HBOS / Halifax Facing Takeover

HBOS, the owner of Halifax, admitted that they were in talks with Lloyds TSB to try and work out a merger deal. The two banks are working very fast to arrange a deal to safeguard the company. The Competition Commission is likely to grant special permission for the merger (despite increase in monopoly power) given the acute crisis that would occur if it was not rescued.

The government will be desperate to protect HBOS, the scale is far greater than Northern Rock. A collapse of a bank the size of Halifax would be unthinkable.

Why is HBOS in difficulty.

Like Northern Rock, HBOS, used money markets to finance its lending business. The traditional mortgage was financed out of savings and deposits. But, increasingly banks like HBOS have been lending on the basis of money raised in money markets.

However, since the collapse of the American subprime sector in 2007. Many banks lost money from the defaults on these subprime loans. Therefore, there has been a shortage of funds in these money markets.

In July, HBOS issued a share rights issue to try and raise £4bn of funds. But, investors shunned the deal, creating uncertainty over their ability to raise finance. This year, HBOS has frequently been the target of speculators seeking to bet on the possibility of a collapse.

This involves people holding ’short positions’ which means if share prices fall, they can exercise their options to sell at a higher price.