Hubris: How HBOS Wrecked the Best Bank in Britain

by Perman, Ray

  CROSBY: No, I didn’t.

  TYRIE: Why not?

  CROSBY: Because I lost money, in the sense that I still had long-term incentives that were sitting there. I lost money, as I would expect to do. For most of those incentives, the money you have talked about was either salary or incentives that had been earned over a substantial number of years.

  TYRIE: You do understand, don’t you, that the public will accept that firms fail and that people make mistakes, but they do not understand or accept that people should profit from that? Do you grasp that the public think you have profited from your time with HBOS and you have not shown any inclination to waive any of that reward, even though you have just apologised for the fact that you are partly responsible for the failure?

  CROSBY: Yes, I do understand that.

  TYRIE: You do know that Fred Goodwin, Dennis Stevenson and Andy Hornby all waived part of their remuneration?

  CROSBY: I understand that was associated with termination. I did leave a few years earlier, and I did not take any notice pay or anything when I left, or any termination terms.

  TYRIE: It was not only termination in Fred Goodwin’s case; for example, he waived half his pension. You mentioned a moment ago that you had potential remuneration benefits from the long-term incentive plan – the LTIP. Did you sell any of the shares in it that you had acquired up to 2006 between 2006 and the failure of the company?

  CROSBY: I believe I did.

  TYRIE: How much?

  CROSBY: Probably two thirds. I can’t remember exactly.

  TYRIE: So you got out before the crash.

  CROSBY: In effect, yes, but not knowingly. It was just because I was, essentially, balancing my portfolio of assets some time after I had left, and it did not make good sense to have that concentration.

  TYRIE: You can understand that when the public hear you say, ‘Well, I was balancing my portfolio of assets,’ they are not going to be very impressed. You are talking about selling two thirds of the holdings that you had, at a time when the messages were getting increasingly strident that there were serious problems with the company that you had just left, and you were busy bailing out of it.

  CROSBY: I am not sure that – well, I certainly did not see it that way at the time. I did not believe that that was what people were saying, and it was certainly no part of my motivation.

  TYRIE: Do you not think it is reasonable for people to say that now?

  CROSBY: I can see why people would think that, but it certainly was not any part of my motivation or my thinking.

  When Phillips took over questioning the hearing began to resemble a trial rather than an inquiry, and it was clear who was in the dock:

  PHILLIPS: Can I say straight away that the thrust of what I am going to be suggesting to you is that the seeds for what went wrong at HBOS were sown during your time as chief executive. Do you understand the point I am making?

  CROSBY: Yes.

  PHILLIPS: The plans and the strategy that you developed straight after the merger were directly responsible for the eventual disaster, which the Chairman has explained, in 2008. That is the suggestion I am making. Do you understand it?

  CROSBY: Yes.

  In further persistent exchanges Crosby was forced to admit that lending in the corporate division of HBOS had been incompetent. The two-hour grilling ended with undisguised contempt from commission members towards the former chief executive. Labour MP Pat McFadden asked Crosby if he had considered giving up his knighthood, and Tyrie ended the session with further pointed questioning:

  TYRIE: For the purposes of the approved persons regime, do you consider yourself to be a fit and proper person to run a financial company?

  CROSBY: I have no plans to apply to be considered as such.

  TYRIE: I have a list of the jobs you have at the moment in front of me, but I am just asking you that question.

  CROSBY: I do not expect that, if I applied, I would be approved, given my history.

  TYRIE: So you do not think that you are a fit and proper person to run a financial company?

  CROSBY: I think I am too closely associated with the problems at HBOS for that to be the case.

  In their examination of Andy Hornby immediately after Crosby, the commission cast him as the junior member of the gang of three identified as most to blame for the fall of HBOS. A number of the commission members left the room, Lord Turnbull took over the chair and David Quest led the questioning rather than the senior counsel Rory Phillips. Hornby too clung to the notion that the closure of the wholesale funding market was what finished his bank and seemed unable to understand that the scale of the losses on lending had made HBOS hopelessly insolvent.

  When Lord Stevenson gave evidence the following day, the commission again turned out in force, with Tyrie and Phillips leading hostile questioning. Stevenson had described himself as ‘part-time and non-executive’ to the committee, implying that he had an Olympian detachment from the day to day running of the bank, yet he had written to the FSA describing himself as ‘part-time, but not non-executive’. In an increasingly tetchy exchange Tyrie forced Stevenson into admitting that much of the lending in HBOS had been incompetent

  TYRIE: A moment ago, you said ‘competence’ was an emotive word. Actually, it is the word used to describe whether people are fit and proper for the purposes of the approved persons regime by the FSA. Do you want to review your assessment of the word ‘competence’ as emotive?

  STEVENSON: I find it difficult applied to – if it is abstract – the abstract concept of lending. Applied to people, it begins to make more sense to me. There was a lot of mistaken lending, but whether it was incompetently done I cannot judge.

  TYRIE: Are you, in your view, a fit and proper person to run a financial institution for the purposes of the approved persons regime?

  STEVENSON: I am absolutely the wrong person to ask.

  TYRIE: Well, I am asking you, and you are going to be asked until you give me an answer.

  STEVENSON: Well, it is rather academic and I am way past wanting to do that and I am not familiar with the criteria for it, so I have no idea. My answer is I don’t know.

  TYRIE: Has this thought crossed your mind from time to time?

  STEVENSON: Well, it is a somewhat academic thought, since (a) I have no intention of working in financial services – not surprisingly after the experience that has taken place – and (b) frankly, at my ripe old age, I would much rather spend time with my grandchildren. So, I don’t think it has really, and my answer is I don’t know.

  TYRIE: Have you held any approved positions since 2009?

  STEVENSON: I don’t think so.

  TYRIE: Are you a non-executive director of Loudwater Investment Partners?

  STEVENSON: Yes . . . no, no, I am not. I used to be.

  TYRIE: When did you cease to be?

  STEVENSON: Some time over the last year.

  TYRIE: We have looked this up, and it appears that you ceased to be a non-executive director last week.

  STEVENSON: That is nothing to do with this session at all. I have taken on two very major responsibilities –

  TYRIE: Okay, well, I am not interested in the major responsibilities.

  STEVENSON: I am just –

  TYRIE: I want to clarify the position with respect to the approved person regime. Are you aware whether the position that you have been holding at Loudwater Investments is one that the FSA deem an approved position?

  STEVENSON: Not as I sit here, no.

  TYRIE: So it hasn’t crossed your mind either?

  STEVENSON: It may have done, but this is going back a large number of years to when I first took it on.

  TYRIE: Okay. When did you take it on?

  STEVENSON: Five years ago; six years ago – something like that.

  TYRIE: So you are on a board; you don’t know whether you are an approved person for the purposes for the approved persons regime.

  STEVENSON: No, but, I said –

  TYRIE: You came off
it last week. Did you know you came off it last week – a week before you give evidence to us?

  STEVENSON: I knew the decision was taken some months ago that I had come off it and it was being implemented, but I didn’t know last week because I had taken on two other major responsibilities and I didn’t have the time.

  TYRIE: Well, let’s go back to the question I asked: are you, in your view, a fit and proper person for the purposes of the approved persons regime?

  STEVENSON: And the answer I gave you is I don’t know.

  TYRIE: You don’t know.

  Stevenson also adopted the ‘innocent victim’ defence, citing the closure of wholesale markets as the factor which brought down the bank. Archbishop Justin Welby was not convinced.

  WELBY: What I am baffled by is that it is clear from the figures that your capital was wiped out.

  STEVENSON: That’s true.

  WELBY: Which is the definition of a complete banking failure. To use an analogy, it seems to me that you are saying that it is like someone who has a fatal heart attack at home and is in a bad car crash on the way to hospital in the ambulance, and the cause of death is put down as the car crash – the car crash being the failure of the wholesale market. There seems to be no realistic analysis or acceptance of a completely failed banking model and culture that wiped out your capital. That is what I am at a loss to identify.

  STEVENSON: I understand your question, and it is a question that has been bobbing beneath the surface of a lot of the others. The commission’s objectives are to learn from the past and to learn for the future.

  WELBY: Well, that is what I am looking for really.

  STEVENSON: I am not trying to defend something or gloss it over – I really am not – so if I may try to put it the context of the timing of it. I am wondering whether to use your metaphor of the heart attack and the car crash. I think I will. We were not aware – this may be a fault – until very late in 2008 that we were suffering from a heart attack. That is the truth. As I said to you before, we published our half-year results for the corporate bank, which had perfectly normal, historic provisions. We were not very worried about the housing cycle. We perhaps – this is a point that has been made – were not worried enough about the commercial property cycle. But to be quite clear, had Lehman’s not been allowed to go bust and had the wholesale markets not closed, I think it is a reasonable presumption that we would not have hit the liquidity buffer, so we would not have had our car crash.

  Now, the million-dollar question – which, I think, in response either to Mr Tyrie or Mr Phillips, we touched on very early on – is if you look at the volume of provisions in our corporate book, what percentage of them resulted from the huge diminution in the world of asset values as a result of the closure of wholesale markets, and what percentage of them resulted from mistaken or incompetent lending, whichever it is? I do not have an answer to that, but it is a reasonable question. I just proffer it for what it is worth. But we really did not know that we had a heart attack. If we had not had the car crash, perhaps we would not.

  He was questioned at length about a letter he wrote to Callum McCarthy, chairman of the FSA, in March 2008 just after the run on HBOS shares. In answer to a question on how he was feeling, Stevenson wrote:

  I and we are feeling about as robust as it is possible to feel in a worrying environment which we would rather did not exist! As I said to you we have faced into the need to be boringly boring for the next year or two and we are setting out our stall to do that.

  To be more specific about our position as I think you and your colleagues at the FSA know, we have had no problems in financing ourselves over the past six months even on the hairiest of days and weeks. Our close monitoring of the key people who finance the London market (particularly in the USA) suggests that our brand and reputation have held and are solid.

  In fact HBOS was already facing liquidity problems and within four months would have to go to shareholders with a rights issue to bolster its capital.

  Stevenson’s letter went on:

  This notwithstanding, we adopted late 2007 a substantially pared down business plan for 2008 which sees us growing assets far slower than liabilities. We said then that if we did not see markets turning by the end of February 2008 we would ratchet it down again. And we have. We have just taken the decision to reduce our asset growth plans by a further £6 billion and increase our deposit plans by a further £13 billion. The net net is that during 2008 we will grow our assets by just 4% and increase our deposits by 12%.

  The reality again was different: HBOS had lost control of its lending. The corporate banking division did not have the liquidity to make new loans, but could not stop existing customers drawing down cash on facilities already granted. Many individual facilities were in the hundreds of millions, some were in the billions.

  Stevenson’s conclusion was extraordinary:

  My soberly considered view is that given the extraordinary external environment, HBOS in an admittedly uncertain and worrying world is in as secure a position as it could be. Happy to be cross-questioned on this but I hope you know me well enough to know this is neither a bravura nor an ill considered statement.

  He went on: ‘What keeps me awake at night?

  . . . I am not aware of any lurking horrors in our business or our balance sheet. Quite the reverse. While it is difficult to believe that we will not see some deterioration in our underlying businesses, we do not see any significant issues currently.

  How would we fare if liquidity completely dried up, you asked? Does that keep me awake at night? Well yes of course one worries about everything, but the answer is no! First, our close monitoring of those who supply the lines of credit leads us to the view that the circumstances in which ours would be withdrawn would either be the ‘freak’ circumstances outlined above (but even that is judged to be unlikely) or where the world has collapsed to an extent that all bets of all kinds are off. The commonsense of the situation is that we are dealing with lenders looking to lend money to a highly conservative institution.

  Commission members jumped on the letter. Former Chancellor Lord Lawson: ‘You said in your letter . . . that HBOS was a ‘‘highly conservative institution’’. This was clearly the reverse of the truth . . . Either when you said that you were being dishonest, or else, if you believed it to be correct, you were delusional. I prefer to believe that you were not dishonest, and you were simply delusional.’

  TYRIE: So your base date for ‘as secure as it could be’ is compared to the day before you wrote the letter, or the week before you wrote the letter, or the month before you wrote the letter?

  STEVENSON: Can I just – I am trying to help.

  TYRIE: I don’t think you are helping us at all. Clearly, this is trying to say, ‘Don’t worry, HBOS is a safe bank,’ when clearly it is not a safe bank.

  Stevenson’s evidence took over three hours and ended on a sour note.

  TYRIE: Do you understand that when you come out with phrases or sentences such as, ‘We may have missed a trick on the corporate loan book,’ people may wonder whether you really are in the real world?

  STEVENSON: I hope –

  TYRIE: Do you know what the losses were?

  STEVENSON: I do know what the losses were.

  TYRIE: How much were the losses on the corporate loan book?

  STEVENSON: About £25 billion.

  TYRIE: Yes, £26 billion. Do you know what the corporate tax yield is in the UK?

  STEVENSON: I don’t.

  TYRIE: Okay; well, it is about £38 billion. We are talking about two-thirds of the whole of the UK’s corporate tax yield going down the Swanee because of appalling loan decisions in the corporate loan book, which you are describing as having ‘missed a trick’.

  I think we have taken this about as far as we can today. Some witnesses have been very frank with us, and it has been clear to us from their evidence that some have been looking the reality of this catastrophic series of events in the face, and s
ome have not. I regret to say that on the basis of what I have heard over three and a half hours, the evidence today has been in the latter category.

  STEVENSON: Might I ask what you think I have not been frank about?

  TYRIE: You have been evasive, repetitive and unrealistic.

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  Retribution of a sort

  The commission report published in April 2013 provoked intense media coverage7 and fierce public indignation at the three men named as being most responsible for the crash – Stevenson, Crosby and Hornby. The title, An Accident Waiting to Happen,1 was taken from the description Mike Ellis had used to the board in 2004 when explaining the FSA Arrow notice, which had suggested that the Group’s growth had outpaced the ability to control risks. Ellis had said that the FSA’s points were not new, they had already been identified by HBOS. One of the main thrusts of the commission’s argument was that there had been warning signs throughout the Bank’s life, but they had been either ignored or too little action had been taken.

  The report was remarkable for being detailed, closely argued and supported by strong evidence, but written in straightforward language intended for readers without technical knowledge. It was also laced with phrases to be picked up by newspaper headline writers or used as broadcasters’ soundbites. Besides the title, the history of HBOS was described as ‘a manual for bad banking’. The FSA was ‘not so much the dog that did not bark as the dog barking up the wrong tree’. Far from being ‘a highly conservative institution’ in a safe harbour, as Stevenson had alleged in his letter to the FSA in March 2008, ‘HBOS was in a storm-tossed sea. It was also holed below the water line.’