BUSINESS leaders accused the government last night of trying to force through the takeover of HBOS by Lloyds TSB, after Peter Mandelson warned the bank would be bailed out only if the deal went ahead.
Concern about ministers' tactics came as new fears emerged about the health of Scotland's financial services industry on the back of figures showing that the sector was still in decline, in marked contrast to the picture for the UK as a whole. Economists at a Glasgow think tank, the Centre for Public Policy for Regions, said the drop in the second quarter of the year was mainly down to insurance companies, rather than banks.
The announcement from Lord Mandelson, the Business Secretary, that the recapitalisation offer for HBOS was contingent on the takeover going through left analysts and opposition politicians concerned about the lengths to which Westminster will go to force through the deal.
The Scotsman has learned that his remarks have driven Alex Salmond, the First Minister, to write to Alistair Darling, the Chancellor, demanding clarification on the government's position.
Yesterday, 64 MPs – more than one in ten – voted against suspending competition rules to allow the HBOS-Lloyds TSB deal to happen. The 424 who backed the move included all the Edinburgh Labour members.
The government announced last week that it had agreed to take a stake in Royal Bank of Scotland, Lloyds TSB and HBOS. Its offer to Lloyds and HBOS was a total of £17 billion – £5.5 billion and £11.5 billion respectively.
The businessman Jim Spowart told The Scotsman the government appeared to be trying to "railroad" the deal through. He said: "This is the government forcing this through.
"The Scottish population is being treated with absolute contempt. That puts the very heart of democracy at risk." He said there was a "wall of silence and gun-to-the-head approach" from politicians.
Mr Salmond is calling on the Chancellor to "urgently clarify" Lord Mandelson's remarks on the growing controversy surrounding the proposed takeover.
Lord Mandelson told the Commons business committee this week that the government's recapitalisation of HBOS and Lloyds TSB depended on the takeover proceeding apace. "The recapitalisation is predicated on the merger going ahead," he said.
Mr Salmond's letter states: "As you will have seen, there is great interest in the implications of the potential Lloyds TSB merger with HBOS in terms of jobs and decision-making functions in Scotland and competitiveness of the market.
"Questions have been asked by a variety of parties seeking clarification of whether the government recapitalisation is available to both banks as independent entities or whether the recapitalisation is contingent on the merger."
The First Minister is believed to have been particularly irked by additional remarks from Lord Mandelson that he had "heard nothing that suggests the merger wouldn't go ahead".
This indicates the Business Secretary is unaware of the growing questioning of the takeover proposal in Scotland and, in particular, Mr Salmond's widely reported speech at the SNP conference in Perth last weekend in which he criticised the plan.
Alex Potter, an analyst at the stockbroker Collins Stewart, said he could not understand the government's persistence in pushing for the takeover when the available liquidity package would do more to help the banks.
"It seems to show the weak grip that Lord Mandelson appears to have on ways to stabilise the financial system," he said.
Keith Bowman, a banking analyst with the broker Hargreaves Lansdown, said although there were strong arguments for HBOS standing alone, "the government is probably too fearful to reverse their stance on the takeover in case they would be undermining the wider plan".
Bryan Johnston, an Edinburgh-based analyst with Bell Lawrie, said: "I have been reluctant about politicians guddling about in the private sector and I regard the remarks by Peter Mandelson with caution.
"There is an element of verbal coercion that may rattle people. I think we are in momentous times and I wish Peter Mandelson and his like would keep their mouths shut."
But Shane O'Riordain of HBOS said: "Lord Mandelson was simply stating the facts. The capital injection is conditional on the deal with Lloyds TSB being completed. That inter-conditionality was communicated to all stakeholders two weeks ago and HBOS has continually referred to it since. It is hardly a surprise."
A Treasury spokesman said it was wrong to suggest the government was strong-arming the banks into the deal. He went on: "The merger is a commercial decision and the boards of both companies would not recommend anything that they did not consider to be in the best interests of their shareholders.
"We said we would support that by waiving the normal competition requirements to allow it to go through quickly."
The spokesman would not comment on what funding might be available to HBOS were its shareholders to vote down the Lloyds TSB merger as this was "hypothetical".
He added that the two banks had gone to the government to ask for recapitalisation on the basis of their merger and the government agreed on those terms.
City sources said they believed Lord Mandelson had been so outspoken in favour of the deal because "the government now believes it has got the City institutions onside behind the takeover".
BACKGROUNDTHE impending marriage of Lloyds and HBOS has had a troubled courtship –which may go some way to explain the government is adamant its matchmaking will not fail at the alter.
The proposal was accepted in the corridors of the Treasury late at night on Wednesday September 17. According to reports, the chief executives were left to hammer it out between themselves.
The outcry was swift from businessmen and politicians, at least north of the Border.
By the start of this month, after Washington initially rejected the £380billion bail-out of US banks, sending shares plummeting across the Atlantic, the deal seemed in doubt. Indeed, it was renegotiated down some a fortnight later. The initial terms valued HBOS shares at 0.83 of a Lloyds share, but this was reduced to a 0.605 ratio.
However, this was overshadowed by the news, revealed at the same time, that both banks, along with RBS, were to take on government funding.
It was announced on October 13 that the banks were to take up the recapitalisation offer that the government had made to them and their contemporaries a week previously.
Bill Jamieson:A few days in the job and Mandy's already riding roughshod over shareholder democracyBritain heading for recession, Brown admits for first timeThe full article contains 1102 words and appears in The Scotsman newspaper.
