The gag was doing the rounds in the City by mid-morning yesterday. Here's Lloyds TSB's new logo, the email said. The attachment showed the famous Lloyds black horse being ridden by a miserable-looking Howard Brown, the Halifax Bank employee who has fronted its advertising for eight years.
This was the fate of HBOS: within the space of just 48 hours, a banking group with almost 560 years of history had become the latest victim of the biggest financial crisis since the Great Depression and a laughing stock on the internet to boot.
It was a fate HBOS's most senior staff knew was inevitable as dawn broke yesterday, but even Andy Hornby and Lord Stevenson, the bank's chief executive and chairman, did not realise how quickly the storm would break.
True, the morning press made grim reading, reporting the second crash in as many days for HBOS shares and the mounting speculation – despite the protestations of the Financial Services Authority, the chief City regulator, and the bank itself – that it would not survive. But HBOS knew it was not in the same boat as Northern Rock, with funding in place for the foreseeable future.
Yet within half an hour of the stock market opening, everyone could see the game was up. For a few hopeful minutes, the bank's shares rallied, as the market took brief comfort from the US Federal Reserve's $85bn overnight bailout of AIG. And then they fell faster than ever. By 8.30am, the shares were down more than 50 per cent.
Worse, this was not a collapse being driven primarily by hedge-fund speculators. Around the country, stockbrokers who deal on behalf of small retail investors began reporting their systems in meltdown as the 2.1 million middle England householders who own little parcels of HBOS shares tried to sell their holdings.
Those small shareholders form a large part of HBOS's customer base – and they were busy too phoning the bank's call centres. As HBOS branches opened their doors, the Treasury, the Financial Services Authority and the Bank of England faced Groundhog Day. A year after Northern Rock's collapse, another terrifying run on a bank was imminent.
And so the call went out from Downing Street: we will not let HBOS go the way of the Rock, there's a deal coming and there's no need for anyone to panic.
That call was answered by one of the few men with the power to dam the floodwaters heading HBOS's way, the BBC's business editor, Robert Peston. In minutes, Mr Peston was on air, revealing breathlessly that Lloyds TSB was riding over the hills to save the day. The message flashed across City dealing screens at 9.16am, and HBOS shares rocketed – from a low of 88p to 214p. Halifax customers got the message too. A run had been averted. The sighs of relief in the City and Whitehall were audible. In fact, this was a deal that had been brokered at the highest levels for much of the previous 48 hours, with officials at Downing Street and the Treasury terrified history was about to repeat itself. On Monday, fearful of the way the wind was blowing, Lord Stevenson had made the first gentle approach to Sir Victor Blank, the chairman of Lloyds TSB. Would a deal be doable if the worst came to the worst?
Gordon Brown was briefed about the tentative talks on Monday afternoon, and knew he would have an opportunity to discuss the takeover that very evening with Sir Victor. Both men were among the 100 guests of Citibank, whose board was meeting in London, at its reception at Spencer House in St James's, London.
The crowded room was not the place for a detailed conversation about such a sensitive issue, but Mr Brown made it clear the Government would do anything it could to ensure financial stability. Sir Victor understood the message – the Prime Minister would find a way to get round the inevitable competition objections Lloyds' rivals would raise once news of a deal with HBOS broke.
Having had an encouraging response from Sir Victor, officials close to Mr Brown felt confident enough to speak to Lord Stevenson, who serves as a government adviser on education issues.
Late on Monday night, Lord Stevenson and Mr Hornby were still of the view that HBOS might be able to remain independent. They told the Prime Minister's team that further talks with Sir Victor would be welcome, but privately hoped the bank could ride out the storm. It was not to be. Throughout Tuesday, HBOS shares slid further and the talks between the two banks became more serious.
Nevertheless, the leaking of the talks took HBOS and Lloyds by surprise yesterday morning – the negotiations were not officially confirmed until 1.25pm.
By 9pm last night, reports confirmed that the deal was done, ready to be formally announced to the City at 7am today, before the stock market opens.
Where the deal was done
Spencer House, in the heart of St James's, is one of the most ambitious aristocratic town houses ever built. Eight of its lavish state rooms are for hire, and have been frequented by the world's biggest financial organisations – including Deutsche Bank, Morgan Stanley and Credit Suisse. Music, flowers and other entertainment are part of the service at the house, which was built in neo-classical style between 1756 and 1766 for the first Earl Spencer.
The essential guide for HBOS customers
What does the deal mean for HBOS customers?
If you're a savings or current account customer with Halifax, Bank of Scotland, Birmingham Midshires or Intelligent Finance, then you can sleep a little easier by knowing that your money's much safer than it was. Although HBOS was not in any immediate financial difficulty, hedge funds had helped push down the share price, which in turn sparked concern among the customers. If the Government had not moved to encourage a takeover of HBOS, the bank could have faced a full scale-run, at which point the company would have been in severe danger of going bust.
Will my money be totally safe with Lloyds?
Some banks are simply too big to fail, as the situation with HBOS has demonstrated. At the first sign of a potential crisis of confidence in the bank, the regulators engineered a deal to secure the bank's future. Given that a combined Lloyds and HBOS will be a much bigger entity, it's fairly safe to assume that the Government would not let Lloyds fail either. If that's not assurance enough, then you should remember that the Financial Services Compensation Scheme (FSCS) guarantees the first £35,000 of your savings if a UK bank goes under. If you've got more money than this with any single institution, then you could take the precaution of spreading it across a few different organisations.
Should I be worried about my savings with Insight Investment and Clerical Medical?
As subsidiaries of HBOS, Insight and Clerical Medical will be included in any takeover deal, and will probably be merged with Scottish Widows, which is owned by Lloyds. This should not be of any concern to customers. Furthermore, Insight, Clerical Medical and Scottish Widows are all covered by the FSCS in the event of insolvency. Pension and life insurance customers would receive 100 per cent of the first £2,000 and then 90 per cent of the remainder. Investment fund customers would receive 100 per cent of the first £30,000 and 90 per cent of the next £20,000.
I'm a Lloyds customer. Will I be affected?
A takeover of HBOS should not have any negative impact on Lloyds' customers. In the long run, it should even have some positive effects, increasing branch availability for Lloyds' customers. Once the merger is complete, Lloyds will account for more than one in four British current accounts.
Will the deal mean anything for Lloyds or HBOS mortgage customers?
Not really. HBOS is the country's biggest lender, and combined with Lloyds, it will have an enormous market share. But if it had gone bust, its customers wouldn't have escaped from having to pay back loans.
James Daley, Personal Finance EditorReuse content