UK Government May Get 77% Stake in Lloyds Bank

Britain will get a stake of up to 77 percent in Lloyds Banking Group after agreeing a deal to underwrite 260 billion pounds ($370 billion) of risky assets, the struggling bank said on Saturday.

Lloyds said it would give the government 15.6 billion pounds in non-voting 'B' shares in return for state-funded insurance against further losses on the assets.

The bank will take a "first loss" of up to 25 billion pounds with the state bearing 90 percent of any subsequent loss.

Lloyds is following Royal Bank of Scotland in putting billions of pounds of risky assets into the scheme in return for giving the government a bigger stake, as policymakers give unprecedented support to try to get lending flowing again.

The plan will limit the losses banks could suffer if the economy continues to deteriorate and loans sour.

The global financial crisis, which stemmed from huge losses tied to a meltdown in risky U.S. home loans, has seen banks collapse and others propped up by the state in America and Europe.

Sharon Lorimer

It has also pushed much of the world into a recession that is likely to be deep.

The deal will see the government's stake in Lloyds rise to 65 percent from 43 percent if shareholders do not take up an offer to buy 4 billion pounds of shares currently held by the government.

The government's holding could rise to 77 percent if the 'B' shares are converted to ordinary shares, but its voting stake will be capped at 75 percent.

It will slash the risk on assets Lloyds holds and boost its core tier 1 capital ratio to 14.5 percent from 6.4 percent.

Eric Daniels, Lloyds chief executive, said he would discuss the deal with shareholders on Monday, and that there had so far been no sign they would object to the plan. "I've received no indication that there is general unhappiness," he told Reuters.

Daniels also defended Lloyds TSB's acquisition of HBOS in January, a move criticized for exposing conservatively-run Lloyds to billions of pounds in risky loans made by HBOS.

Eighty-three percent of the assets Lloyds is putting into the government insurance program were originally held by HBOS.

"The HBOS deal will prove to be a very good deal, and we will basically reward our shareholders over several years with a very good leading position," Daniels said. The Lloyds board has unanimously backed the asset protection agreement, the bank said.

Government Under Pressure

Under the deal, Lloyds has committed to increase lending to homeowners and businesses in the next year by 14 billion pounds, and by the same amount the year after, something the government is demanding as a drying up of credit is strangling an economy already in recession.

Treasury Minister Stephen Timms said the agreement provided certainty for the bank.

"In due course Lloyds is going to be a strong and successful bank and the arrangements we have been able to facilitate will make sure that is going to be the case," he told BBC Radio.

Prime Minister Gordon Brown's Labor Party is trailing the opposition Conservatives by some 20 points ahead of an election that must take place by June 2010. He says Britain is victim of a world crisis that nobody saw coming.

But his opponents say, as architect of Britain's financial regulation structure, he bears some of the blame. "It is also clear that the takeover of HBOS, which the prime minister helped orchestrate, is responsible for dragging Lloyds into majority public ownership," Conservative finance spokesman George Osborne said.

Share Offer

Lloyds had been locked in talks with the Treasury for more than a week, and had wanted to limit the government taking a majority stake.

The bank is replacing 4 billion pounds of preference shares already owned by the government with ordinary shares, which are being offered to shareholders to buy at 38.4 pence each. The Treasury will buy any shares not taken.

A mix of assets will be put into the scheme -- some 151 billion pounds of corporate and commercial loans, 17 billion pounds of treasury assets, 74 billion pounds of residential mortgages and 18 billion pounds of unsecured personal loans.

Analysts had expected Lloyds to put about 250 billion pounds of its riskiest assets in the insurance scheme. The government has already insured 325 billion pounds of assets owned by RBS, which could lift the state's 70 percent stake up to as much as 95 percent.

Lloyds said the cost of the deals was similar, estimating its total participation costs at 20.9 percent of the reduction in its risk-weighted assets, against 21.3 percent for RBS.

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