Hobson's choice

But Peter Burt, who led HBOS predecessor Bank of Scotland plc, and George Mathewson, former chairman and CEO of its Edinburgh rival, Royal Bank of Scotland Group plc, should be congratulated for their temerity. Both men have been knighted by Queen Elizabeth for their previous services to banking, but they have arguably done the nation a bigger service by their quixotic attempt to stand in the way of a merger conceived in haste and ruthlessly pursued.

Burt and Mathewson are not the first to argue that the proposed merger flies in the face of accepted antitrust norms. HBOS alone accounts for one in every five household mortgages and 16% of all current accounts (retail checking and deposits). Together Lloyds TSB and HBOS command a share of more than 28% of the mortgage market and around 33% of the current accounts -- enough to drain competition from the market and squeeze consumers.

Nor are the two Scots alone in believing that HBOS current leadership should be replaced even quicker than is planned under the merger proposal. The plan calls for Eric Daniels, the Lloyds TSB CEO, to take over the running of the combined bank, with Lloyds chairman Victor Blank remaining in that position.

However, they have little support for their proposed solution, which is to take on the chief executive's and chairman's roles themselves. The Lloyds TSB team has performed very well. The conservative bank survived the early months of the credit crunch much better than many of its peers and turned to the government for help only after it was pushed to inject capital into the ailing HBOS. Burt and Mathewson have only their swashbuckling pasts to attest to their leadership skills.

The two Scots have so far failed to convince either HBOS directors or shareholders that they have a real alternative to the Lloyds takeover. The Scotsmen's plan appears to rely on the government to provide the same funding without a merger as would be available under the terms of the bailout agreed with Lloyds TSB. Yet analysts have argued that HBOS would need more cash on its own than the £11.5 billion ($17.7 billion) offered by the government -- and even that might not be available on the same terms if the government believes it has been snubbed. Meanwhile, the rebels have shown no evidence of either outside funding or of a detailed restructuring plan that would allow them to revive a failing bank as a standalone institution.

Burt and Mathewson argue that HBOS would be better off independent and Scottish. That might seem ironic, given their respective backgrounds as leaders of two of the biggest banking mergers in U.K. history, both of which involved the takeover of English banks by their own Scottish institutions. But one can see why Scottish nationalist politicians bucked the trend and took their bid seriously. North of the Anglo-Scots border, the way the regulatory goalposts were moved to permit London-based Lloyds TSB to swallow HBOS was inevitably seen as a piece of English imperialism -- though Prime Minister Gordon Brown and Alistair Darling, the finance minister, are Scotsmen. A challenge that would retain an independent HBOS as a Scottish national champion while Royal Bank succumbed to majority central government ownership from London therefore has obvious appeal.

However, it is in London where Burt and Mathewson have performed their greatest service. Wherever we hail from in the United Kingdom of England, Wales, Scotland and Northern Ireland, we Brits tend to refer to our knights deferentially. The Great and Good, pillars of the establishment, City of London grandees -- all end up with the title Sir followed, after the first reference, only by their first name. Yet Sir Peter and Sir George have shown they are not afraid to stand up to the banking establishment.

The government's spin doctors would like us to believe the counterbid has proved the good sense of its own solutions to the banking crisis. Yet these two are ready to question the complacent assumption that the prime minister and his team have all the answers. Just as HSBC Holdings plc, Britain's biggest bank, and Barclays plc were right to spurn the government's money (whatever we may think of Barclays selling 32% of itself to the Gulf), the rebellious knights are right to challenge a takeover made at the government's behest.