The former chief risk officer at Lloyds Banking Group initially refused to sign off a £10bn loan facility to help rescue HBOS at the height of the 2008 banking crisis, because of concerns about the transaction, court documents have claimed.
The allegation has been made in a £600m High Court lawsuit brought by 6,000 investors who are suing Lloyds and five former directors including ex-chief executive Eric Daniels over the controversial rescue of HBOS in 2008.
The shareholders claim they were misled into approving the takeover as key information over the true financial health of HBOS was withheld including details of emergency support from the Bank of England and the Federal Reserve. Lloyds and the ex-directors deny wrongdoing and are defending the case which goes to trial in October.
The investors claim Lloyds “secretly” gave HBOS a £10bn loan facility in early October 2008 to enable the stricken bank to stay afloat and to pay its debts as they fell due.
The investors allege that the loan facility “was not entered into in the ordinary course of Lloyds’ or HBOS’s business” and ought to have been disclosed as a “material contract”.
Carol Sergeant, who at the time was chief risk officer at Lloyds, was “initially not prepared to sign off on the £10bn loan transaction and “directly expressed to Mr Daniels her concern about entering the transaction at all”, according to the court papers.
In an email on September 25 2008, Ms Sergeant stated she did not “understand why we are potentially lending against what look like some very illiquid assets”, it is claimed. She also raised concerns about HBOS “exporting their liquidity problems to us before consummation and in such extraordinarily difficult markets”.
In an email on October 1 2008, Ms Sergeant also told Eric Daniels and Truett Tate, who ran the bank’s wholesale division, that granting the £10bn loan facility to HBOS “appears part of a systemic rescue package” and said she wanted the Financial Services Authority to “explicitly endorse the transaction and all of its risks”.
Ms Sergeant, a former financial regulator, left Lloyds in 2010 and is not a defendant in the lawsuit.
Ms Sergeant signed off the loan facility on October 2 2008 after Mr Tate spoke to senior FSA figures including Sir Hector Sants, then FSA chief executive about the loan facility, it is alleged.
“The fact that Lloyds was granting or had granted a £10bn loan facility to HBOS was at all material times treated as secret by Lloyds and the knowledge of the transaction was limited to a relatively small group of people,” the claim alleges.
Lloyds denies the claims and says ex-directors acted properly at all times. In its defence filing, it maintains the £10bn loan facility — which was never fully drawn down — was fully collateralised, was not “secret”, had been written about in press reports and says the loan terms were “commercial” and “arm’s length” and it was not part of a systematic rescue package.
Lloyds says that whilst Ms Sergeant was “initially reluctant” to sign off on the loan facility, her email on September 25 2008 also stated: “I accept that I am not fully briefed at all and am only seeing part of the picture and can’t get hold of Truett [Tate] today.”
She later approved the loan facility, the bank says. Lloyds cites an internal email sent by Truett Tate on October 2 2008 in which he wrote that the FSA were aware of the £10bn loan facility and “blessed it on every level”.
Lloyds said: “The group’s position remains that we do not consider there to be any merit to these claims and we will robustly contest this legal action.”