HBOS accused of misleading the public over £4bn rescue

At the height of the crash, the bank failed to tell investors it was being supported by the state

Investigations editor

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.

Gordon Brown and Alistair Darling Gordon Brown and Alistair Darling 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.

The Bank of England has been embroiled in the scandal The Bank of England has been embroiled in the scandal "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.

Andy Hornby Andy Hornby 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.

News
people
News
people
Arts and Entertainment
Keys to success: Andrew and Julian Lloyd Webber
arts + entsMrs Bach had too many kids to write the great man's music, says Julian Lloyd Webber
Voices
Left: An illustration of the original Jim Crowe, played by TD Rice Right: A Couple dressed as Ray and Janay Rice
voices

By performing as African Americans or Indians, white people get to play act a kind of 'imaginary liberation', writes Michael Mark Cohen

PROMOTED VIDEO
News
i100
Arts and Entertainment
Hand out press photograph/film still from the movie Mad Max Fury Road (Downloaded from the Warner Bro's media site/Jasin Boland/© 2014 Warner Bros. Entertainment Inc.)
films'You have to try everything and it’s all a process of elimination, but ultimately you find your path'
Arts and Entertainment
Imelda Staunton as Dolores Umbridge in the Harry Potter films
books

New essay by JK Rowling went live on Pottermore site this morning

News
Russia Today’s new UK channel began broadcasting yesterday. Discussions so far have included why Britons see Russia as ‘the bad guy’
news

New UK station Russia Today gives a very bizarre view of Britain

News
people

Top Gear presenter is no stranger to foot-in-mouth controversy

Arts and Entertainment
Keira Knightley and Benedict Cumberbatch at the premiere of The Imitation Game at the BFI London Film Festival
filmsKeira Knightley tried to miss The Imitation Game premiere to watch Bake Off
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

The benefits of Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Finance Assistant - Part time - 9 month FTC

£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

Marketing Manager

£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

Day In a Page

The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

Paul Scholes column

Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

Fall of the Berlin Wall

History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
How to turn your mobile phone into easy money

Turn your mobile phone into easy money

There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes