HBOS rescue deal is under threat

The £12.2 billion rescue takeover of HBOS was thrown into doubt today as its shares slumped again.

Traders were betting millions of pounds that the Lloyds TSB deal to save Britain's biggest mortgage lender, owner of the Halifax, was at risk of falling apart.

At one point HBOS shares were down by more than 20 per cent. They recovered slightly to be 16p down at 126p. A failure to secure the deal would be a massive blow to the authority of the Prime Minister, who was closely involved in stitching it together last week.

It would also mark a new and even more dangerous phase of the financial crisis as HBOS is one of Britain's biggest banks with assets of £667 billion, dwarfing Bradford & Bingley.

The new doubts about the merger deal that would create a huge "superbank" represented in virtually every high street in the country came as share prices around the world were sent on a rollercoaster ride after the failure of the US Congress to approve a $700 billion bail-out for American banks.

The FTSE-100 Index initially fell 105 points to 4713 in early trading but then staged a remarkable comeback as shellshocked traders and investors paused for breath.

Hopes that a new bail-out deal can be negotiated by Thursday when Congress returns after the Jewish new year break breathed some confidence back into the market.

But Wall Street and City analysts still fear that without a bail-out banks around the world will fail because of their burdens of bad mortgage debt, leading to a block on credit that will plunge the world economy into a deep recession.

The fresh doubts over the HBOS deal cast a shadow in the City. The sharp falls in the share price are a clear signal that speculators on the stock market fear the deal is either dead or will be slashed in value. Lloyds declined to comment on whether it is looking at dropping the terms of the bid and said: "We are pressing ahead with the deal."

But senior banking sources said that the bank was now looking at "repricing the terms of the offer".

Lloyds shares actually rose slightly on hopes that the takeover will be scrapped or made cheaper, climbing 81.2p to 225.75p. That made the offer worth 188p a share or 62p more than the HBOS share price.

Any scrapping or changing of the rescue deal would hit Halifax Bank of Scotland's 2.1 million private shareholders hard. It is also politically charged given the thousands of people the bank employs in Scotland and West Yorkshire. Hundreds are expected to lose their jobs after the merger.

Analysts pointed out that since shortselling of shares in banks was made illegal earlier this month, swings in share price have become even more volatile.

Punters who want to bet against a bank or company now have to sell the shares outright rather than using side bets. When Lloyds launched its offer to takeover the Halifax and Bank of Scotland owner it offered a proportion of its own shares for every HBOS share.

Originally that offer was worth 232p per HBOS share. But as the banking crisis deepened not only have both banks' share prices fallen but the gap between the value of Lloyds' offer and the HBOS share price, known in the stock market as the discount to the offer, has widened.

Originally the discount was less than 15 per cent which reflected investors' measurement of the risk of the deal not being done by Christmas.

Normally in all-share takeover bids the target's share price tracks the attacker's fairly closer.

But today the discount between the HBOS share price and the value of the Lloyds offer was as great as 40 per cent - a level never normally seen in a takeover bid.

That effectively meant that stock market professionals were betting no more than 50/50 on the deal going ahead.

Lloyds TSB, like all bidders, has a clause in its original takeover announcement allowing it to pull out or change the terms of its bid in the event of a "material change" in circumstances.

Anyone in financial markets could easily argue that has happened in the last couple of days.