992, the Office for National Statistics said.

Motorists are finally feeling the benefit of falling forecourt prices as crude oil tumbles to less than half its mid-July peak. The average price of a litre of petrol fell 7.1p to 104.5p in the month to October, with diesel dropping 7p to an average 116.3p.

But the sharp fall brings home warnings of the threat of deflation – negative inflation – next year from Bank of England governor Mervyn King and Prime Minister Gordon Brown. A prolonged cycle of falling prices could send the UK into a deep slump.

Experts said interest rates could fall further from the current 53-year low of 3 per cent to kick-start the economy.

Parties battle over future public spending

LABOUR and the Conservatives clashed over spending plans yesterday, with each side trying to outflank the other on cuts.

David Cameron, the Conservative leader, shelved his party's promise to match the government's growth in public expenditure under a future Tory administration from 2010. He insisted the move was crucial to avert the inevitable tax rises Labour's policies of high spending and spiralling borrowing would reap.

But the Chancellor, Alistair Darling, pledged the government would be more efficient and hinted at further savings in Monday's Pre-budget Report.

Yvette Cooper, the Chief Secretary to the Treasury, also said yesterday "there may be scope to go beyond" the £30 billion in savings already recommended in the Gershon review of government spending.

• A poll from Ipsos Mori found the Tories' lead over Labour cut to just 3 points.

Thousands more lose jobs

THE jobs axe cut deeper into the UK economy yesterday, with thousands more posts being slashed as unemployment edged closer to the two million mark. Plumbing and building supplies firm Wolseley announced plans to cut 2,000 jobs and close more than 200 branches in the UK and Ireland. Union leaders said National Express was to trim more than 300 workers from its East Anglia franchise. The firm said it was also reviewing catering on its Scotland-London east coast franchise. And Independent News and Media said it was axeing 90 posts, mainly editorial.