Material Adverse Change

CHAPTER 6Who Is Behind the Curtain?

Government is not the solution to the problem, government is the problem.

—Ronald Reagan

A CASE STUDY: LLOYDS HBOS

HBOS, a large financial services conglomerate, was one of the most respected banks in the world. It was the largest retail mortgage provider in the U.K. with a market share of 20 percent and balances of approximately $400 billion. On September 17, 2008, several days after the bankruptcy filing of Lehman Brothers, HBOS's share price experienced enormous volatility, reaching a high of 220p and falling to a low of 88p. Over the next three days, share prices plunged 37 percent amid fears of an impending collapse. HBOS voiced concern that depositors and lenders had started withdrawing from the bank, prompting a run-on-the-bank type of situation.

Fearing that the failure of the country's largest mortgage lender would have catastrophic repercussions on the U.K. financial system, the U.K. government arranged a merger between HBOS and Lloyds TSB. The government pushed the acquisition by promising to override competitive laws using a national interest clause to maintain the “stability of financial system.” Gordon Brown, then prime minister of the U.K., became personally involved to ensure that the deal was successful.

After intense negotiations lasting less than 48 hours, Lloyds TSB and HBOS announced the terms of the transaction on September 18, 2008, valuing HBOS at $20 billion. Eric Daniels, then chief executive of Lloyds, admitted ...