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.