13 July 2009
Speaking on Bloomberg TV, Justin Urquhart-Stewart, director of Seven Investment Management, has described HBOS as being “pregnant with the spawn of Satan” by the time Lloyds TSB saved it from extinction last September. I don’t think he’s far wrong.
Most of the damage was done in the corporate lending arm, overseen by Peter Cummings (pictured above, at the bank’s former headquarters on the Mound), who has been described by The Times as a “short, squat and curmudgeonly Scot”. An inside source at Lloyds recently revealed the extent of the Glaswegian’s folly.
At the UBS Global Financial Services Conference in New York, Lloyds’ chief financial officer Tim Tookey presented a slide entitled “understanding the HBOS loan book” (to view slide, click here, and scroll down to page 9, “Understanding the HBOS loan book”).
The slide reveals that, of the £116bn of corporate lending advanced by Cummings’ BoS Corporate unit, £80bn — a stunning 69% — would have been beyond the pale to Lloyds TSB.
Being a polite banker and a former KPMG accountant, 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.
Put simply this means that, of every £1,000,000 Cummings and his colleagues at BoS Corporate lent to business customers — including all those property wannabees who are dropping like flies at the moment — only £310,000 would have been lent by a “normal” bank, such as Lloyds TSB once was.
Fuelled by greed for bonuses (which were either transactional or based on the short term effect on the bank’s income, irrespective of whether the loans and deals concerned stacked up), the false assumption that the UK property market had entered a permanent upwards trajectory, and the delusion that risk could be banished through structured finance and securitization, Cummings and his cronies lent like crazy to the frothiest sectors of the market.
They had a particular penchant for commercial property, leisure, hotels and retail — the sectors most likely to implode in the event of a market correction.
The strategy, and the extraordinary tactical and moral errors that occurred within it, was dependent on what the FSA has described as BoS Corporate’s “atypical” approach to credit approvals.
Having been given free rein to do what he wanted on the corporate lending side by the HBOS board led by chairman Lord Stevenson of Coddenham, Cummings seems to have abused their trust and ran amok. Even if he didn’t always technically chair his own credit committee, I know that Cummings frequently over-ruled colleagues and internal experts who were warning him to slow down as bubbles burst around him.
Having learnt about “handshake banking” from his mentor Gavin Masterton at BoS, Cummings used HBOS’s bigger balance sheet to dole out billions of pounds in loans to his mates — apparently without bothering to put much down in writing or to carry out much in the way of due diligence on the deals.
He was supportive of a coterie of business people who would never have been able to borrow money on the same terms from rival bankers — and in return they hero-worshipped and feted Cummings. They included the retail tycoon Philip Green (pictured enjoying some bevvies with Cummings below) and rags-to-riches retail and property entrepreneur Sir Tom Hunter.
Others backed by Cummings included the Reuben Brothers, Vincent and Robert Tchenguiz, Nick Leslau and Remo Dipre of Gladedale.The boy from Dunbarton liked mixing socially with these property and retail entrepreneurs and was a frequent guest at the lavish parties and bar mitzvahs they threw.
In Scotland property wannabees in receipt of the Cummings treatment included John Kennedy of Kenmore, Iain Wotherspoon of Kilmartin, Jonathan Milne of FM Developments and Donald Macdonald of Macdonald Hotels.
This is how Patrick Hosking described Cummings in The Times (‘Get rid of this man who broke the bank‘, published December 13th, 2008): “Media-shy, prickly and defensive, his personal reputation soared on a personality cult puffed up by entrepreneurs who borrowed from him and could not believe their luck. Here was a man seemingly prepared to bankroll them on the sweetest of terms. No wonder they connived in glorifying Mr Cummings as the man with the golden touch.”
Other banks have a separate credit committee made up of impartial naysayers who have no direct relationship with corporate clients and whose remuneration is not based on the quantity of loans they advance. But at HBOS, the credit committee was peopled by the very same executives who issued the loans, making it far easier for Cummings and his cohorts to lend for all the wrong reasons.
The bank’s “integrated finance” model, developed by Masterton and Cummings, exaggerated the danger. The unit bought chunky equity stakes in companies to which the bank was also lending, creating massive scope for conflicts of interest. Sometimes known as “pig-on-pork”, the model tends to cloud bankers’ judgment as the prospect of juicy returns on the equity side means credit risks are ignored.
BoS Corporate also had a bizarre habit of piling hundreds of millions of debt onto near-bankrupt customers, including the aviation group Corporate Jet Services (which owned Club 328 and EuroManx), and which was chaired by a man it supported to the hilt, David Mills, even though many such businesses would have been shut down by rival banks years earlier. Inter alia, the bank is thought to have done this to flatter its own balance sheet and deliberately to mislead City investors about its bad debt position. For more detail see Examining HBOS.
A press release from the law firm Lovells reveals how BoS Corporate was prepared to lend the astonishing sum of €4bn (£3.4bn) to a quoted private equity vehicle managed by Harbourvest, and to a number of huge European commercial property funds, including some run by the bank’s own property affiliate Teesland, in January and February 2008 — at precisely the worst point in the cycle. It would be interesting to know how much of this debt Lloyds has now written down to zero.
Cummings wasn’t acting alone at HBOS. The cheerleaders for his disastrous lending spree also have much to answer for. They included the bank’s institutional investors, investment analysts, sections of the media and most of all the bank’s board of directors.
Apparently in Cummings’ thrall, HBOS’s flibbertigibbet chairman Lord Stevenson is known to have been egging him on. The bank’s disgraced former chief executives Sir James Crosby and his successor Andy Hornby als have much to answer for, as does anyone who served on its board from 2003 to 2009.
The figures that Tookey provided for HBOS’s other businesses are truly shocking. They show that, of the £255bn lent by HBOS in retail mortgages and other consumer loans, £86bn (25.5%) was “outside Lloyds TSB’s risk appetite”. In international lending, £20bn (33%) of HBOS’s £61bn loan book would not have been advanced by Lloyds TSB.
Altogether, £165bn (38.3%) of HBOS’s £432bn total loan book is described by Tookey, a 46-year-old self-confessed Robbie Williams fan, as lending Lloyds would not have done. These staggering figures represent dire news for the UK taxpayer, who is now having to foot the bill for HBOS’s profligacy and greed.
And Cummings’ reward for causing this mayhem? The HBOS remuneration committee so liked his style they handed him an “additional incentive opportunity”, which meant he alone among HBOS directors could earn up to 200% of salary as a bonus in 2007 and 2008. The former tea-boy earned a whopping £2.6 million (£50,000 a week) in 2007.
In January 2009, Cummings “retired” aged 53 on an annual pension of £352,000 (that’s nearly £7,000 a week, or £29,000 a month). This is an obscene amount for a man who, probably more than anyone else, destroyed HBOS, inflated the UK’s commercial property bubble, and left a trail of devastation in its wake. These rewards for failure must be clawed back for the taxpayer.
This morning we were also warned by John Kingman, chief executive of Lloyds’s majority shareholder, UK Financial Investments (UKFI), that it’s going to be years before the merged bank can be returned to the private sector — and therefore before taxpayers can get a return on their investment.
Tookey’s figures beg a question: given the toxicity of the HBOS loan book why did Lloyds proceed with its £8bn acquisition of the Edinburgh-based lender?
Were its chairman Sir Victor Blank and CEO Eric Daniels so stupefied by the prospect of recreating the oligopoly in UK banking that they turned a blind eye to the “spawn of Satan”?
Were they hoodwinked by Stevenson and Hornby (who may have failed to reveal the extent of the carnage that occurred on their watch in the hope of making the deal fly)? Or were Blank and Daniels bullied into doing the takeover by a desperate Gordon Brown? Even with a minimal amount of due diligence one might have thought they would have caught a whiff of the rottenness at the heart of HBOS…
It’s clear that rather than the pathetic pussy-footing we’ve seen so far from the Fundamentally Supine Authority (FSA), we need a full judicial inquiry into the activities of HBOS. It is something that a group of us, including the bank’s former head of group regulatory risk Paul Moore, intend to campaign for in the months ahead.
Separately, Lloyds Action Now is seeking access to notes of conversations between Brown and Blank relating to the Lloyds/HBOS deal under the Freedom of Information Act (FoI). The group suspects that the prime minister and his business secretary, Lord Mandelson, were fully aware of the extent of HBOS’s problems prior to the merger but failed to disclose the information to the Lloyds board and by extension Lloyds sharholders.
P.S.: Can anybody tell me why it was considered appropriate for Cummings to sit on the boards of 147 corporate customers of BoS Corporate, while he remained a senior executive at the bank? Was there not scope for conflicts of interest? A cursory reading of the Companies House records suggests that the Dumbarton resident was director of scores of companies linked to prominent customers of Bank of Scotland Corporate – including Donald Macdonald of Macdonald Hotels, Kevin McCabe of Scarborough, David Sutherland of Tulloch, John Kennedy of Kenmore, Geoff Ball of Cala, Sandy Orr of City Inns, Rocco Forte of RF Hotels and the Reuben Brothers of Sapphire Retail Fund.
- To read a selection of previous entries on HBOS and Bank of Scotland Corporate click here