by Perman, Ray
Blame for the downfall of HBOS was placed squarely on Sir James Crosby, as architect of the strategy that set the course for disaster, Andy Hornby, who proved unable or unwilling to change course, and Lord Stevenson, who presided over the Bank’s board from its birth to its death. ‘Lord Stevenson, in particular, has shown himself incapable of facing the realities of what placed the bank in jeopardy from that time until now.’ The commission expressed ‘profound regret’ that the FSA’s enforcement actions had been ended before these men could be punished as a deterrent to others in the future, and called at least for a lifetime ban on working in financial services.
In addition to using counsel to carry out most of the questioning of witnesses, the commission had employed experienced bank analysts to sift through the papers and evaluate the evidence. Most of the report was a careful analysis of what had gone wrong at HBOS, but underlying all other mistakes was a dangerous culture.
The strategy set by the board from the creation of the new group sowed the seeds of its destruction. HBOS set a strategy for aggressive, asset-led growth across divisions over a sustained period. This involved accepting more risk across all divisions of the group. Although many of the strengths of the two brands within HBOS largely persisted at branch level, the strategy created a new culture in the higher echelons of the bank. This culture was brash, underpinned by a belief that the growing market share was due to a special set of skills which HBOS possessed and which its competitors lacked. The effects of the culture were all the more corrosive when coupled with a lack of corporate self-knowledge at the top of the organisation, enabling the bank’s leaders to persist in the belief, in some cases to this day, that HBOS was a conservative institution when in fact it was the very opposite.
For the first time the commission estimated the losses of HBOS, which totalled a staggering £54 billion – £46 billion of loan ‘impairments’ and over £7 billion lost on treasury derivatives. More than 10 per cent of total lending went sour. In absolute terms the collapse of RBS had been bigger, but as a proportion of loans written off, HBOS was twice as bad. Most of the money had been lost in the corporate banking division, where the £26 billion of ‘impairments’ would have been enough on their own to sink the Bank. But £15 billion had also been lost in the international division, most of it in Ireland, where more than a third of all loans made had gone bad. Australia had escaped most of the fallout from the credit crunch and had not suffered a recession, yet HBOS still managed to lose £3.6 billion there, a quarter of all its lending.
Retail was the least affected lending division, but still lost £7 billion, mostly on its unsecured loans and non-standard products, such as the notorious 125 per cent, self-certified and buy-to-let mortgages.
As the financial crisis hit, the HBOS treasury division turned from a source of profit to losing £7.2 billion, which alone would have required recapitalisation of the group. ‘All relevant functions at HBOS, from the board downwards, did not properly understand the nature of the risks embedded in the treasury division’s structured investment portfolio, either from a credit risk or liquidity perspective.’
The report detailed the failings of the group’s federal management structure and its risk functions, which had low status throughout the Bank and were fatally undermined by a lack of expertise and experience. It added: ‘The weaknesses of group risk in HBOS were a matter of design, not accident. Responsibility for this lies with Sir James Crosby, who as Chief Executive until 2005 was responsible for that design, with Andy Hornby, who failed to address the matter, and particularly with Lord Stevenson as Chairman throughout the period in question.’
The commission was especially scathing about the HBOS board and held up to ridicule Sir Ron Garrick’s assertion that it was the best board he had ever sat on and Lord Stevenson’s claim that governance was ‘rather good’.
The corporate governance of HBOS at board level serves as a model for the future, but not in the way in which Lord Stevenson and other former board members appear to see it. It represents a model of self-delusion, of the triumph of process over purpose.
The board lacked banking knowledge and did not have the experience or expertise to identify the core risks that the Bank was running.
Judging by the comments of some former board members, membership of the board of HBOS appears to have been a positive experience for many participants. We are shocked and surprised that, even after the ship has run aground, so many of those who were on the bridge still seem so keen to congratulate themselves on their collective navigational skills.
The report laid a serious charge at the door of the directors: ‘Consumers and the wider economy, as well as shareholders and taxpayers, have paid a heavy price for the blunders of the HBOS Board.’
The commission entirely dismissed the assertion that HBOS was brought down by the unforeseen worldwide liquidity crisis, rather than its own actions. Had that been the case the effects would have been much less. Much of the funding problem the Bank faced was caused by the market worrying about the quality of the Bank’s lending – fears which proved to be entirely justified.
The commission was very disappointed by the attempts of those who led HBOS into the abyss to acknowledge, even now, either the nature of the problems that eventually consumed the bank or the extent to which they flowed from their own decisions rather than unforeseeable events. No bank is likely to be immune from the effects of an economic downturn, but the scale of HBOS’s credit losses was markedly worse than that of any of its major peers [the Big Four UK banks]. In these circumstances, the apologies of those at the top of HBOS for the loss imposed upon the taxpayers and others ring hollow; an apology is due for the incompetent and reckless board strategy; merely apologising for having failed to plan for an unforeseeable event is not much of an apology.
The FSA also came in for fierce criticism from the commission, which said its regulation was thoroughly inadequate. In the three years following the merger of Halifax and Bank of Scotland, the FSA had identified some of the issues that would eventually contribute to the group’s downfall, but failed to follow through and was too easily satisfied that they had been resolved. It also took too much comfort from reports prepared by third parties rather than doing the work itself. International regulation, in the shape of the Basel II framework ‘not only weakened controls on capital adequacy by allowing banks to calculate their own risk-weightings, but also distracted supervisors from concerns about liquidity and credit; they may also have contributed to the appalling supervisory neglect of asset quality. The FSA’s attempts to raise concerns on these other fronts from late 2007 onwards proved to be a case of too little, too late.’
The report, however, came a week after the FSA had been abolished, to be replaced by two separate agencies, plus the Bank of England and the Treasury. The regulator had failed to publish its own report on HBOS, which was left on the list of unfinished business to be completed by its successor.
The publication and widespread publicity led to demands for actions against the men named in the report. The Secretary of State for Business, Vince Cable, announced that he was investigating whether they should be banned from being directors of any company. James Crosby was the first of three to respond, stepping down from his roles as an advisor to the equity investor Bridgepoint, resigning as a trustee of the charity Cancer Research UK, asking for his knighthood to be withdrawn and voluntarily surrendering a third of his pension, estimated at over £570,000 a year for life, index linked to the rate of inflation. Crosby had 284,758 HBOS shares at the time he resigned, but options and incentives could have brought this to more than 550,000. Had he sold two-thirds of these at or near the peak price of £11 he could have realised up to £4 million.
Neither Stevenson nor Hornby made any comment, but Hornby’s employer, Gala Coral, issued a statement supporting him.
Pressure mounted on two former finance directors of HBOS to resign from their positions. Phil Hodkinson told the Resolution insurance group that he would n
ot stand for re-election to its board, where he was senior independent director, but Mike Ellis remained silent on his role as chairman of Skipton Building Society.
Drawing on the lessons from the HBOS disaster, Archbishop Justin Welby in effect called for a return to the past. He suggested the creation of a professional institute for banking to provide training and police standards. He said that as banks ‘have the capacity to have such an impact on the wider economy’ then specific training should be necessary. ‘Banks are incredibly complicated things, it is one of the most demanding and complicated areas of management going. The idea that people can hold hugely responsible positions in them without any kind of formal training seems to a number of us as quite surprising.’ The bankers of 20 years ago would have agreed and banking institutes still exist in England and Scotland, but have largely been bypassed by the banks.
Welby also wanted one of the big banks to be recapitalised and broken up to form regional banks, but his ideas fell on stony ground and failed to achieve a positive response from the Government. In fact the prospect of ending the strangehold of the Big Four on the British banking market looked more remote in 2013 than it had done a year previously. Then the sale of more than 300 branches by RBS and 630 branches by Lloyds (forced on them by the European Commission as a condition for them being allowed to receive state aid) had promised to create one or two new challenger banks. But in late 2012 Santander, the Spanish bank which had rescued Abbey, pulled out of the Royal Bank sale and six months later Co-operative Bank announced it would not go through with the purchase of the Lloyds branches. Co-op also suffered a downgrade of its creditworthiness and sought new capital, while Lloyds said it would float TSB, a new company owning the 630 branches, on the stock market.
The lessons from the collapse of HBOS could not be more stark and were laid out with exemplary clarity by the parliamentary commission. Whether those lessons will be learned voluntarily by the banks is much less certain. It will be up to governments, current and future, to use the regulators to enforce higher standards of ethics and training. Politicians must also accept that ‘too big to fail’ can also mean ‘too big to manage’ and ‘too big to rescue’. Breaking up big banks would take political courage and impose short-term costs, but in the long run it may be the cheapest way to ensure a sustainable banking system.
Notes & references
CHAPTER 1: BANKER TO THE STARS
1 The Sunday Telegraph, 15 May 2005
2 The Daily Telegraph, 19 November 2010
CHAPTER 2: BASE METAL INTO GOLD
1 T.M. Devine, The Scottish Nation 1700–2000, Allen Lane, 1999, xxii
2 S.G. Checkland, Scottish Banking, a history 1695–1973, Collins 1975, 6
3 Ibid., 7
4 Ibid., 11
5 Andrew Forrester, The man who saw the future, Thomson Texere, 2004. 1–9
6 David Armitage, ‘Paterson, William (1658–1719)’, Oxford Dictionary of National Biography, Oxford University Press, 2004; online edn, Sept 2010 [http://www.oxforddnb.com/view/article/21538]
7 Douglas Watt, The Price of Scotland; Darien, Union and the Wealth of Nations, Luath Press, Edinburgh 2007, 1
8 Ibid., 17
9 Forrester, 62–3
10 Checkland, 15
11 Alan Cameron, ‘Holland, John (1658–1721)’, Oxford Dictionary of National Biography, Oxford University Press, 2004; online edn, Jan 2008 [http://www.oxforddnb.com/view/article/13531]
12 Forrester, 140
13 Alan Cameron, Bank of Scotland 1695–1995: a very singular institution, Mainstream 1995, 21
14 Checkland, 29–30
15 Watt, 63
16 Checkland, 33
17 Ibid., 36
18 In the event only the Scottish commissioners got all the money promised them, leading them to be dubbed ‘a parcel of rogues bought with English gold.’ Cameron, 32
19 Cameron, 36
20 Queen Anne, David Green, Collins, 1970, 335
21 Checkland, 60
CHAPTER 3: A COSY WORLD
1 There are two histories of Bank of Scotland’s first 300 years. See bibliography
2 Now the Chartered Institute of Bankers in Scotland
3 Cameron, Bank of Scotland, 225
4 Quoted in ‘Banks, bailouts and bonuses: a personal account of working in Halifax Bank of Scotland during the financial crisis’, Vaughan Ellis and Margaret Taylor, Work, Employment & Society, December 2010; vol. 24, 4: 803–812. N.B. ‘Margaret Taylor’ is a pseudonym
5 Financial Times, 30 October 1999
6 Richard Saville, Bank of Scotland: a history, 1695-1995, Edinburgh University Press, 1996, 700
7 Ibid., 718
8 Cameron, 230
9 Saville, 783
CHAPTER 4: COMETH THE HOUR, COMETH THE MAN
1 Saville, 792
2 The Glasgow Herald, 3 May 1984
3 Saville, 796
CHAPTER 5: THE CULTURAL REVOLUTION
1 By assets. Saville, 809
2 The Times, 26 September 1985
3 Financial Times, 27 April 1989
4 Financial Times, 26 April 1990
5 The Times, 23 April 1985
6 M. Oram and R. Wellins, Re-engineering’s Missing Ingredient: The Human Factor, IPD, 1995
CHAPTER 6: THE MOST BORING BANK IN BRITAIN
1 Management Today, 1 October 2001
2 Financial Times, 27 April 1997
3 Saville, 815
4 Financial Times, 25 April 1996
5 Saville, 800
6 Financial Times, 14 May 1996
7 Bank of Scotland annual report and accounts, 1998
CHAPTER 7: A DARK LAND – WE NEED TO PRAY FOR THEM
1 Financial Times, 26 April 1997
2 Financial Times, 2 March 1999
3 The Scotsman, 3 March 1999
4 The Scotsman, 5 March 1999
5 Financial Times, 6 March 1999
6 BBC News, 3 June 1999
7 Financial Times, 3 June 1999
8 Financial Times, 10 June 1999
CHAPTER 8: NO TURNING BACK AT DERBY
1 Financial Times, 2 October 1999
CHAPTER 9: MORITURI TE SALUTANT
1 Reuters, 24 September 1999
2 The Economist, 30 September 1999
3 Sandler was later to lead Northern Rock after its nationalisation
4 The Economist, 2 December 1999
CHAPTER 10: ‘THE NEXT THING HE DOES HAS GOT TO WORK, OTHERWISE HE’S TOAST’
1 Financial Times, 18 February 2000
2 Financial Times, 28 September 2000
CHAPTER 11: PETER’S LAST SUPPER
1 The Daily Telegraph, 5 May 2001
2 HBOS annual report and accounts 2001
CHAPTER 12: A CLASH OF CULTURES
1 http://www.george-fieldman.co.uk/executive_coaching/exec_coaching_5.htm
2 http://news.bbc.co.uk/1/hi/programmes/moneybox/transcripts/jan02_july02/1866378.stm
3 The Daily Telegraph, 4 May 2001; Financial Times, 7 May 2001
4 The Sun, 27 February 2002
CHAPTER 13: ROOM AT THE TOP
1 The Observer, 3 March 2002
2 Daily Mirror, 28 February 2002
3 The Daily Telegraph, 29 March 2003
4 Financial Times, 26 February 2004
5 Financial Times, 15 December 2004
6 Financial Times, 6 January 2006
7 Financial Times, 6 January 2006
CHAPTER 14: GIVE ME ENOUGH DEBT AND I’LL MOVE THE WORLD
1 Who Runs Britain? Robert Peston, Hodder & Stoughton 2008, 93
2 Ibid., 95
3 The Daily Telegraph, 13 October 2003
4 Financial Times, 22 October 2004
5 Peston, 135
6 The Daily Telegraph, 13 October 2003
7 Financial Times, 24 November 2003
8 Financial Times, 9 October 2006
9 The Daily Telegraph, 4 April 2010
10 Financial Times, 9 October 2006
CHAPTER 1
5: AS SAFE AS HOUSES
1 Daily Mail, 1 November 2006
2 BBC, 2 February 2004, http://news.bbc.co.uk/1/hi/business/3478635.stm
3 The Daily Telegraph, 28 June 2008
4 Financial Times, 2 March 2006
5 The Independent, 3 October 2007
6 HBOS Report & Accounts, 2007
7 Quoted at http://www.ianfraser.org/a-brief-history-of-halifax-bank-of-scotland/
CHAPTER 16: ZIGGY’S STARDUST
1 Bowie Bonds did not fare well. The singer’s later albums were not as popular as his earlier ones and the bonds, never very highly rated, were marked down to ‘junk’ status.
2 Saville, 796
3 Asset Backed Alert, Harrison Scott Publications Inc., 21 November 2003
4 The Credit Crunch, Alex Brummer, Random House Business, 2008, 78
5 Back from the Brink, Alistair Darling, Atlantic Books, 2011. Kindle edition location, 281
CHAPTER 17: THE EYE OF THE STORM
1 The Times, 13 December 2008
2 Financial Times, 27 February 2008
3 The Times, 13 March 2008
4 Beyond the Crash, Gordon Brown, Simon & Schuster, 31
5 Sunday Herald, 8 March 2009
6 See http://www.breakingviews.com/europes-great-bank-balance-sheet-fiddle/1615635.article where it is argued that Lloyds reduced HBOS risk-weighted assets by £34 billion by switching from the IRB to the Foundation method
7 Birmingham Post, 30 April 2008
8 The Times, 20 June 2008
9 Brown, Beyond the Crash,35
CHAPTER 18: APOCALYPSE NOW
