Britain’s Scandal-Battered Banks Paralyzed as Election Looms

Jakarta Globe, Stephen Morris,May 01, 2015

This picture shows a general view of a branch of the Royal Bank of Scotland (RBS)
 alongside a branch of Clydesdale Bank in Edinburgh, on September 11, 2014.
(AFP Photo/Andy Buchanan)

Whatever the outcome of Britain’s election next week, the outlook for the country’s banks is worsening.

Almost seven years since the industry received the biggest taxpayer bailout in history, public confidence in banks is near an all-time low and lenders’ efforts to boost profit are being frustrated by investigations into alleged currency and interest rate-rigging. Since the coalition government took power in 2010, UK bank stocks have lost 7 percent. Their US counterparts have returned 46 percent.

“You can hardly believe we are now seven years into this crisis, and we’ve still got billions in fines to come and virtually none of the major banks predicting decent returns for at least another three to four years,” said Ed Firth, head of European bank research at Macquarie Group. “If you told us that in 2007, we just wouldn’t have believed it.”

The industry’s prospects look to be getting worse as both major political parties distance themselves from the City, London’s financial district, before the May 7 election. The Bank of England is preparing harsher stress tests this year that may force firms to bolster capital buffers and new rules require expensive firewalls to be created around consumer operations. A levy on banks’ balance sheets has been increased eight times since 2010.

Tarnished bankers

UK taxpayers sunk about 1 trillion pounds ($1.5 trillion) into banks in 2008 and 2009 to prop up the nation’s failing system, and still own 79 percent of money-losing Royal Bank of Scotland Group and a fifth of Lloyds Banking Group. Before the election, the tarnished reputation of the industry has taken another battering with HSBC Holdings embroiled in allegations it aided tax evasion. The Asian-focused lender said last week it may leave London because of rising tax and regulatory costs and Standard Chartered may join them.

The banks remain unloved by the taxpayers who saved them: 68 percent of Britons said it would be good or would make no difference if lots of bankers left the country, according to a survey by polling company YouGov in November. Seventy-three percent want to see bankers’ bonuses capped.

The UK’s four largest banks face 19 billion pounds more in misconduct charges in the two years through 2016, according to Standard & Poor’s. In the five years to 2014, about 7.5 percent of their revenue, or 42 billion pounds, was swallowed by charges for wrongdoing.

Earnings decline

This week’s earnings reports show how the past continues to haunt the banks. Barclays set aside almost 1 billion pounds and RBS another 434 million pounds to settle allegations they rigged currency benchmarks and for selling consumers payment- protection insurance they didn’t need or that didn’t cover them. Meanwhile, Standard Chartered’s first-quarter pretax profit fell 22 percent, with all but one division reporting lower earnings. Lloyds reports on Friday and HSBC next week.

“Conduct and litigation charges are now a way of life for the U.K. banking industry,” said Nigel Greenwood, a credit analyst at S&P. “Some form of charge seems probable every year for the larger banks.”

Britain’s Labor Party is seeking to capitalize on bankers’ enduring bad reputation by pledging a new tax on bonuses to pay for a youth employment program and to increase the levy on banks’ balance sheets. The industry scarcely fared better in George Osborne’s March budget, which boosted the bank levy and barred them from deducting customer compensation from taxable profit, costing the industry 5.3 billion pounds over five years.

Shrinking industry

The UK is introducing some of the world’s toughest rules on financial conduct, including jailing senior bankers for “reckless misconduct” that contributes to a firm’s collapse, as it attempts to focus accountability on individuals, a source of public anger.

The industry is smaller and less profitable than before the crisis. Together, the banks have eliminated 193,828 jobs and cut 1.82 trillion pounds of assets since 2008, according to data compiled by Bloomberg. The leadership at all five banks has changed since the crisis, twice at RBS.

“The regulations continue to change, capital requirements continue to go up and conduct charges continue. There’s no sign of the end,” said Stephen Carter, co-head of financial institutions for Europe, Middle East and Africa at Credit Suisse Group, who advised the UK government on the bailout in 2008. “If the level of capital that’s being held in the banking sector is roughly double what it was pre-crisis, by definition the returns have gone down.”

Profit declines

None of the major British lenders were able to make a return-on-equity of more than 8 percent in 2014, the data show. The average ROE was 17.7 percent in 2007.

After profitability at Barclays, Standard Chartered and HSBC declined in 2014, the three reduced their ROE targets, citing increased regulation, greater capital requirements and high funding costs.

Lloyds and HSBC are the only major UK banks trading above its book value, indicating investors see the other three as worth less than they would receive if the company failed and liquidated its assets.

UK banks’ “problems were deeper than the market realized, most expectations were for a five-year job, but here we are seven years and counting,” said Chris White, who helps oversee about 3.2 billion pounds at Premier Asset Management in Guildford, England. “Banks couldn’t write off everything on day one as their balance sheets wouldn’t have survived, so they’ve stretched out liabilities over a period of time, yet still there’s more work to be done.”

CEOs replaced

Investors have pressured bank boards to replace top executives as the share prices suffered. RBS has fallen 14 percent this year, almost completely erasing its gains in 2014. Standard Chartered plummeted 29 percent last year, followed by a 10 percent drop at Barclays.

Standard Chartered replaced Chief Executive Officer Peter Sands, 53, with former JPMorgan Chase & Co. banker Bill Winters, also 53, and overhauled its board, as it tries to reverse two years of falling profits. It may still need to issue shares to bolster capital, analysts say, and the bank is monitored by the US after breaching a ban on transactions in Iran.

The Asia-focused lender is just the latest to change bosses. RBS has had two new CEOs since 2007, with retail banker Ross McEwan, 57, now in charge. Barclays also picked a consumer banker, Oxford-educated Antony Jenkins, to take over from Robert Diamond in August 2012 after the Libor-rigging scandal.

RBS’s outlook

RBS was meant to have returned to private ownership by last October, according to transcripts of meetings of the Bank of England policy makers that arranged the lender’s bailout. RBS Chairman Philip Hampton, 61, similarly predicted in May 2013 the government would be able to start reducing its stake in 2014.

Instead, the lender, recipient of a 45.5 billion-pound rescue, had its seventh straight annual loss in 2014. In March, it finally gave up its ambitions to be a global bank, and may cut as many as 14,000 investment-banking jobs to refocus on the UK consumer market, according to a person with knowledge of the matter. It had another loss in the first quarter, and the stock still trades below the government’s break-even price, where taxpayers would at least get their money back.

Lloyds progresses

Lloyds, Britain’s biggest mortgage lender, comes the closest to a success story, returning to profit after five years of losses and planning to resume dividend payments. The turnaround comes with an asterisk: It has paid 12 billion pounds to compensate clients for improperly sold payment protection insurance and is still about 20 percent owned by the government that spent more than 20 billion pounds to save it.

Banks also have to contend with new rules forcing them to separate their consumer banks from riskier trading businesses to protect depositors. The move may make investment banking operations untenable for the industry, according to Bill Michael, head of Europe, Middle East and Africa financial services for KPMG in London.

“The fundamental problem with the entire debate post- crisis is that we’ve been unable to separate our response to protecting depositors and taxpayers from other banking activities and it’s paralyzing for the industry,” Michael said. “The sector is still at an inflexion point and won’t look like anything it does now in three to four years because none of these banks’ models are sustainable.”

Bloomberg

Bank of England blasts Lloyds for rigging bailout funding

Taxpayer-owned bank ordered to pay nearly £8m after 'reprehensible and unlawful' manipulation of repo rate – on top of £218m in fines for Libor rigging

The Guardian, Jill Treanor, Monday 28 July 2014

Lloyds Banking Group fined over Libor rigging. Photograph: Facundo Arrizabalaga/EPA

The Libor-rigging scandal took a new twist on Monday when Lloyds Banking Group faced accusations of unlawful behaviour after being ordered pay compensation to the Bank of England for manipulating the fees it paid for emergency funding during the height of the banking crisis.

In addition to £218m of fines from regulators in the UK and US for rigging the benchmark rate, the 24% taxpayer-owned bank was ordered to pay Threadneedle Street nearly £8m.

The fines imposed on Lloyds cover two main issues – manipulating Libor, for which seven other firms have been punished – and, for the first time, rigging another rate, known as the repo rate. This repo rate was used to calculate the scale of the fees paid to the Bank of England for its special liquidity scheme (SLS) which was created to pump money into the financial system amid fears banks were facing a credit crisis.

The Bank of England said Lloyds' manipulation of the repo rate was "highly reprehensible and clearly unlawful".

As has been the case with other Libor fines – Barclays was the first to be penalised in June 2012 – regulators on both sides of the Atlantic published emails and electronic chats exposing evidence of manipulation. In one exchange, a Lloyds trader remarks when asked about reducing a Libor rate: "every little helps... It's like Tescos".

Unlike other Libor penalties, Lloyds is also paying the Bank of England £7.8m in compensation because of the lower fees being paid for the SLS, which was introduced in April 2008 and closed in January 2012.

In a harshly worded letter, the Bank of England governer Mark Carney said this scheme was intended to help banks get through the worse of the financial crisis as Lloyds TSB rescued HBOS, which owned Halifax and Bank of Scotland.

"Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved," Carney said.

The Lloyds chairman, Lord Blackwell, replied: "I absolutely share your concern about the nature of the SLS conduct and in particular its implications for reducing fees. This was truly shocking conduct, undertaken when the bank was on a lifeline of public support".

Tracey McDermott, the FCA's director of enforcement and financial crime, said: "The firms were a significant beneficiary of financial assistance from the Bank of England through the SLS. Colluding to benefit the firms at the expense, ultimately, of the UK taxpayer was unacceptable.

"The abuse of the SLS is a novel feature of this case but the underlying conduct and the underlying failings - to identify, mitigate and monitor for obvious risks - are not new. If trust in financial services is to be restored then market participants need to ensure they are learning the lessons from, and avoiding the mistakes of, their peers. Our enforcement actions are an important source of information to help them do this," she said.

The Financial Conduct Authority, which issued fines alongside two US regulators, shows a manager from Bank of Scotland and a trader at Lloyds acknowledging their influence over the repo rate used to price the SLS. "While we've got two votes we should use this to our advantage, you know what I mean?" the Bank of Scotland manager told his colleague in 2009, four months after the two banks merged.

Four individuals at Bank of Scotland and Lloyds were involved in or knew about the repo fixing while 12 were involved in or knew about rigging Libor when priced in sterling, US dollars and Japanese yen, where there was collusion with the Dutch bank Rabobank.

The Libor fine also covers a period when Bank of Scotland was still part of HBOS and as it was being rescued by Lloyds. Bank of Scotland submitters to Libor were given direct instructions to ensure their rates did not appear too high. Submitting a higher rate than rivals may have indicated their bank was in financial distress. An individual at Bank of Scotland responsible for submissions to Libor sent a message to a rival: "I've been pressured by senior management to bring by rates down into line with everyone else". Only days previously, the rate had been half a percentage point higher than rivals.

Libor has been overhauled since the furore caused by the fines on Barclays and others, including Royal Bank of Scotland and UBS. During the period of the offences it was based on submissions from banks at the rate they believed their rivals would charge them to borrow for a number of periods, ranging from overnight to 12 months.

Related Article:

Lloyds suspends seven people after £226m bill for rigging interest rates

US regulator sues 16 banks for alleged Libor rigging

BBC News, 14 March 2014

 

Some of the world's biggest banks have been accused of colluding to fix Libor

Libor scandal

• Former trader charged over Libor
• Libor change responds to scandal
• EU proposals to take control of Libor
• Can we ever trust bankers again?

A US regulator has sued 16 banks for allegedly manipulating the London interbank offered rate (Libor).

The Libor rate is used to set trillions of dollars of financial contracts, including mortgages and financial transactions around the world.

The regulator said the manipulation caused substantial losses to 38 US banks which were shut down during and after the 2008 financial crisis.

The sued banks include Barclays, HSBC, Citigroup and Royal Bank of Scotland.

The British Bankers' Association (BBA) has also been sued by the regulator - the US Federal Deposit Insurance Corporation (FDIC).

"BBA participated in the alleged scheme to protect the revenue stream it generated from selling Libor licenses and to appease the Panel Bank Defendants that were members of the BBA," it was quoted as saying by the AFP news agency.

The FDIC alleged that the banks mentioned in its lawsuit rigged the rate from August 2007 to at least mid-2011.

Other banks named in the lawsuit include Bank of America, JPMorgan Chase, Deutsche Bank, Lloyds Bank, Credit Suisse, UBS, and Rabobank.

Growing pressure

Libor is the average rate at which banks lend money to one another and is decided on a daily basis.

Most of the world's biggest banks contribute estimates to form the Libor.

But there have been allegations that some have looked to profit from it by understating or overstating their submissions.

Over the past two years, regulators across the globe have been investigating the manipulation of the rate and there have been $3.7bn (£2.26bn) in fines to date.

A string of international banks and brokers, including Barclays and the Royal Bank of Scotland, have faced both criminal and civil penalties for their involvement in the scandal.

Some banks have also been found to have understated their submissions in the period during and after the financial crisis.

They did so in order to avoid the perception that they were having to borrow at higher interest rates than their peers and might therefore be in financial difficulty.

Related Article:

Libor scandal claims second executive at Rabobank

Bankers' bonus cap architect says EU must sue UK government

MEP calls on European commission to take UK to court for allowing banks to 'blatantly' sidestep EU rules limiting bonuses

The Guardian, Jennifer Rankin and Jill Treanor, Tuesday 4 March 2014

The UK government should be sued for allowing banks to sidestep new
bonus caps, says one MEP. Photograph: Alamy

One of the architects of the EU's cap on bankers' bonuses has called for the UK government to be sued for allowing banks to sidestep the new rules as two more high street banks were preparing to hand their bosses up to £1m in extra pay to avoid the clampdown.

Philippe Lamberts, the Belgian Green MEP who helped devise the restrictions, said it was clear the UK was failing to implement EU law and accused the coalition of having no interest in halting "absurd remuneration packages". He urged the European commission to take the UK to court for allowing bankers to bend the rules which limit bonuses to 100% of salary or 200% if shareholders approve.

His plea came as Barclays and the bailed-out Lloyds Banking Group are expected to reveal they are handing their bosses Antony Jenkins and António Horta-Osório new share awards, on top of their salaries, to prevent their overall pay falling as a result of the cap. The new pay deals could be announced as early as Wednesday.

Their disclosures will follow HSBC's move to pay its chief executive, Stuart Gulliver, an additional £32,000 a week in allowances on top of his £1.2msalary, and after Virgin Money raised the salary of its boss, Jayne-Anne Gadhia, to £637,000 from £550,000 as a result of the restriction. Royal Bank of Scotland, which is 81% owned by the taxpayer and paid out £567m in bonuses after making an £8bn loss, is yet to announce its response to the bonus cap. However, it is considering asking its shareholders for permission to pay out bonuses worth 200% of salary. Standard Chartered reports its results on Wednesday when it will also face questions about how it intends to tackle the cap.

"What we are witnessing now is an attempt by the major banks, with the support of the British government, to circumvent the rules and that is to compensate what we did on terms of structure, by just raising the fixed rate of remuneration," said Lamberts.

The European commissioner for the single market, Michel Barnier, should take legal action against the UK, he said. "I will see Barnier soon and I will encourage him to do that. I know that the commission has already asked for specific information from the British government. So I will certainly take a hard look at that."

The chancellor, George Osborne, is challenging the bonus cap in the EU's highest court because it will push up the amount of fixed pay but Lamberts said he was not worried about losing because the UK government argument that the caps are illegal was based on "fragile" logic.

"People like David Cameron and George Osborne are part of the same club. These are people who are really out of touch with reality. They are part of the same class, so I think it is natural for them to defend their interests."

The MEP insisted that the EU cap on bankers' bonuses had not failed, because "disguised remuneration" was now out in the open. Barnier on Tuesday published details of which bank staff would be affected by the cap and said that "some banks are doing their utmost to circumvent remuneration rules… The commission will remain vigilant to ensure that new rules are applied in full."

The European commission said it was too early to say if any country was in breach of the capital requirements directive, known as CRD IV, which includes the bonus cap.

Lamberts, however, said the UK government was in breach of the directive:"To me it is clear that it doesn't act. And I think the best example of that is when a bank is 80% owned by the British government and they are not acting. To me they have no appetite for really going after absurd remuneration packages."

The Bank of England governor, Mark Carney, is also opposed to the restrictions and has written to the Treasury select committee to promise a new consultation this month on tougher measures to claw back bonuses and to extend the deferral period for bonuses from three to five years, in line with recommendations by last year's parliamentary commission on banking standards.

Carney warned the select committee - which is overseeing implementation of the commission's recommendations - that its proposal to claw back pension rights from individuals at banks in receipt of taxpayer support could be in breach of European human rights legislation and the UK pensions act.

Lloyds has already announced that Horta-Osório is receiving a £1.7m bonus for 2013 and is likely to reveal a payout from a long-term incentive plan of around £2.9m. It may also disclose whether bonuses are being clawed back from previous management for new provisions for PPI mis-selling and last year's £28m fine for bonus structures which encouraged mis-selling.

Lloyds becomes the first bank to strip executives of bonuses as it takes back £2m from senior management

• Former chief executive and four other previous directors targeted
• Move will prompt calls for other banks to follow suit

Daily Mail, by Ruth Sunderland, 20th February 2012 

Clawback: The move is understood
to come on the orders of Lloyds chief
 executive Antonio Horta Osorio (pictured)

Lloyds Banking Group has become the first bank to strip executives of part of their bonuses since the start of the financial crisis.

In total 13 executives will lose some of their bonuses for 2010 in the wake of the scandal over payment protection.

The bailed-out bank is to take back a combined total close to £2m from its former chief executive Eric Daniels, along with four other current and previous senior directors who will lose sums of up to £262,50.

A further eight executives, below board level, will be stripped of 5 per cent of their bonus awards of around £100,000 each, the state-backed bank added.

The move will prompt calls for other banks to follow suit.

It is understood to come on the orders of Lloyds chief executive Antonio Horta Osorio.

Earlier this year he volunteered to give up his bonus of up to £2.4 million because he had taken a leave of absence due to exhaustion and felt bosses’ rewards ought to reflect hardships suffered by customers during the downturn.

The clawbacks have been imposed due to Lloyds’ involvement in the payment protection insurance (PPI) mis-selling scandal.

Daniels will lose 40 per cent or £580,000 £1.45m bonus for last year. The 60 year old former chief left the bank in March 2011 but remained on the payroll until the following September receiving £100,000 a month, although he did no work for his erstwhile employer.

The PPI scandal was one of the biggest of its kind in recent years.

More...

• So when will we get our money back? Lloyds and RBS expected to report losses of £4bnlast year
• It wasn't such a sacrifice after all: RBS chief Stephen Hester gets £600k shares windfallweeks after giving up £1m bonus

Customers were sold insurance policies when they took out loans that were meant to cover repayments if they fell sick or lost their job.

The products were extremely lucrative for the banks but often turned out to be of dubious value to consumers. Lloyds last year said it would have to write off £3.2 billion to cover the cost of redress.

PPI scandal: Lloyds last year said it would have to write off £3.2 billion
to cover the cost of redress

Sacrifice: Eric Daniels (left) and Helen Weir (right) are among the
executives targeted in the clawback

City watchdog the Financial Services Authority called on the banks to reflect the seriousness of the scandal in executive pay-packets. Horta Osorio was not at Lloyds at the time of the mis-selling.

The other bosses who face a clawback are departing finance chief Tim Tookey, who will sacrifice £235,000 of his £942,000 payout; Helen Weir, the former head of the retail bank, who will lose £218,000 from her bonus of £875,000 award; wholesale banking boss Truett Tate, who retires this month and will have £260,000 of his £1.05 million bonus clawed back and former head of risk Carol Sergeant.

The pay and bonus of Ms Sergeant, who held a senior position at the Financial Services Authority prior to joining the bank is not disclosed as she was not a board director.

The bank is able to claw back the bonuses because they were awarded in shares to be released over three years so it will simply not pay out the full awards.

So far others have fought shy of clawbacks for fear disgruntled bosses may mount legal challenges.

Lloyds is expected to reveal losses of around £3.5 billion when it issues its full year results for 2011 later this week. Taxpayers own a 41 per cent stake following a £20bn government bailout.

Fellow state-backed bank Royal Bank of Scotland has set aside £850million to cover PPI claims. Its boss Stephen Hester succumbed to pressure to give up his £963,000 bonus after a public outcry, but there are now likely to be fresh demands for further clawbacks on previous bonus awards because of PPI.

Related Article:

Lloyds bank claws back £1.5m bonuses from directors

Banks brace for backlash as bonus season arrives

Annual pay round in investment banking sector likely to be the most politically explosive yet amid atmosphere of pay restraint in wider economy

guardian.co.uk, Jill Treanor, city editor, Wednesday 4 January 2012

Bank bonus season is about to begin in the City.
Photograph: Anthony Devlin/PA

One of the most controversial annual bonus rounds ever is about to get under way in the City. The size of payouts at a time of rising unemployment and pay restraint in the wider economy will spark a fresh wave of protest about high pay in the financial industry, despite protestations from bankers that bonus pools are down markedly on 2010.

But announcements of more than 125,000 job cuts last year mean bankers will find it harder to use their traditional excuse that they need to pay out big bonuses to retain top talent.

Expectations are also mounting that even after the toll on jobs in 2011 – when the crisis in the eurozone conspired with regulatory changes to make investment banking less profitable – more bankers will lose their jobs this year as banks such as Royal Bank of Scotland dramatically scale back their size of the investment banking operations. French bank Société Générale began to restructure its investment bank on Wednesday, axing 880 jobs in Paris in a move that could signal losses are to come in the City.

Even within the financial industry itself, bonus season sparks anger. David Fleming, national officer of the Unite union, which represents high street banking workers, warns of the "disgust" at the multimillion-pound rewards handed out to City bankers. "Pay imbalances in the finance industry remain shockingly high," he said. "The bonuses at the tops of these institutions must be curbed. Instead of paying casino bonuses to investment bankers, these companies should stop cutting the staff working hard to serve their customers."

As it stands, 2011 was a difficult year for investment banks. Global investment banking fees sunk to their lowest level in three years, according to data published by Thomson Reuters on Wednesday. Yet banks face the tricky task of explaining that the proportion of revenue they are using for pay will be higher – because while revenue has fallen, they argue staff still need to be paid bonuses deferred from previous years.

Rob Harbron, the economist who compiles a twice-yearly forecast of job cuts and bonuses, warns that there will more pressure on City jobs this year. "If the eurozone crisis gets any worse, we could see downward revisions to our forecasts and a lot more job cuts in 2012," Harbron said. His latest forecasts for the Centre for Economics and Business Research are for £4.2bn of bonus payments in 2011 – roughly a third of the £11.6bn peak paid out just as the banking crisis took hold in 2008.

Reuters calculates that 125,000 jobs were earmarked for the axe last year, although the losses will be phased over the next few years.

Additionally, apart from the fall-off in business, bankers are also being told by regulators to curb bonus payments if they are not making enough profits to bolster their capital cushions.

The key test of the appetite for confrontation will take place in a fortnight when Wall Street firms such as JP Morgan and Goldman Sachs publish figures for 2011. Two years ago, Goldman attempted to demonstrate "restraint" – even though the average pay deal was more than £300,000 per employee – by cutting the amount of revenue allocated to pay from 48% to 35.8% while its 400 partners contributed $500m to its charitable foundation, Goldman Sachs Gives. Such a move was possible during 2009 because the bank's revenues had doubled, but this year may prove more tricky as the Thomson Reuters data shows that fees collected by Goldman fell by more 11%.

For UK banks, the pressure is on. Major investors represented by the Association of British Insurers have written to top bankers to tell them to"significantly" reduce their bonus pools.

The government is facing pressure to use its 83% holding in Royal Bank of Scotland and 40% stake in Lloyds Banking Group to put restrictions on bonuses. Vince Cable, the business secretary, is preparing to publish proposals on executive pay later this month.

UK Financial Investments, which controls the taxpayer stakes in the bailed-out banks, is expected to again demand that any bonuses of more than £2,000 is not paid in cash. RBS is thought to be preparing to pay out £500m in bonuses, half last year's levels.

But, this may not be enough to deflect public anger. Andrew Simms, fellow of the New Economics Foundation thinktank, points out that the protesters outside St Paul's Cathedral in the heart of the financial district illustrate the new depth of feeling that has erupted since the 2008 crisis. "This must be the most sensitive bonus round yet," said Simms.

Related Articles:

Banks must cut executive pay, warns shareholders group

UK's Cameron to tackle "excess" City pay

Lloyds staff split into ‘haves’ and ‘have nots’

Lloyds Banking Group's bosses were 'reckless', say lawyers for US investors

Aggrieved investors are suing Sir Victor Blank and Eric Daniels, the former chairman and chief of Lloyds Banking Group

guardian.co.uk, Juliette Garside, Sunday 1 January 2012

Eric Daniels, former Lloyds Banking Group CEO, has been named in a
court action filed in US. Photograph Heathcliff O'Malley / Rex Featur

Lloyds Banking Group's former chief executive, Eric Daniels, and previous chairman, Sir Victor Blank, have been accused of "reckless disregard for the truth" in a class action lawsuit filed in the US by a retired British sea captain.

Lawyers say that shareholders lost an estimated £14bn as Lloyds shares crashed after news of its emergency acquisition of its troubled rival HBOS in 2008. About 1,400 US residents and numerous institutions that bought Lloyds TSB shares on the New York stock exchange could claim compensation.

The case is being fronted by a 79-year-old former merchant navy captain, Albert Ross, who is originally from Scotland and now lives near New Orleans. He and his wife risk losing their home after the family's investment in Lloyds wiped more than $340,000 (£220,000) from their retirement fund.

Ross, a writer of seafaring novels including the self-published Truth, Half Truth and Lies, told reporters: "My wife and I face losing everything we have worked for. It is not just our home but our dignity. We are proud people who have worked hard to maintain our independence only to see everything stripped away from us."

Days after the HBOS acquisition was announced in September 2008, lawyers say that the troubled British bank was "technically insolvent". Because information was kept back, the market did not begin to understand the true nature of its financial woes until February 2009, when a £10bn annual loss was reported.

Announcing the merger, Daniels described it as "a fantastic deal", saying that the combined companies would have a "robust capital position". However, by 1 October, HBOS had been forced to take emergency loans from the Bank of England, which later peaked at £25.4bn, and borrow an estimated $11.5bn from the US Federal Reserve.

During an analyst call on 13 October, Daniels continued to assert that the HBOS acquisition was a "very good deal" for shareholders. Papers filed by lawyers acting for Ross claim the reverse was true: "At that point, HBOS was not only insolvent on a cashflow basis, but on the basis that its assets were substantially exceeded by its liabilities."

Reference is made to a subsequent report by the Bank of England governor, Mervyn King, who said that without the emergency loans, HBOS "would not have survived". The claim is that Blank and Daniels "acted with knowledge of or reckless disregard for the truth in omitting and/or misrepresenting material facts" regarding the bailout, which if true could put them in breach of the US Exchange Act.

"United States securities law is very clear about the heavy consequences of withholding important information which investors are entitled to know when purchasing shares," said Jim Swanson, a partner for the firm bringing the suit.

Lloyds has been listed on the New York stock exchange since 2001, and is bound to report company information in accordance with US market rules. If the Securities and Exchange Commission, the US regulator, pursues its own investigation, it can impose hefty fines. Last year Goldman Sachs paid a record $550m after misleading investors in the marketing of sub-prime mortgages.

Lloyds declined to comment and spokesmen for Blank and Daniels did not respond to requests for comment.

Related Articles:

Lloyds staff split into ‘haves’ and ‘have nots’

Sir Victor Blank: The crony with a gift for disaster

To blame: Victor Blank, Lloyds TSB chairman,
is responsible for the situation the bank now finds itself in