British Chancellor of the Exchequer Alistair Darling yesterday defended the government’s bailout of crippled banks after one of the institutions involved said it expected to make huge losses.
Lloyds Banking Group (LBG) warned on Friday that its HBOS division could suffer a pre-tax loss of £10 billion (US$14.5 billion) last year because of the credit crunch.
LBG’s share price slumped by more than 40 percent in reaction to the surprise warning from the partly nationalized bank.
The group, which was created earlier this year from the merger of Lloyds TSB and the crisis-hit HBOS, is 43 percent owned by the British taxpayer after a major recapitalization.
Darling said the government had “no alternative” but to act swiftly last year to prevent the bank’s collapse.
“The problem we had last October was we had a banking system which was about to collapse,” Darling told BBC television.
“We had to intervene. We had to do it very quickly. We didn’t have months or weeks to do it,” he said.
“Now what we have asked the new management to do is go through the books, so we can deal with the assets that have gone bad and the other problems that have emerged,” Darling said.
Britain’s bailout of banks has been hailed by Prime Minister Gordon Brown as a blueprint for other countries’ plans.
LBG said the massive losses were caused by the tumbling value of HBOS assets and a £7 billion writedown on its corporate division.
Martin Slaney, head of derivatives at GFT, said: “This merger is turning out to be the merger from hell for Lloyds.
“The figure for the expected losses is a good five or six times worse than the market was expecting and dispels any view that the worst of the writedowns are over,” he said.
LBG chief executive Eric Daniels said HBOS’ results last year had been adversely affected by the impact of market dislocation, which accelerated significantly in the last quarter, and the additional impairments required on the HBOS corporate lending portfolios.
“These impairments primarily reflect the application of a more conservative recognition of risk and the further deterioration in the economic environment,” he said.
The news comes days after HBOS’ former bosses apologized this week to British lawmakers for failing to foresee the global financial crisis that led to their institutions being bailed out.
Former HBOS chairman Dennis Stevenson told parliament’s Treasury Select Committee, which is investigating the crisis, that he and former chief executive Andy Hornby were “profoundly sorry.”
Royal Bank of Scotland, which is almost 70 percent owned by the British government, warned this month that last year’s losses could reach £28 billion.
The bank attributed the loss — which would be a record in British corporate history — to the drying-up of the money markets and the costly consortium takeover of Dutch lender ABN Amro before the credit crunch began in 2007.