Lloyds HBOS? Credit crunch makes anything possible

Media reports that British banks HBOS and Lloyds TSB are in advanced merger talks underscore the speed with which regulators seem prepared to ditch long-held orthodoxies to counter the credit crunch.
HBOS, Britain's biggest home loan lender, and Lloyds, which has previously been blocked from buying a smaller mortgage bank, can only have got so far by getting a nod from regulators that they want a deal to go ahead.
That unofficial steer follows the British government's decision in February to put Northern Rock into public hands — the first major nationalisation in Britain since the 1970s and a move the ruling Labour Party had been keen to avoid.
Major action has been forced on regulators by the credit crunch in the United States where authorities have committed about $300 bln — an unprecedented sum — in the past 10 days to bail out mortgage lenders Fannie Mae and Freddie Mac and insurer AIG.
In Britain, an HBOS-Lloyds deal would not have been countenanced in the recent past.
HBOS is easily the country's biggest mortgage provider with a 20% market share. Lloyds ranks fourth with an 8% share, giving a combined group a 28% market share.
In July 2001, the government blocked an 18.5 bln pound ($33 bln) bid by Lloyds for mortgage bank Abbey National, shutting the door to takeovers among the country's major banks and forcing them to look abroad. "The merger would be against the public interest and should be prohibited," Trade and Industry Secretary Patricia Hewitt said at the time, arguing the pair would have dominated current accounts and smothered competition for small business banking.
Lloyds never did a major overseas deal and, while it has not spent the past seven years in the wilderness, its share price has more than halved in value.
Now, it seems those same British authorities are encouraging the 'Black Horse' bank to ride to the rescue of a bigger mortgage bank than Abbey National was. A combined group would have a market value of about 28 bln pounds.
HBOS and Lloyds declined to comment on Wednesday.
The two have started talks, according to a person familiar with the matter, after HBOS shares were battered for a sixth consecutive day amid mounting fears about its funding position as the credit crunch has raised the cost of borrowing.
The news sparked a rally in its shares, helped by a BBC report that HBOS shares would be valued at nearer to last week's closing price of 300 pence than their current level.
By 1100 GMT HBOS shares were down 1% at 180 pence and Lloyds shares were up 15% at 322p.