Pesto Browns, Pesto Thickens

This evening Peston was on the 6 o'clock news saying the merger between HBOS and Lloyds was nothing to do with Gordon Brown, which is strange because on the BBC website he said this on 17th September last year.

Our business editor said there was a real concern that any run on HBOS shares would create enough fear among the bank's financiers - providers of wholesale credit who give the bank its money - for there to be a withdrawal of credit for HBOS.

"Clearly the watchdog and Treasury will welcome a deal as it will put the bank on a sounder footing," he said. "The last thing they want is a fully fledged crisis."

He added that the deal was negotiated at a very high level, with Prime Minister Gordon Brown telling Lloyds TSB chairman Sir Victor Blank that it would helpful if Lloyds could end the uncertainty surrounding HBOS by buying it.

Of course Pesto omits to remind us that if Lloyds made a mistake when they merged with HBOS, the government must have made the same error when they put in 40% of the current equity into Lloyds.

Lloyds has an excuse because HBOS was a competiror prior to the merger. The government / Treasury / BoE / FSA has no such excuse because the FSA was supposed to regulate HBOS.

At this point, we realise that Pesto's analysis falls apart. After all, when Eric Daniels and the Lloyds board told the government and the FSA that they really didn't want to go througfh with the deal, the government put extra money into HBOS, which is why the tax payer now owns 40% of the merged group.

Far from distancing himself from the merger, it was Brown who pushed it through by ponying up several billion of tax payers cash to push the deal through. Having agreed to pump billions into HBOS Brown wanted it to go to a bank that could manage the assets properly.

Unfortunately, Brown and Darling appear to have forgotten to ask HBOS how many dubious assets they had before they pumped in any money. Assets don't go bad overnight, particularly not commercial proprty backed assets, so the £10 billion of assets that were written off in February 2009 must have looked pretty shaky in September 2008.

Earlier this week, Eric Daniels of LLoyds told the Treasury Select Committee that he thought the HBOS purchase was good for Lloyds shareholders and last month Victor Blank announced that all the bad news in HBOS had been announced, only to announce on Friday of this week that there was a further £10 billion of writedowns. One might well question the ability of these two men, and indeed why Andy Hornby is being retained by Lloyds on a substantial consultancy contract, although that is probably sensible in order to catch big problems before they get any worse.

But the biggest questions are for Mr Brown and Mr Darling. What were they doing putting billions of tax payers money into HBOS at the market price when there was another £10 billion of losses to be announced?