Wednesday, September 17, 2008

HBoS - the end of an auld sang

September 17th will go down as the blackest day for Scottish finance in three hundred years. HBoS, Scotland’s second largest company is to be merged into a London-based monolith called Lloyds Halifax. And rumours circulating the City that Scotland’s largest financial institution, Royal Bank of Scotland may shortly be merged with HSBC. It doesn’t get much worse. The two pillars of the Scottish economy crumbling before our eyes.

The First Minister of Scotland, Alex Salmond, has laid into the “spivs and speculators” who allegedly brought Scotland Halifax Bank of Scotland, to its knees. was real passion here; Alex Salmond is a former banker himself, an oil economist with the Royal Bank of Scotland before he went into politics, and he takes this personally. You felt that he was ready to get tooled up and go visit a few hedge funds.

But also in his sights is the Prime Minister, Gordon Brown, for arranging so precipitately what Salmond called a “shotgun marriage” of HBoS and Lloyds TSB. Though Salmond didn’t say so openly, many in the Scottish National Party suspect a degree of English perfidy in the manner in which this great Scottish institutions appears to have been “bought and sold for English gold” to quote Burns.

There is potentially a huge sense of national grievance here. The Bank of Scotland has emotional significance almost equal to its financial clout. It was set up under an Act of the old Scottish Parliament in 1695, twelve years before the Act of Union. It was the first European bank to successfully issue its own bank notes, a function it retains to this day. But perhaps not for much longer. The Bank of Scotland was tainted by association with the Jacobite rising in 1715, which led indirectly to the loss of its banking monopoly and to the creation of the Royal Bank of Scotland in 1727. Rivalry between the two banks - which are by far the two largest companies in Scotland - has waxed and waned for nearly three centuries.

Even after it merged with Halifax in 2001, to form Britain’s largest mortgage lender and fourth largest clearing bank, HBoS was still regarded as a great Scottish institution. It’s massive Roman Baroque headquarters on Edinburgh’s Mound has dominated Scotland’s capital city since 1806. There was gallows humour on the Mound yesterday among the hacks posted on death-watch outside the building. “It would make an awfy nice hotel, wouldn’t it?”

Well, it could come to that. The new Lloyds Halifax superbank will almost certainly have its headquarters in London. will be fought bitterly by the Scottish Government, and by many in the opposition parties. HBoS employs 17,000 people in Scotland, and it dominates the financial sector which has been the growth area in the Scottish economy since the departure of the electronics industry in the Nineties.. The nationalists are adamant that, under an independent Scotland, such a loss would be unconscionable. But the reality is that an independent Scottish government would have been pretty powerless against the global financial holocaust which brought HBoS to its knees.

Alex Salmond suggests that the regulators should have stepped in to bolster HBoS; that the FSA had ruled it to be a sound and solvent institution, and it should have stuck to its guns. The short sellers, or “spivs and speculators” could have been fought off, he believes, by determined government action to protect the integrity of HBoS. Perhaps. But equally, HBoS’s fate could have been similar to Northern Rock, and that would have been an even greater national humiliation. Even the United States government has been powerless to halt the destructive domino effect that has decimated Wall St and has now spread to the City of London and the City of Edinburgh.

The truth is that HBoS is not the canny and prudent institution that existed before the merger with Halifax in 2001. It became intoxicated with securitisation and became dependent on the wholesale markets for much of its mortgage finance. It bought heavily into American sub-prime mortgages and started throwing big money at the UK mortgage market, which is now in meltdown. Perhaps if the Bank of Scotland had stuck to its old fashioned banking practices, which stood it in good stead for nearly three centuries, it would still be standing today, and perhaps picking through the carrion of other fallen banks. But no one can turn the clock back, and this is beginning to look like the end of another “auld sang”.

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