A highly questionable deal between a major British bank, the previous Labour government and UK financial regulators resulted in the publication of misleading information that led the public to invest hundreds of millions of pounds in the failing bank.
An investigation by The Independent on Sunday has found the Treasury and the Bank of England were funnelling billions of pounds worth of loans to HBOS (Bank of Scotland) when it raised £4bn – without informing potential investors that it was surviving on life support from the state.
In a desperate attempt to keep its head above water at the height of the financial crash, the bank issued a £4bn rights issue, where new shares were issued to investors, in April 2008. This outlined its financial position in a prospectus signed off by UK financial regulators.
However, HBOS failed to mention anywhere in the 194-page document – which is supposed to detail all possible risks to potential funders – that its balance sheet was so dire it was being propped by billions of pounds in state loans.
Legal experts and MPs expressed astonishment yesterday at the omission, which may have seriously misled the markets and appears to have been approved by Gordon Brown's government, raising disturbing questions about possible collusion between UK financial regulators and a major British bank. Months after the rights issue, HBOS went bust, forcing taxpayers to cover a £25bn black hole in its finances.
An investigation by The IoS can also reveal that the current Bank of England review of regulators' historic supervision of HBOS – mysteriously delayed for years – is refusing to investigate the implications of the HBOS rights issue, despite it being central to its terms of reference.
As a result, lawyers and whistleblowers are poised to contact authorities in the United States, as they have lost confidence in the UK's willingness to confront the disastrous decisions which led to the wholesale collapse of the City of London.
Paul Moore, a former HBOS executive whose warnings over the bank's finances were suppressed by his superiors, said: "This is an extremely serious matter. The state support was clearly a material fact that should have been disclosed to the markets in the rights issue. In fact, as the Bank of England is the 'lender of last resort', this essentially means that HBOS were tantamount to insolvent when they launched and completed the rights issue. Failures have been made by HBOS, the Bank of England, the FSA and the Treasury. We need to know what former Prime Minister Gordon Brown and his Chancellor, Alistair Darling, knew about this."
"Astonishingly, the Bank of England review of HBOS is failing to investigate this matter. Unless we get proper investigation and enforcement action by the relevant UK authorities, I shall be forced to alert the Securities and Exchange Commission in America."
Andrew Tyrie MP, the chairman of the Treasury Select Committee, said: "Over the past four years, the committee has been determined to ensure that the major banking failures during the financial crisis are fully investigated. Around three million shareholders have almost been wiped out as a result of the failure of HBOS – and taxpayers are still paying the price for the catastrophic failures of management, governance and regulatory oversight.
"It is now essential – as the regulatory and supervisory structures that failed so badly prior to the crash are fundamentally reformed – that we have the lessons of the past in front of us and all credible allegations should be thoroughly examined."
Documents published on the Bank of England website reveal the Labour government was "fully aware of the vulnerabilities of HBOS" from at least September 2007 and was receiving "daily liquidity reports" on HBOS from the Financial Services Authority. Despite the turmoil behind the scenes, in December 2007 the then HBOS chief executive Andy Hornby announced the bank was "set to deliver a good full year outcome" and its "capital strength" continued to "underpin confidence and support for HBOS in the wholesale funding markets".
Problems escalated, and on 21 April 2008 the Treasury and the Bank of England launched the "special liquidity scheme" (SLS), which lent HBOS an estimated £40bn over the following months. But one week later, HBOS published its £4bn rights issue, failing to mention the state support on which it was reliant.
In summing up the bank's position, the prospectus told investors that there had "been no significant change in the financial or trading position of the Group since 31 December 2007" – failing to mention the massive support it was receiving from SLS.
At a meeting in June 2008, HBOS shareholders were persuaded to vote in favour of the rights issue. During that meeting, Lord Stevenson said: "Performance will be satisfactory and resilient. Armageddon may happen and we should be prepared for it and we are.
"We are telling the truth; we are truthful people. But if we weren't, there's an army of regulators, auditors, etc, to make sure we are."
In any event, only 8 per cent of the shares in the rights issue were taken up, causing the vast majority of the £4bn to be covered by the two underwriters, Morgan Stanley and Dresdner Kleinwort.
HBOS went bust in September 2008, received a £25bn taxpayer-funded bailout and was forced to merge with Lloyds to stay afloat.
Solicitor Damon Parker acts for Lloyds shareholders in group litigation against former directors of the bank, who claim they suffered losses as a result of the disastrous merger with HBOS.
He said: "The alleged failure to disclose information about HBOS's early use of the Bank of England's special liquidity scheme in its listing documents for the April 2008 rights issue clearly require serious attention.
"If The Independent on Sunday's concerns are well founded, they would echo those of the claimants in the group action, who allege that HBOS's true financial position, and in particular its reliance on Bank of England funding, was not properly disclosed to the shareholders of Lloyds TSB."
HBOS – now part of Lloyds Banking Group – the Bank of England, the Financial Conduct Authority and Lord Stevenson all refused to comment when contacted by The IoS.
Bust and bailout
Sept 2007 Treasury and Bank of England on red alert over HBOS finances.
Dec 2007 Chief executive Andy Hornby says HBOS's "capital strength" will continue to "underpin confidence and support for HBOS".
21 April 2008 Treasury and the Bank of England launch "special liquidity scheme" (SLS), which loaned HBOS billions of pounds to stay afloat.
29 April 2008 HBOS launches £4bn rights issue but fails to mention SLS.
July 2008 Rights issue signed off after chairman Lord Stevenson says: "Armageddon may happen and we should be prepared for it and we are. We are telling the truth; we are truthful people."
Sept 2008 HBOS goes bust; needs a £25bn taxpayer-funded bailout.
Jan 2009 HBOS forced to merge with Lloyds to stay afloat.