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.
on 13 December 2013
I don't normally read this sort of book, but as an ex-HBOS employee of ten years, including the period of near-bankruptcy in late 2008, I was interested to know exactly how the collapse was brought about. I worked in one of the call centres dealing only with personal customers, light-years from the world of nine- and ten-figure corporate finance deals, but many of the root causes of the destruction of HBOS were visible even from my insignificant position within the company hierarchy. None of these issues are particular to HBOS, either. They are symptoms of the degradation of the banking industry over the last few decades. Genuine customer knowledge and understanding has been replaced by box-ticking; a sensibly conservative attitude to lending has been replaced by a culture of hucksterism where quantity of sales is the sole measure of success, quality being little more than an afterthought; and long-term stability has been sacrificed on the altar of short-term profits and the annual bonus payment. I left the company [now part of Lloyds Banking Group] in February of this year (2013), and I'd like to say it appeared that the company had learned its lesson, but sadly I cannot. If anything, the period after integration into Lloyds was characterised by an even stronger focus on sales, as if the company believes it can claw back the billions it lost to the toxic debts of HBOS by employing the same sales strategy that allowed those poisonous loans to be made in the first place. I fear that another serious banking crash may not be very far away.
on 22 November 2012
In Hubris: How HBOS Wrecked The Best Bank in Britain, Ray Perman reveals that, in 2006, certain members of the HBOS board had serious concerns about the bank's behaviour in the UK mortgage market and that they failed to intervene. A plan to launch 125% loan-to-value residential mortgages in November 2006 was, Perman writes, greeted with 'mute astonishment' by some board members'. What he does not reveal was who was mute and why they bit their tongues. Given that their role is supposed to be to look after the interests of shareholders, surely these individuals ought to be named and shamed?
Maybe part of the problem was that, as Perman reveals on page 96 of the book, executive directors were allowed to appoint the non-executives - the exact opposite of what's meant to happen in a PLC.
Perman makes clear that, until some 25 years ago, the Bank of Scotland was actually trusted by its customers. When it adopted its 'A Friend for life' slogan in 1984, Perman claims, 'it was not greeted with cynicism. People believed it meant it, and more importantly, it did.' However by the 1990s the leadership of the Bank of Scotland and other UK banks had no qualms about sacrificing this trust on the altar of greed. Not only did they start prioritising sales over service (and, latterly, financial stability); they also started playing fast and loose with their own balance sheets in pursuit of targets that were often quixotic and ephemeral.
Perman recounts how things deteriorated further following Bank of Scotland's ill-considered merger with Halifax in September 2001. The merged bank, called HBOS, immediately started taking a 'cheap and cheerful', 'pile it high and sell it cheap' approach to financial products under the leadership of ex-actuary James Crosby and former Asda marketeer Andy Hornby.
As long as the sales growth continued, the bank's board didn't seem to care how it was achieved, or if they were burdening their customers and the wider economy with debt they could ill afford, or that the assumptions that underpinned their approach (house prices couldn't fall, derivatives had banished risk etc) were wholly fallacious. Nor, seemingly, did they mind that they were leading a 300-year-old institution to the brink of destruction, even firing senior risk managers such as Paul Moore who dared to warn them of the error of their ways (this is an episode that I don't think Perman examines fully enough).
Perman describes how a collective amnesia overcame the top people at HBOS, their minds dulled by reassuring claims from the Federal Reserve chairman Alan Greenspan that complex derivatives had banished volatility from financial markets and from Chancellor of the Exchequer Gordon Brown that he had banished "boom and bust".
Reassured by such falsehoods, the HBOS directors strove to grow their balance sheet at almost any cost, partly because it would trigger bigger bonuses for themselves. They had few qualms about piling into risky lending, highly dubious lending, overpriced speculative private equity and commercial property deals and proprietary trading on financial markets. And they did so mainly in five main geographic markets: UK, US, Ireland, Australia and New Zealand.
Perman describes with aplomb some of the wilder excesses HBOS's retail and corporate banking arms, capturing the cynical mind-set of its Crosby-led management and the internal chaos that ensued. In particular he highlights that the 15% to 20% annual growth targets laid down by Crosby and his co-directors were 'startlingly demanding'.
As the FSA reports have made clear, internal controls were virtually non-existent, especially in the bank's now notorious corporate lending arm. It was no surprise that by the time the credit markets started to freeze over as a result of massive fraud in the subprime mortgage market from July 2007, HBOS was dead in the water.
It was laid low because, as a direct result of their knowledge of its own reckless and cavalier approach to lending, poor quality 'asset' base and inability to reduce its dependence on short-term wholesale funding, its wholesale funders no longer trusted it.
The disastrous institution probably ought to have been allowed to go bankrupt (or shut down in as orderly a way as possible) but, for fear of financial Armageddon, the Bank of England, Financial Services Authority, US Federal Reserve and the government of Gordon Brown stepped in to save it from the consequences of its own folly.
They did this by providing clandestine emergency loans, and by recapitalising the bank with £11.5bn of taxpayers' money, and waving through an anti-competitive rescue takeover by Lloyds TSB. At the time Brown chose to single out Fred Goodwin, the chief executive of RBS, which also failed in spectacular fashion in October 2008, for special blame - it enabled Brown to divert the media and public attention away from his own pivotal role in the banks' near demise. However, as Perman makes clear in Hubris, the greedy and incompetent former directors of HBOS, including its Teflon-coated chairman Lord Stevenson, are no less worthy of such opprobrium.
My main criticisms of the book are that Perman shies away from probing the well-documented instances when, at the apogee of its own reckless irresponsibility in 2003-07, HBOS broke FSA regulations and also, probably, the criminal law. Instances included when it encouraged customers who were taking out so-called 'self-certified' loans to lie about their incomes. Another was when it imposed known embezzlers on between fifty and two hundred of its small and medium-sized corporate borrowers, with devastating results. I expect a lot more will surface about some of the bank's more nefarious activities in the coming weeks and months.
I also think that Perman is sometimes inclined to take a rather simplistic, black and white, BoS = "good", Halifax ="bad" approach to this sorry saga. It is worth pointing out that the two HBOS executive directors who were directly responsible for the most damage at HBOS -- Colin Matthew (international, including Ireland and Australia) and Peter Cummings (corporate) -- both started as trainees at Bank of Scotland in the 1960s and 1970s.
Bank of Scotland is today a hollowed-out shell. It is no more than a trading name within the enlarged Lloyds Banking Group. Perman makes clear that, having squandered our trust, it and similar banks like RBS are likely to take at least a generation to regain it. My own view is that, unless those who were responsible for the carnage at HBOS (many of whom still work in the enlarged Lloyds Banking Group or, like Graeme Shankland and his team, have found other ways of profiting from their past idiocy and incompetence) are held accountable for their actions, trust will never be rebuilt, and proper reform of the UK's financial sector will prove elusive.
on 14 June 2014
There have been three very informative books on the demise of RBS and HBOS, all of which merit close reading. They go some way to providing detail on how provincial banks embarked on aggressive growth, abandoned their customer raison d'être, provided platforms for massive rewards based on what are now known to have been illusory profits, and for some time were applauded for doing so by shareholders and governments of the day. The folly and recklessness are now all too apparent and whilst the RBS versus HBOS circumstances had unique characteristics (HBOS did not have an embedded investment bank), the parallels of rash lending to poor credit on inflated values, with paper thin equity to support the risks taken and over reliance on wholesale financing markets, become clear. Ray Perman has provided excellent coverage of how what at one time would have been regarded as a very secure lending and deposit taking institution was sacrificed in a decade to 'stack em high, sell em cheap' approach to banking, all the more disturbing in many respects as there wasn't even a rash of corporate acquisitions to blame it all on, as there was for RBS.
Perman has avoided subjective judgement and allowed the facts to tell their own story, which does not make pretty reading for those involved, not least as one suspects that Perman, as an outsider, could not possibly have been given access to 'some of the stuff that must have gone on'. Should be recommended reading for anyone in the banking industry.
on 29 November 2012
Review by James Buxton
Ray Perman does a masterly job telling an appalling story. It is the tale of how a Scottish bank which once attracted admiration for sound management made an unsuitable merger, pursued unsustainable growth and ended up losing vast sums of money for its shareholders, many of whom were its own employees.
Bank of Scotland was one of the oldest banks in Britain. It was founded in Edinburgh in 1694 before Scotland and England united to form the United Kingdom. In the 1980s it was shaken out of a placid existence by an imaginative chief executive, Bruce Pattullo. The bank was a pioneer in innovation, becoming the first UK bank to enable its customers to access their accounts via their PCs.
It also avoided some of the mistakes made by other UK banks in the 1980s and under Pattullo and his successor Peter Burt, Bank of Scotland was happy to be described by The Economist magazine as `the most boring bank in Britain.'
But that was to change. In 1999 the bank hatched an ambitious plan to treble its size by acquiring the ailing National Westminster Bank, a bank three times its size. It was narrowly outbid by its Edinburgh neighbour the Royal Bank of Scotland, and was left vulnerable to a takeover.
But then Peter Burt received a suggestion that Bank of Scotland might be interested in merging with another financial institution, the Yorkshire-based Halifax Building Society, Britain's biggest mortgage provider.
The merger went ahead in 2000, creating Halifax Bank of Scotland or HBOS for short. Its head office was in Edinburgh with its administrative centre in Halifax. But it was not a happy arrangement.
The cautious Scottish bankers were under the direction of people in Halifax they unflatteringly referred to as the Haliban, like the Taliban in Afghanistan. In charge was Andy Hornby who had come into banking from retailing, having been a managing director at Asda, the supermarket chain.
Hornby believed that instead of simply providing customers with a service, the bank should actively sell them financial products and even telephone them at home in the evening. Soon the bank was winning one third of all new mortgages sold in Britain.
At the same time HBOS massively expanded its corporate lending, becoming involved in financing large transactions in the UK retail sector, and taking equity stakes in the businesses they created.
But the expansion was unsustainable and in 2008 the chickens came home to roost. HBOS admitted to making huge losses on its exposure to the US housing market while the UK companies to which it had lent could not repay their loans.
By September 2008 customers started to take their money out of the bank. HBOS was collapsing and Alastair Darling, the UK finance minister, had to authorise an emergency loan from the Bank of England.
The UK government searched for another company to rescue HBOS. It turned to LloydsTSB, then a relatively strong bank. A deal was reached after a frantic night's negotiations and LloydsTSB agreed to buy HBOS for a knockdown price. The government had to put in billions of pounds of new capital, ending up owning 45 per cent of the merged company.
HBOS had been wrecked. Its shareholders lost 90 per cent of their investment. Among the unluckiest losers were the 50,000 HBOS staff who had been rewarded for loyalty with shares in the bank, or who had taken advantage of offers to buy shares at a discount. They had watched in horror as the value of their shares collapsed almost to zero.
Meanwhile the directors and senior executives enjoyed to the end enormous salaries. When they lost their jobs they still received generous redundancy packages.
Ray Perman tells the story of the rise and fall of Bank of Scotland vividly and succinctly. He explains the technicalities of banking and embellishes the story with human touches about the key personalities involved. It's just a shame that it's such a sad story.
on 21 March 2014
It was a bit heavier than I expected but I soon learned that it needed to be. The gross incompetence and arrogance fuelled by greed propelled the bank(HBOS) towards an inevitable disaster. How were they ever allowed to lend in that fashion in the first place?.
on 10 December 2012
Frankly I did not expect to enjoy this book but it was well written and tried to clearly explain what went wrong with HBOS. It is a hugely complex, technical area which Perman succeeds in many ways to explain to the non-banker but it leaves a 'nasty taste in the mouth'. Greed and meaningless, delusional reports judged on their size rather than their accuracy or clarity seem to prevail at all management tiers in HBOS creating muddle. Leaving ample opportunity for those at the top to reward themselves with even bigger remuneration.
Unfortunately though our technological age has many advantages, the ability to complicate reports to make them effectively to dull to comprehend is a problem. It was a problem apparantly happily embraced by HBOS not just for clients and toothless regulators but also for management It is a problem which shows no sign of disappearing. I am left wondering whether banking in the way we know it has any future? I am also left wondering if people exist with honesty, integrity, banking ability who are not shockingly greedy?
on 13 May 2015
A very easy and informative read for me, despite the fact that I had what I consider to be only an average prior knowledge of normal banking procedures - if such as thing exists in these days of corporate greed by companies run by individuals who seem to be obsessed by power and personal gain, rather than providing a good service to customers and maintaining the long-term prosperity and security that not only their customers, but also the country at large has a right to expect. Everyone should read this book, as the excesses which brought the the country to its knees are only likely to be driven out of the system when better informed shareholders, customers and the general public demand more far more accountability from these crooks in sharp suits. This book certainly dispels the myth that only by paying top dollar can companies in the UK secure the quality of management required for long-term growth and prosperity - in fact it suggests that the reverse may be true, as large organisations such as this really need to be run by long-term thinkers and strategists with a steady hand, rather than members of the get rich quick brigade who are generally seeking to feather their own nests, rather than act as responsible custodians of not only their own organisations but also the economy on which the rest of the population depends.
on 31 May 2013
I found Hubris more riveting that a Dan Brown and much more believable. It is well written, carefully researched, just the right balance of facts and comments and paints a very colourful picture of the downfall of a Scottish institution. I used to think that I couldn't go wrong in owning banking shares - reading Hubris explains to me why I was mistaken. I look forward to a follow-up book when matters have progressed and those responsible for the bank's collapse have been dealt with under due processes.
on 16 September 2012
An excellent insight into the arrogance of the people really responsible for the collapse of HBOS. The book reveals the men responsible for the disastrous decision to not only merge with the Halifax but to put them in charge of the Bank of Scotland. An absolute scandal that no one has been brought to book.....yet.