Bullyboy Brown and the new managed economy

11 November 2008

John Murray, editor of Lending Strategy

News that Sir George Mathewson, erstwhile chief executive of Royal Bank of Scotland, and Sir Peter Bert, formerly chief executive of Bank of Scotland, are trying to derail the Lloyds TSB takeover of HBOS has to be welcomed.

The issue goes deeper than just a question of acquisition and the way it is resolved will have implications for every mortgage lender in the UK.

As I see it we have a government that is leveraging fear of the recession in the same way that it leveraged fear of a world wide Islamic conspiracy, following 9/11, to move towards, in the new buzz words, a “managed economy”.

We’ve already had a taster of what this means following the somewhat theatrical decision by the Monetary Policy Committee on Thursday November 6 to reduce base rates by a startling 1.5% - a move which suggests that earlier decisions had been off the mark or that there is a lot worse to come.

It was no coincidence that come the night of Thursday November 7 only Abbey and Lloyds TSB, which is to be bankrolled by the government to the tune of £5.2bn when it acquires a monopoly of the UK mortgage market through its takeover of HBOS has passed on the whole of the rate cut to its borrowers.

Along with Abbey which has received £4bn from the Financial Services Authority under the financial services compensation scheme for acquiring the branches and liabilities of Bradford & Bingley.

Frustrated by the reluctance of others to fall in the footsteps of Bully Boy Brown’s lackies, the story goes that by Friday night Treasury officials were telephoning the eight largest UK lenders to summon them to a breakfast meeting at the Treasury on Saturday, November 8, to be told, according to the Sunday Times, that “they had a moral duty to pass on the cut."

The Sunday Times reports: “Alistair was firm” and the “atmosphere was a little frosty but business-like” and “he repeatedly said that he expected rates to be cut in line with base rate - he was quite clear.”

So at a stroke it was immaterial that a decision to cut mortgage rates by 1.5% did not reflect their cost of funds.

Obviously Brown and Darling hadn’t lost any sleep over that issue or the plight of savers who outnumber mortgage borrowers by a ratio of six to one and will truly suffer if savings rates fall by a similar margin.

The problem is that if the government can exercise its influence over mortgage providers through its investment in Lloyds TSB/HBOS, Royal Bank of Scotland, Northern Rock, what’s left of Bradford & Bingley, and the Bradford & Bingley and Abbey deal, then we can kiss goodbye to a free market and the advantages of competition.

Instead what faces us will be a market determined by political expediency which will be cursed by the myopic vision of Whitehall and the law of unintended consequences.

Therefore good luck to knights Mathewson and Bert, formerly competitors but now united against a merger that creates a state approved monopoly of the mortgage market and delivers precious little added value for shareholders.

While the management team at HBOS might argue that the duo haven’t brought new money to the table, it is difficult to discredit the logic of the heavyweight political dissidents.

They maintain that the government’s £50bn bail out of banks, which superceded its sanction of the Lloyds TSB deal, makes that deal redundant, so the takeover has been overtaken by events.

But in a managed economy anything can be managed.