September 19, 2008 – 7:45 pm

2008-09-19 – HBOS Implodes:

The symbols of a community always have intrinsic value to the people in it even though they benefit directly in no meaningful way. Even though the residents of Brooklyn New York gained no benefit, they even had their taxes raised to keep their baseball theirs, yet there was outrage when the Dodgers abandoned them for Los Angles. And so it is with HBOS whose symbos HBOS together have no official meaning, but to the people of Scotland the meaning is deep and intrinsic, it is widely recognised as an abbreviation for their bank, Halifax Bank of Scotland, them! And it was with the same shock and finality as a loss in sudden death overtime that Scotland met the word of the end of it’s oldest bank, but the credit crunch is no gentelmans game and unlike a sports team, for HBOS there will never again be a next year.

The credit crisis claimed another casualty Thursday when Lloyds TSB PLC announced a 12 billion pound (US$22 billion) deal to take over struggling HBOS PLC, Britain’s biggest mortgage lender and owner of major British banks including Halifax and the Bank of Scotland.

The Bank of Scotland is the UK’s oldest commercial bank, was formed by an Act of the Parliament of Scotland in 1695 and Halifax was founded in 1853 as the Halifax Permanent Benefit Building and Investment Society. The bank which many considered to be the true bank of Scotland, HBOS was formed when the two merged in 2001.

The bank has since with stood revolutions, the great depression, two world wars, the cold war and too many social and economic calamities to list. It has become a social financial pillar of the rock upon which sits Scotland. But in the roil and rumble of the credit crunch once immovable financial pillars are knocked over with the ease and capriciousness with which a child throws his toys to the floor. And so Bear Stearns, Fannie Mae and Freddie Mac, Merrill Lynch, Lehman Brothers AIG and now HBOS know the sudden death swiftness with which the credit crunch can seize and strip a bank to its penniless bone.

But unlike the others who succumbed to the greatest convulsion in financial markets this penniless bank still has an intrinsic equity which yields to the people of Scotland only a pain and confusion. The suddenness of its crash stunned them, the secrecy and lack of leadership of management betrayed them, and the resulting hyper drive of short-selling frenzy that descended on HBOS shares before the merger financially broke them, and broke their pride.

2008-09-19 – The Pain:

HBOS said that it is in “advanced talks” with Loyd’s of London over a merger to create a £30B banking giant with nearly a third of the UK mortgage market. At one point, before the merger speculation broke, HBOS’s share price was down 50 percent at 88p, less than a third of the value when the market opened on Monday morning. <>

2008-07-31 – The Spin:

HBOS reported earnings tonight and guess what, they beat estimates. But that’s the only thing they beat as write downs were $2.2B, capitial raised was a shaky $8B, loan loss provisions came in at $2.58B, and the bank holds a murky level 3 equivalent of $3.77B. Here’s the tally thus far:

  1. Tally for Write-Downs/Charge-Offs: $3.5 B+ $1.1 B = $4.6 B
  2. Tally for cash raised: = $8B
  3. Current level of Level III assets at $3.77 B
  4. Current level of loan loss reserves at $2.58 B

We now add all the distresses to get HBOS’s current Misery Index of $18.95B

2008-07-21 – The Message:

The message went out loud and clear to all banks trying to shift their trash heaps of debt onto investors. NO MORE! HBOS got its $4B in the rights, but the underwriters got screwed instead of screwing investors for a change.

2008-06-25 – The Rights Price:

After settling its rights issue, HBOS got squeezed by short sellers and its shares were rudely kicked down below the rights price.

2008-06-17 – It’s My Turn:

HBOS is providing a prospectus detailing plans to raise £4B from shareholders to shore up the credit-riddled balance sheet.

2008-05-19 – Off-Balance:

Banks are not writing down their write-downs and getting away with it. Instead they are writing them down in the balance sheet and there is a distinction.

HBOS was hiding $1.0B on the balance sheet, but we will balance things out for them by adding $1.0 B to their existing $2.5 total bringing them up to $3.5B.

2008-04-30 Raising £4B:

You can sense the urgency morphing into desperation at HBOS. After write-downs and downgrades, the bank has admitted to walking up to the Bank of England’s handout window.

2008-02-27 Earnings In Line:

HBOS reported earnings that were broadly in line with guidance, but write-downs of £225M ($447) were higher than the £180M announced in December.

Britain’s largest mortgage lender HBOS PLC reported Wednesday that profit rose 3.8 percent in 2007 despite a $447 million writedown on investments.

“An erosion of net interest margin, additional writedowns resulting from the credit crunch, and a slowdown in lending all contributed to the malaise surrounding the results.”

We have heard a lot of that lately.


HBOS is due to report full-year 2007 earnings on Feburary 27. The parent company of Bank of Scotland and mortgage lender Halifax said in a December 13 statement that it expects earnings to meet market expectations. Namely that:

Its underlying 2007 pretax profit is forecast to rise 4 percent to 5.78 billion pounds, based on the average of 17 analysts polled by Reuters Estimates.

That number would have been closer to £6B were it not for a £180M loss on securities.

An additional £550M loss on US subprime-related assets was written down and kept off the books so that it didn’t come off the bank’s bottom line. This £550M stood as of the end of August. The lender claims in a press release

to have reduced the exposure by 120 million to 430 million as of Nov. 30 (presumably by selling assets). Investment banking is responsible for 411 million of the banks total subprime exposure while equity trading accounts for the remaining 19 million. Then another 30 million pounds is marked down.

‘HBOS marked down 30 million pounds of U.S. subprime assets, which stood at 430 million pounds as of Nov. 30, down from 550 million pounds in August.’

So, the running total is £550M written down as of August + £30M = £580M of stated write-downs, and £430M of subprime exposure remaining as of the end of November.

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