HBOS — the mortgage lender Lloyds took over in January — suffered a 2008 statutory loss of 10.8 billion pounds, hit by 9.9 billion pounds of losses on decaying corporate loans, rising homeowner bad debts and credit market exposure.
The corporate loans area contributed heavily to the losses. These loans were concentrated with property developers, property builders and private equity capital. So as well as having exposure to declining house prices through having the largest share of the UK mortgage market they were further exposed through their loans to property developers and builders.

The bank essentially took a huge bet on the housing and property bubble through the money markets and corporate lending. These are the so called “toxic” loans that Lloyds are trying to insure with government. In fact these are declining assets in any recession and the British people will under the scheme pick up any further losses on these assets.  And there will be further losses as this recession is set to last for some time – most mainstream economists now think at least another year. So as house prices continue to fall and companies take in lower revenues or fail on the back of reduced consumer demand and the lack of credit so these loans will decline in value.

In exchange for owning any further losses on these loans we, through the government, get more shares in Lloyds!
In effect Lloyds do not have to pay us any money but just have to print new shares which dilute the already low value of the existing shares driving the share price lower. This share price will also continue to fall as the outlook for banking continues to deteriorate on the back of a prolonged recession.
A falling economy will further cause a fall in the value of private equity schemes (PES) as the revenue they will get from running the companies declines. And the likelihood of them selling the company they have taken over falls as stock market prices fall. PES work on the principal of: taking over a company – delisting it from the stock exchange; creating efficiencies through increased productivity and redundancies and selling off part of the assets. They do this through a loan which they service the repayments through the business’s income stream. They then hope to pay off the principal of the loan by selling the pruned down company back to investors through a stock exchange listing.

This type of HSBOS PES business and the corporate loan business is run out of Edinburgh. This is further bad news for the city as Lloyds will look to prune this business through the toxic asset scheme and redundancies. This comes on top of yesterday’s news that RBS are set to make 20,000 redundant with up to half going in Edinburgh.