Lloyds, HBOS and Deflation
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Trading Features / Strategies from Simon Denham of Capital Spreads.
I think the new saying should be “beware prime ministers bearing gifts”. The next time Gordon Brown sidles up to someone, opens his great coat, and says “got a nice line in Retail Banks hot from the city, don’t worry about competition or the FSA, I have them covered” perhaps the little rabbits caught in the headlights of associating with him might deign to look under the lid.
You occasionally hear of company mergers being complete disasters, mainly due to fraud on one part or the other, but this must be the first I have heard of where a major acquirer did not do sufficient bog standard due diligence. Not only this, but the final merger date was only a few weeks ago, I find it difficult to believe that they ‘discovered’ £10bn of doubtful debts in just a couple of weeks.
It is not clear whether the losses in HBOS are actually ‘toxic’ debt (as in sub prime derivatives) or whether they are real loans to real businesses in the UK that have gone belly up. HBOS was a big lender to the Baugers of the world but to have lost some 10% of your loan book indicates a lack of risk analysis that is startling.
The continued bleat from the Lloyds press liaison team that the deal represents ‘good value’ to share holders seems to indicated that they employ the same PR firm as the Labour Party who continued to say that the UK was in a much better position to weather any downturn than other nations.
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I suppose it’s one of those “if you tell a lie big enough and keep repeating it people will eventually come to believe it”. What particular bit about a share price of 58p (currently) with no prospect of a dividend and the promise of possible further write downs represents good value, precisely?
The markets are in something of a quandary at the moment as we all try to ‘look through’ the huge stimulus package offered variously across the globe. Will they work? What will be the legacy? Does Claudia Schiffer have my telephone number? These are the questions investors are struggling to answer.
What we do know is that the consequences, if it all goes wrong, could be truly appalling. The small unlit route through the current crisis seems very narrow and dark just about now. On one side is the hidden abyss of asset destruction via hyper-inflation caused by the massive injections of cash into the economy and on the other the soul destroying prospect of long term stagnation and deflation.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Lloyds, HBOS and Deflation' edited by DB, updated 16-Feb-09
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