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Brought to account

Most of us can probably remember the time when we finally grew up financially or rather when it seemed to us at the time that we had finally grown up, whereas in fact we have remained childishly ignorant about money matters all our lives.

For me, that grown-up moment came when I was 17 and opened my first bank account. I wish I could say that I shopped around carefully. The truth is that there were two banks close to my bus stop on the way to the local college in Bournemouth. One of them had a beautiful young woman behind the counter, leading to a relationship with Lloyds Bank that endured over 20 years until First Direct and subsequently Intelligent Finance, then part of Halifax and now HBOS, came along.

If I am honest, I should have left Lloyds years earlier. Over time, the relationship I had enjoyed with my local branch and its staff, although never, sadly, the young woman I fancied so much, changed and became much more impersonal.

Whenever I rang up I found myself talking to a different call centre operative hundreds of miles away. Any decision by the bank, for example, about an overdraft charge, became a tick-the-box exercise rather than a judgement by a person who knew me.

What finally swung it for me was the attraction of a mortgage offset account. Plus, I figured that if I was going to use the internet or the phone to run my current account, there was no point in sticking around with Lloyds any longer.

Over the years, cutting that umbilical link has done me a power of good, helping me focus on the truly important elements of any financial decision. Moreover, when I needed to open a business bank account, I chose Bank of Scotland, cementing even further my relationship with HBOS.

Until the other week that is, when I suddenly found myself back with Lloyds TSB all over again. Or at least I will be, once the takeover details of HBOS are finally sorted out.

Now, don’t get me wrong. I don’t take things personally. I am not blaming Lloyds TSB for what happened and I might well stick around to find out what is happening to my IF account. Indeed, the beauty about having learned that it is possible to leave a bank you don’t like is that you also learn that it is possible to stay too, as long as there is no harm in it.

But, and this is a weird thing, I do mourn for HBOS and its loss of independence. Let’s not forget that as banks go, it was staggeringly successful for quite a few years. It had some 20 million savings accounts and up to 20 per cent of the UK’s homebuyers had a mortgage with HBOS.

That is not to say there weren’t problems with HBOS. In common with almost all other mortgage lenders, it funded a considerable proportion of its mortgages via the money markets.

By July this year, the impact of credit crunch had made life more difficult. The bank announced that profits had halved to £1.45bn in the first six months of 2008 compared with the same period last year. Bad debts – people who owed it more than three month’s worth of mortgages, had risen to £1.31bn or 1.95 per cent of its loanbook.

In 2007, when its profits were the highest in living memory, the proportion of bad debts was 1.67 per cent. A steady upward curve but not an insurmountable problem, given that the majority of so-called “bad debts” tend to be resolved by means other than evictions.

Plus, the bank had also recapitalised to the tune of £4bn to help tide it over the coming difficult period. You would think a bank that was as fundamentally sound as HBOS would stand a good chance of survival, even in today’s climate.

Unfortunately, it was not to be. Over a period of literally two days, one of the most aggressive “shorting” campaigns by hedge funds ever seen in the UK managed to stampede HBOS into the arms of Lloyds TSB.

As far as I can see, there are two lessons to draw from this debacle. The first is that without doubt the new enlarged bank will remove a massive chunk of competition out of the UK mortgage and savings market. The second key lesson to learn is that much of this has been brought on us by speculators who tested HBOS’s share price virtually to destruction.

Oh, and by the way, let’s not have any guff from those who describe shorting as being part of a process of informed share price “discovery”. It might be in other instances but when you deliberately punt hundreds of millions, perhaps billions of pounds on a share to fall, this is not about “discovery” but herding panic-stricken cattle into the abattoir.

Last week, the FSA finally moved to ban short-selling of banking shares in order to shore up confidence in the battered financial sector. Hector Sants, chief executive of the FSA, said this was because “the current extreme circumstances have given rise to disorderly markets”. Stable. Door. Horse. Bolted. Four words that say it all.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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