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BANKING GOOD PRACTICE KIDNAPPED BY THE 'HALIBAN'
on 31 December 2012
Experienced financial journalist Ray Pearman's well researched, informative, interesting and erudite account of the supposed 'merger' of The Halifax Building Society and The Bank of Scotland, gives a succinct summary of the history of both companies, a detailed account of the getting together, and the disasterous but wholly avoidable stampede into bankruptcy, followed by a very thoughtful analysis of what went wrong and how the most basic of well established elementary banking and commercial principles would have avoided the collapse which cost the taxpayers dearly.
Immediately the 'merger' was consumated the direction and running of HBOS was dominated by the men from Yorkshire, who were compared to the religious fanatics of Afganistan - 'The Haliban', and led by Andy Hornby, a marketing whizz-kid from the supermarket chain Asda, who swamped the combined company with a 'tsunami' of a vastly increased portfolio of riskier mortgages, big ticket business loans , and poorly adjudged commercial property lending, financed in the large part by securitizations, and short term borrowings. Even at the start of 2008 when the property market was imploding worldwide, HBOS buried it's head in tha sand and publicly announced "Some people look as though they are losing their nerve - beginning to panic even - in today's testing property environment. Not us". It was soon seen as a highly reckless and irresponsible delusory statement but was indicative of the almost total lack of understanding of the gravity of the situation the bank had manoeuvred itself into. Despite falling profits and horrendously massive bad debts looming ahead pay and bonuses for the top executives escalated upwards.
Forced to improve it's capital base in accordance with Basel II regulatory requirements in July 2008 HBOS launched a rights issue which in a move that the underwriters would live to regret, was the biggest flop since the stock market crash of 1987 with less than 9% taken up, leaving the underwriters to take over a 90% paper loss. The end of HBOS came soon after when a hasty, devoid of proper due diligence procedures, take-over by Lloyds was forced through by the Government and for which Lloyds is still counting the costs and losses. Lloyds failed to spot the level of toxicity in HBOS's book and for a time it looked as if they might have blown up two banks instead of one.
HBOS's demise was caused by a fundamental breakdown in basic commonsense. If money is lent to people with no jobs, no provable income and no assets combined with lending money to buy an asset which is worth the same or even less than the amount of the loan, then those responsible must be pretty much close to delusional or stupid or both. You simply don't need to be an economic rocket scientist or mathmatical financial risk management specialist to know that this is not the way to build up a book of debt. This together with funding the whole operation with largely short term money bearing no relationship to the average length of the loan book, and an almost total lack of proper internal governance, was a lethal highly toxic mix guaranteed to bring down the house of cards.
Within 7 years of the merger the Bank of Scotland was destroyed, by the focussing on only growth with common sense and everything else subordinated, with the result of the losing sight of the incredibly simple rules of banking, which had not changed since it's inception in 1695.
A highly recommended, difficult to put down read.