SHARES in both Bank of Scotland owner, HBOS, and Lloyds TSB rose yesterday, as the Court of Session cleared the takeover of the former by the latter to remove the final hurdle to the creation of Lloyds Banking Group.
SHARES in both Bank of Scotland owner, HBOS, and Lloyds TSB rose yesterday, as the Court of Session cleared the takeover of the former by the latter to remove the final hurdle to the creation of Lloyds Banking Group. However both share prices, while up, remained well adrift of the terms of the two banks' open offers to shareholders. The offers were a monumental flop. So the Treasury, using taxpayers' money, now finds itself owning some 57.9% of HBOS for the next few days and, once shares in the merged Lloyds Banking Group start trading next Monday, the state will own approximately 43.4% of the enlarged group.
Even though they were paying a sizeable premium to the market price, all the directors of Lloyds TSB took up their own entitlement in full. Clearly they have to believe there will be real, long-term value in the creation of what some have dubbed a "super bank" or they shouldn't have been pushing this deal in the first place.
For almost all other shareholders the offer proved very easy to resist. Overall, valid applications were received for a miserable 0.24% of the HBOS shares on offer and for just 0.5% of those in Lloyds TSB.
It's another sign of just how extraordinary these times are proving to be for banks and banking. Mainstream bank shares, for so long a must-have in millions of portfolios, are being shunned by investors and financial advisers alike. Thanks to the global credit crunch, the public credibility of banks and bankers has been shredded.
Those that embraced, however reluctantly, a state-sponsored recapitalisation - HBOS, Lloyds and Royal Bank of Scotland - are only in the first phase of rehabilitation. But those which sought alternative ways of shoring up their shrinking reserves - like Barclays - must know there's a long, hard road ahead for them, too.
The part-nationalised banks have made it clear that one of their first priorities is to redeem the expensive preference paper that has come onto their books as part of the government's rescue. A 12% coupon certainly makes the eyes water even more now that Bank Rate is down to 1.5% and likely to fall further.
Both Lloyds Banking Group and RBS want to see those preference shares redeemed quickly, by the end of this year, if possible. If they succeed in that, Barclays, which must have breathed one huge sigh of relief that Royal, not it, got its hands on ABN-Amro at a very fat price, will then be left with the even-more-expensive capital injection it negotiated with a trio of Middle East sovereign wealth funds last October.
That expensive alternative and the large chunk of Barclays equity these funds will get for their money, may eventually alter investor perceptions of which of the banks made the better choice.
However, for all of them, the real key to rehabilitation - as it is for the vigour of our economy and others - is getting credit markets moving again. And, like other indicators, the latest CBI/PWC Financial Services Survey suggests that's still some way off.
Bank profitability is falling. The value of non-performing loans is accelerating alarmingly. Business volumes are still contracting and this latest survey detects the fastest reduction in commission and fee income since the series began in 1989. There has been, as we all knew instinctively, "a brisk increase in spreads between lending and borrowing rates".
But that boost to bank earnings has simply been overwhelmed by all those other negative volume and income factors. So the banks take it in the neck from everyone from business lobbies to politicians for turning off the credit tap, while that rediscovered risk aversion among bankers is doing nothing to restore their profitability.
Governments are getting increasingly restless about how long this crisis might last. The historical omens are not encouraging. A new paper delivered to this year's meeting of the American Economic Association in San Francisco makes stark reading.
Kenneth Rogoff, of Harvard, and Carmen Reinhart, of the University of Maryland, have studied 14 severe banking busts in the past. Ranging from Argentina to Indonesia, from Norway and Sweden to Spain, they show the cumulative changes in house prices, equity valuations and GDP per capita were falls of 36%, 56% and 9.3% respectively, while the average rise in unemployment was seven percentage points. More troubling still, the average period each crisis lasted in advanced economies was around seven years. The past isn't always a sure-fire guide to what comes next. But these kind of time-spans are too much for any politician to bear. So we are bound to see even more billions thrown at stimulus measures and fresh initiatives to unlock bank lending again.
In the UK, the next instalment on that latter front is expected later this week.
A national loan guarantee scheme targeted at small business, fresh financial support for some of the worst-hit industrial sectors, like car making, and additional Bank of England liquidity support for the banking sector itself are all being touted and trailed.
Whatever David Cameron says, it is certainly going to push government borrowing even higher.
