RBS, HBOS, Lloyds Get 37 Billion-Pound U.K. Bailout

By Jon Menon

Oct. 13 (Bloomberg) -- Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group will get an unprecedented 37 billion-pound ($64 billion) bailout from the U.K. as governments across Europe act to avert a banking collapse.

In exchange, Edinburgh-based Royal Bank of Scotland and HBOS will cede majority control to the government, give Prime Minister Gordon Brown seats on their boards, the right to fix dividends, and power to set executives' pay.

``We are going through quite extraordinary circumstances the world over,'' Chancellor of the Exchequer Alistair Darling said on GMTV today. ``It's very, very important to the future not just of British banks, but working our way through with other governments what is a truly international problem.''

The U.S. Federal Reserve, European Central Bank and the Bank of England will offer banks unlimited dollar funds for the first time in an attempt to ease tensions in money markets that have toppled seven European lenders in as many weeks. The region's benchmark stock indexes tumbled 22 percent last week, helping to erase more than $25 trillion from global equities in 2008. European leaders agreed this weekend to guarantee new bank refinancing, and use government cash to stop lenders collapsing.

``They have no choice,'' said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein & Co. in London. ``Paulson, Bernanke, Darling, Merkel, Sarkozy, Trichet & Co. will throw whatever they can at the problem until something sticks.''

Stocks Rally

Stocks rallied worldwide, with the MSCI World Index rebounding from its worst week on record, and the euro climbed against the dollar as concern eased that more banks will fail. The MSCI World Index advanced 2.6 percent to 934.1 at 9:18 a.m. in London. The euro rose 1.7 percent, the most in three weeks, to $1.3636.


RBS will get 20 billion pounds, while HBOS and Lloyds will raise 17 billion pounds between them, the companies said in separate statements today. The government is set to take majority control of the two banks, owning as much as 60 percent of RBS and 58 percent of HBOS. Barclays Plc said it will try to raise more than 6.5 billion pounds without the government's help.

The takeovers mark the implementation of a 50 billion- pound rescue package announced by Brown last week for British banks struggling under seized-up credit markets and a plunge in home prices. In the past year, the government nationalized lenders Northern Rock Plc and Bradford & Bingley Plc, and brokered the sale of HBOS to Lloyds TSB Group Plc.

Paulson Plan

In the U.S., Treasury Secretary Henry Paulson will tap some of the $700 billion financial-rescue package approved by Congress this month to buy equity in financial companies.

Governments in Germany, France, Belgium and the Netherlands have also stepped in to rescue real estate lender Hypo Real Estate Holding AG, Dexia SA and Fortis. Iceland's three largest banks have also collapsed in the past month.

European leaders, meeting in Paris yesterday, sought to improvise their own response to the banking crisis and deflect criticism that they were making scattershot country-by-country efforts without a credible joint strategy.

The leaders gave permission for governments to buy bank stakes, a commitment to recapitalize what the statement called ``systemically'' critical banks in distress, and a guarantee on bank debt of up to five years' maturity.

``The steps taken in Europe are very positive,'' billionaire investor George Soros said in Washington yesterday. ``The European governments have got religion and realized this is a serious problem they have to address.''

`Crucial Steps'

European plans to recapitalize banks ``appear comprehensive'' and may reach 300 billion euros ($406 billion), Goldman Sachs Group Inc. analysts said.

``The critical success factor, in our mind, is that public intervention must restore private investors' confidence to provide equity and funding again,'' Goldman Sachs banking analyst Christoffer Malmer wrote in a note to clients today. ``Interbank lending guarantees and government guarantees on new unsecured debt are crucial first steps for the reopening of short-term markets.''

The German government's rescue package for its financial system may total 400 billion euros ($540 billion), Volker Kauder a leading lawmaker of Angela Merkel's party said. The government may include steps to recapitalize banks in return for ``massive changes'' to German equity law, said Kauder.

The British funding will allow the banks to boost their so- called Tier One capital ratio to more than 9 percent, the government said. RBS Chief Executive Officer Fred Goodwin and Chairman Tom McKillop will step down, as will HBOS CEO Andy Hornby and Chairman Dennis Stevenson.

``The government is not a permanent investor in U.K. banks,'' the Treasury said. ``Its intention, over time, is to dispose of all the investments it is making as part of this scheme in an orderly way.''

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net