Time to undo the Lloyds/HBOS deal

The situation of Lloyds Bank puts one in mind of Greek tragedy. For instance, Aeschylus' "The Supplicants", in which the plot rest on the forced marriage of the 50 daughters of Danaus - the Danaides - to their cousins, the Aegyptians. To escape this fate, the Danaides flee to Argos, where King Pelasgus eventually agrees to protect them. But lo, the Aegytians turn up and threaten a blood bath. King Pelasgus is killed. Danaus takes his place but cannot resist the Aegyptians. The Danaides are duly married, but follow their father's instructions to murder their husbands on their bridal beds. 49 do so. The husband of the fiftieth kills Danaus.

Direct parallels with Lloyds are hazy, but the essential commonality is there. Supplication by HBOS to be saved. Pelasgus - that's Gordon Brown - offers to help but to no eventual avail. Like Lloyds, the Aegyptians achieve their improbable desire but are immediately decimated by it. There are a few more scenes to run yet… I fear the Lloyds body count hasn't started.

It is irresistible to quote a few of the small Lloyds shareholders who had their say at the general meeting last November which approved the deal. As a rule, I think this is a diehard mode of expression whose exponents have too much time at their disposal. Yet I am grateful to them for maintaining this fragile aspect of corporate democracy and I salute David Stembridge, who according to The Financial Times, told the meeting that Lloyds was "putting its head on a noose" and that the deal "smacked of an ego trip". His fellow shareholder, Tony Peterson, also seems to have had his finger on something when he said, "I find it profoundly disturbing that this deal was cooked up at a cocktail party… Most of us think this deal stinks…"

The deal was not in fact cooked up at a cocktail party, but it was certainly triggered by it. It is reported that Lloyds had been considering the possibility of taking over HBOS for a couple of years, but considered the prospects improbable due to competition constraints. And then, lo, the government cast these aside: the deal was indeed done in a rush.

But Mr Peterson was sadly wrong with his last assertion, because 96 per cent of Lloyds shareholders voted in favour. However, they may have been fatally reassured by Eric Daniels, the Lloyds chief executive. Responding to a questioner at the meeting worried about nasty surprises lurking in the HBOS balance sheet, he made the reassuring statement that Lloyds had spent "5,000 man hours" working through the HBOS books.

This exchange will surely go down in the annals of corporate doublespeak, for as Mr Daniels must have known when he made this statement, the key fact was not that Lloyds had spent 5,000 man hours on the process, but that it should have spent at least 15,000 man hours on it. This emerged last week when Mr Daniels was being quizzed by the Commons Treasury Committee. He said that if the time had been available, Lloyds would have carried out three to five times as much due diligence on HBOS as in fact it did.

How this shortfall might be allocated between any undue desire within Sir Victor and Eric Daniels to grab the leading position in UK banking and the exigencies of the situation - which obviously imposed some urgency into the takeover process - will never be clear. But the result has been to transform Lloyds from a strong bank into an extremely vulnerable supplicant. It was fair enough for Lloyds to take a £17bn injection from the government to finance the takeover. This level of supplication was part of the cost agreed to by Lloyds shareholders.

But last Friday, when HBOS' 2008 result was revealed to be a loss of £10bn instead of the £5bn anticipated last November, almost a third of that government injection was vapourised. On Monday, Lloyds' bond rating was downgraded. It now stands on the edge of requiring a level of supplication which could wipe out the shareholders.

What's to be done? It makes no sense from anybody's point of view including the government's to have HBOS ruin Lloyds. The initially attractive private sector solution of the HBOS problem should be recognised for the Greek tragedy it threatens to become. The merger is hardly started. It should be undone, leaving Lloyds reputationally damaged but financially fit. HBOS should be purchased by the government, and helped to work out its problems alongside Northern Rock.

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