Sources close to Lloyds Banking Group's board last night attacked the Government's terms for its second financial bailout as "draconian", as the Treasury admitted the ultimate cost to the taxpayer remains uncertain.
Lloyds yesterday finally agreed a deal with the Government which will see it offload £260bn in toxic loans in the Treasury-backed insurance scheme in which Royal Bank of Scotland (RBS) dumped £325m last month.
Lloyds had been forced to go cap in hand to the Government after it revealed losses of more than £10bn on assets held by HBOS, which it bought last year.
More than 80 per cent of the assets being dumped in the Asset Protection Scheme (APS) come from HBOS. Under the scheme, Lloyds will absorb the first £25bn of losses on toxic assets before the taxpayer is asked to step in, as well as 10 per cent of future losses.
The move will cost Lloyds £15.6bn in fees and means the taxpayer now owns 65 per cent of the bank. In January the Government was forced to take a 43 per cent stake in Lloyds after investors failed to buy new shares.
Lloyds' board is believed to be unhappy with the terms the Government has forced on the bank in exchange for dumping the bad loans. Senior Lloyds directors are understood to have wanted to avoid being majority-owned by the state. Sir Victor Blank, chairman of the bank, said in January: "I think we can probably conduct our business better than the Government can conduct it for us."
The directors are also believed to be annoyed at restrictive capital requirements placed on the bank for entry into the scheme. "Nobody expected the Government to be as draconian as they have been on this," a source close to the board said. Another stipulation is that Lloyds must help to kickstart the economy by loaning £28bn to individuals and businesses. Half will be issued this year: £11bn to companies, £3bn for mortgages.
John McFall, the influential chairman of the Treasury select committee, warned the firm: "We will be periodically monitoring that the lending is happening. Lloyds was actually run pretty conservatively, but the HBOS merger has been their recent downfall. However, there are synergies, and I would urge the market to take a long-term view of the bank's prospects."
Stephen Timms, chief secretary to the Treasury, said Lloyds would emerge from the recession as a successful bank, but confessed: "Where similar arrangements have been made... some fraction of the total value of the assets is ultimately a cost to the taxpayer, but it will be some years before the total cost becomes clear."
Pressed on speculation that taxpayers could lose up to £100bn, Mr Timms said he expected losses to be far lower, adding: "We just don't know."
The assets covered by the insurance scheme include £74bn in residential mortgages, £18bn in unsecured personal loans and £151bn in corporate and commercial loans.
Eric Daniels, chief executive for Lloyds Banking Group, said the scheme would significantly reduce risk on the bank's balance sheets. "Our significantly enhanced capital position will ensure the group can weather the severest of economic downturns and emerge strongly when the economy recovers," he said.
The deal was welcomed by Vince Cable, the Liberal Democrat Treasury spokesman, although he accused the Government of "dithering" over reaching the agreement.Reuse content