November 26th, 2012 (updated November 27th 2012)
It is not often that I am gob-smacked by the pronouncements of former directors of failed British banks, having become increasingly inured to their rank hypocrisy and doublespeak in recent years. But, I was genuinely astounded by the remarks of Sir Ron Garrick, the former deputy chairman of HBOS, to the Parliamentary Commission on Banking Standards.
Garrick’s insistence that HBOS had “by far and away the best board I ever sat on” seems just so out of kilter with the reality of what the bank was up to during his reign.
Garrick was on the board of HBOS from the bank’s inception in September 2001 until January 2009, a few months after its collapse. He was styled “senior independent director”, chaired the bank’s corporate risk committee and its nominations committee.
It is worth remembering that Tim Tookey, former finance director of the enlarged Lloyds Banking Group, concluded on 12 May 2009 that an astounding £80 billion, or 69 per cent, of the £116 billion that the HBOS corporate division lent was “outside Lloyds TSB’s risk appetite”. Basically he was saying that this was money that should never have been lent.
One issue was that many of the loans were resprayed as equity or hybrid capital in order to deceive regulators and enable HBOS to minimise the amount of loss-absorbing capital it needed to set aside. Another was that significant sums lent by the so-called Bank of Scotland Corporate unit were pumped into a lattice-work of shell companies many of which didn’t trade and some of which bordered on the fraudulent.
Garrick was also Chairman bank’s Irish arm, Bank of Scotland (Ireland) — 84 per cent of whose £20 billion corporate loan book is now ‘impaired’. Garrick took the role on 21 February 2005 after the previous chairman Phil Flynn had his home and offices searched by the Irish Garda as part of a criminal investigation into the £26.5 million Northern Bank heist in Belfast. Garrick was also chairman of Bank of Scotland from 19 February 2005 to March 2006 and deputy chairman of the entire HBOS group from 6 January 2003 until 16 January 2009.
Garrick’s extraordinary remarks suggest that:-
(a) The board of HBOS was totally clueless (and at one stage, when asked why he believed the bank’s activities were “conservative and cautious”, Garrick said exasperatedly “it’s what they [the executives] kept telling us”. Which implies the board directors were rather credulous as well).
(b) the board of HBOS was wilfully blind, and/or
(c) Britain’s elaborate system of corporate governance has utterly failed and must be replaced (as I said in a recent blog post). If you need further confirmation of this, just watch the cross-examining of another former HBOS non-executive director, Charles Dunstone (see video below).
Among other things, Dunstone claimed that the management information systems at the doomed bank were of good quality and that the bank was run in a very transparent way. This was at odds with his later claim that the massive scale of the losses incurred on his watch came as complete revelation. He also claimed that, while sitting on the board, and serving as chairman of the bank’s corporate risk committee, he was unaware of the high proportion of corporate lending that had gone to “low-rated or unrated exposures” or of the fact the bank had “an unbalanced portfolio”.
Garrick’s ‘see no evil, hear no evil’ approach to bank stewardship reminded me of the recent remarks from Mercedes Rojo-Izquierdo, a former non-executive director of the disastrous Spanish bank Bankia. Earlier this month she admitted to a judge who is investigating fraudulent accounting and price-fixing by the troubled Madrid-based savings bank that she “didn’t understand” finance. In my opinion, the main difference between Garrick and Rojo-Izquierdo is that the latter is more honest (something for which Rojo-Izquierdo deserves some credit).
In exchange for showing up at ten three-hour board meetings each year, Garrick was paid fees of £27,000 in 2000, £48,000 in 2001, £55,000 in 2002, £145,000 in 2003, £158,000 in 2004, £183,000 in 2005, £213,000 in 2006, £235,000 in 2007 and £258,00 in 2008. That’s a total of £1.322 million over nine years and a near 855% pay rise over the bank’s catastrophic nine-year life.
In this period the former pump-maker seems to have been content to live in a bubble of box-ticking and back-slapping, apparently totally oblivious to the fact HBOS was, in fact, going to hell in a hand cart. Stuck in the comfortable belief that the HBOS board was ‘the best he’d ever sat on’, Garrick didn’t seem to know or care whether the bank was becoming catastrophically reckless, corrupt, fraudulent and dangerously toxic. Nor did he seem capable of recognising that, if his bank had not been saved from the consequences of its own folly (and alleged criminality, over which Garrick and his co-directors may face charges of conspiring to pervert the course of justice), thanks to a rescue takeover by Lloyds TSB and a massive £11.5 billion bailout from the UK taxpayer in September-October 2008, it would have gone down the swanee.
Garrick’s remarks have really got me wondering about the quality of the boards at Weir Group, Scottish Enterprise, Shell UK and Scottish Power, where he is or was a director.
Here is Patrick Hosking’s account of Garrick’s testimony to the parliamentary commission, published in The Times on Tuesday 20 November, 2012:-
The former deputy chairman of HBOS has said that its board was the best he had ever served on and that, even with the benefit of hindsight, he would join it again.
Sir Ronald Garrick, in evidence to the Parliamentary Commission on Banking Standards, said that he “did not recognise” the depiction of the doomed bank as set out by the Financial Services Authority in March, when the FSA found it guilty of “very serious misconduct” over failings between 2006 and 2008. The report made “horrible reading” and did not chime with what was going on in the bank at the time, he said. “That was not the company I was working in.”
HBOS got into serious difficulties in the banking crisis and was taken over by Lloyds TSB. The Government had to inject £20 billion of taxpayers’ money into the combined group.
Sir Ronald, a Scottish industrialist who headed Weir Group for 20 years, was pressed on HBOS’s heavy dependence on wholesale funding, with the committee hearing how one senior manager had told executives in 2006 that its reliance was “untenable and unsustainable”. Those words were “quite strong, I have to admit”, Sir Ronald said. “I wouldn’t be sure that went to the board. I’m not trying to dodge that question. I just don’t know.”
Lord Turnbull, chairman of the commission’s sub-committee on HBOS, has been frustrated in trying to find out why the reliance on wholesale funding, which had been seen internally at HBOS as a danger from 2001, was never properly addressed. HBOS relied on more wholesale finance than all its main rivals put together and was poleaxed from the moment wholesale markets froze in August 2007.
Sir Ronald submitted: “I have no doubt that the HBOS board was by far and away the best board I ever sat on.” He praised it as open, transparent, of high intellect and integrity, with good relations between the chairman Lord Stevenson and his chief executives and a good mix of experience and expertise. “If, with the benefit of hindsight, I was asked if I wanted to sit on this board again, I would be saying yes.” He joined the Bank of Scotland board in 2000 and stayed on when it merged with Halifax to form HBOS in 2001. He was there until January 2009 and was also senior independent director.
Weir Group was fined £3 million in 2010 and gave up £13.9 million of illegal profits for busting United Nations sanctions and paying kickbacks to officials in Iraq between 2000 and 2002, when Sir Ronald was chairman.
Sir Charles Dunstone, a non-executive director of Halifax and HBOS from 1999 to 2008, said that while the bank modelled a variety of threats in its stress tests, it never hypothesised the collapse of wholesale markets “in so far as I recall”.
And here is Patrick Hosking’s account of the evidence given to the parliamentary commission by Tony Hobson, the ex-chairman of HBOS’s group audit committee (from The Times 21 November 2012). This is equally strange given that Hobson contradicts the FSA in denying there was ever any clash with HBOS’s auditors KPMG over provisioning for the pile of toxic assets accumulated by the bank’s notorious corporate lending arm, led by Peter Cummings:-
HBOS took an optimistic view that loans by its notorious corporate division would not go sour because its sister retail banking division was provided for so well, its former audit committee chairman said yesterday.
Tony Hobson told the Parliamentary Commission on Banking Standards that throughout 2001 to 2008 the policy had been to take an optimistic view about corporate loans, an unusual approach justified by the strong past track record of the corporate unit in managing problem borrowers and the “very prudent” provisioning taken by the retail division, which balanced things out. The policy had the approval of the group auditor KPMG, he said.
HBOS collapsed in 2008, hit by a blowout in defaults by corporate customers. It was bought by Lloyds TSB and both banks received a £20 billion injection of public money. It was censured in September by the Financial Services Authority for “very serious misconduct”, including rejecting KPMG’s advice that it should set aside bigger provisions for bad debts on the corporate side.
Mr Hobson said yesterday, however, that “if KPMG told us to do something, we did it. We were very responsive to their suggestions.” There had never been disagreement on any matter between the audit committee and KPMG over the eight years to 2008, he told MPs, and the FSA judgment was “not a proper reflection of events”.
If you can bear it, you can watch Sir Ron Garrick’s testimony (after that of Charles Dunstone) here:-