31 January 2012
The man who destroyed the Bank of Scotland with a reckless and out-of-control corporate and real-estate lending spree is in the media again.
Mortgage Strategy has an article (Living in the age of less reason) which touches on the “pig on pork” or integrated finance model favoured by Peter Cummings, who was in charge of HBOS’s corporate lending division from 2005-09. Cummings joined the Bank of Scotland as a tea boy in 1973 and worked his way up the ranks.
In August 2001, as a managing director of corporate banking at Bank of Scotland, Cummings was given an open chequebook by his bosses to invest in the equity portion of joint-venture companies alongside the bank’s corporate borrowers. Having just merged with Halifax, the bank was desperate to expand its corporate loan book and specifically targeted frothier sectors like retail, housebuilding, commercial property, hotels and leisure.
The HBOS board, led by chairman Lord Stevenson, was apparently so impressed by the returns Cummings had made from a couple of deals he had struck along these lines with Topshop owner Sir Philip Green, they decided to give him free rein to do whatever he wanted, without much in the way of oversight and with weak credit controls and governance (it seems that they had made the mistake of confusing genius with a bull market)
The method involved HBOS taking equity stakes in the companies and corporate vehicles to which it lent. By blurring the line between equity and debt, the method had the (dis)advantage of deceiving the regulators and enabling HBOS to ratchet up its lending, often at crazy multiples, without making any concomitant increase in its capital.
Astonishingly, Cummings joined the board of 147 of the labyrinthine network of joint venture vehicles he created with retail and property “tycoons” thought to have included Sir Philip Green, Sir David and Sir Frederick Barclay, Sir David Murray, Sir Tom Hunter, Kevin McCabe, John Kennedy, Ian Wotherspoon, Donald Macdonald, David Sutherland, Robert Tchenguiz, Vincent Tchenguiz, Remo Dipre, the Reuben Brothers, Nick Leslau and Jón Ásgeir Jóhannesson, creating clear scope for conflicts of interest.
The Mortgage Strategy piece said that Cumming’s integrated approach, which left British taxpayers saddled with billions of pounds of near worthless “assets” following the rescue takeover of HBOS by Lloyds TSB: “had the touch of an Aladdin’s Cave about it, too. The money on loan appeared as capital rather than debt, so HBOS could increase its lending without increasing its capital. That, coupled with some rather interesting lending partnerships involving retailers, property developers and hoteliers, many of them in Ireland, culminated in the fall of the House of HBOS and the ill-fated takeover by Lloyds TSB which continues to write off billions of pounds of HBOS’ bad debt.”
The financial fallout from the cave’s collapse has been almost unimaginable. At a UBS Global Financial Services Conference in New York in May 2009, Lloyds’ chief financial officer Tim Tookey presented a slide entitled “understanding the HBOS loan book” (to view slide, scroll down to page 9 of presentation PDF).
The slide shows that, of the £116bn of corporate lending advanced by Cummings’ Bank of Scotland Corporate unit, £80bn — a stunning 69% — would have been beyond the pale to Lloyds TSB. Tookey didn’t put it quite like that. Instead he said £80bn of the £116bn was “outside Lloyds TSB’s risk appetite.” But I think he meant pretty much the same thing.
Further reading on HBOS’s Peter Cummings:-