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Thursday, 6 August 2009

When is a deal not a deal?

When it is an "intended participation". The government announced on the 23 March that Lloyds had agreed in principle to ask the government to guarantee £260 billion of is assets unther the Asset Protection Scheme. Details here.

It will come as little surprise to students of the governments incomepeence as well as those who have ever tried to close a deal with Lloyds, that over 4 months later, they haven't actually closed a deal, as we read the following in the Lloyds interim statement:

Intended participation in the Government Asset Protection Scheme

The Group is working with HM Treasury to finalise the detailed terms and conditions and the operational mechanics of its intended participation in the Government Asset Protection Scheme (GAPS). The operation of the Scheme and its impact on the Group’s business (and the consequential impact on its lending and the wider economy) is complex. The Group expects to conclude these discussions and agree terms and conditions which will be in the interests of shareholders.

Given that:
  1. Lloyds has written off about £25 billion and thinks it has nearly cleared out its bad assets;
  2. the APS scheme only kicks in after Lloyds have taken the first loss of 25% (c. £65 billion) and it is thus unlikely that loys would ever call on the government's guarantee;
  3. the main advantage of the scheme to Lloyds (that wrapping the second loss position in a government guarantee effectively turns £200 billion of assets into 0% risk weighted assets) is largely irrelevant because Lloyds now has total regulatory capital equal to 10.2% of risk weighted assets after yesterday's £7 billion additional profit (despite the £13 billion write off); and
  4. Lloyds has decided that £300 billion of its £1,100 billion assets are "non-core" and will be run down or sold, thus improving its capital ratios further,
it is hard to see why Lloyds would want to agree a deal, except that it will probably be strong armed into doing so by the government rather than see the Treasury and UKFI embarrassed by Lloyds deciding it is not such a good idea after all.

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