10 February 2009
It was a case of “we’re sorry but we’re not to blame” at the Treasury Select Committee hearing on Tuesday morning. The four erstwhile titans of finance got in their “unreserved apologies” soon after proceedings got underway, but any sense of personal culpability had melted away by the end of the session — especially after former HBOS boss Andy Hornby said: “I don’t feel particularly personally culpable.”
In the end of the day, the 14 MPs probably had insufficient knowledge of banking, finance and corporate governance to get any convincing explanations from the “Fallible Four” — Lord Stevenson, Hornby, Sir Tom McKillop and Sir Fred Goodwin — as to why and how they led centuries-old institutions to destruction. The Fallible Four turned out to be great at passing the buck when being lightly sautéed (rather then grilled or poached) by the MPs on Tuesday.
They blamed greedy and short-termist institutional investors for egging them on to pursue unsustainable growth strategies. They made side swipes at the ratings agencies for misleading them about the value of toxic instruments and structured products. Most of all, they blamed external circumstances, with the “market disruption” caused by the collapse of Lehman Brothers last September the most popular scapegoat. I’m afraid this simply won’t wash.
In the end of the day, the Fallible Four chose to adopt and deploy self-destructive “growth at any costs” strategies whilst in charge of their banks -– and to persist with these even after they were warned of the dangers by trusted insiders. Also, it’s worth remembering that banks like Barclays, HSBC and Standard Chartered navigated the same choppy waters without hitting the rocks. One day, even if it takes the full judicial inquiry requested by the Intelligent Finance founder Jim Spowart, members of the Fallible Four will have to come clean.
Even though Tuesday’s session was, to a large extent, a damp squib, it did at least shine some light on the dark place that was HBOS in 2003-05. This in turn could serve the useful purpose in explaining why the dysfunctional bank crashed and burned and provide an object lesson for future generations in how not to run a bank. This was largely thanks to a memorandum submitted to the committee by Paul Moore, the HBOS’s former head of group regulatory risk. This incendiary document –- described as “devastating” by one former senior executive director at the bank — confirms the widely held view that HBOS was already out of control four or five years ago.
In the memo, Moore, a barrister and former KPMG partner who was at HBOS from 2002 to 2004, said there was a “total failure of all key aspects of governance [at the bank]. In my view and from my personal experience at HBOS, all the other specific failures stem from this one primary cause.”
Moore, who first spoke out about HBOS on the BBC Money Programme in October 2008, added: “Even non-bankers with no “credit risk management” expertise, if asked (and I have asked a few myself), would have known that there must have been a very high risk that, if you lend money to people who have no jobs, no provable income, and no assets, to buy an asset which is worth the same or even less than the amount of the loan, and secure that loan on the value of that asset purchased and, then, assume that asset will always rise in value, then you must be pretty much close to delusional?”
He added: “The current financial crisis is a bit like the Emperor’s new clothes. Anyone whose eyes were not blinded by money, power and pride (hubris) and who bothered to look carefully, knew that there was something wrong and that economic growth based on excessive consumer spending, excessive consumer credit, massively increasing property prices, which were caused by the very same excessively easy credit, could only lead to disaster. But sadly, no-one wanted to speak up for fear of stepping out of line with the rest of the lemmings who were busy organising themselves to run over the cliff behind the pied piper CEOs and executive teams that were being paid so much to play that tune and take them in that direction.”
Moore’s reward for warning the bank’s board that they were about to drive it over a cliff? He was be personally fired by Sir James Crosby, HBOS’s former chief executive, even though the way in which the sacking was orchestrated ran counter to HBOS’s ethics and human resources policies.
Crosby’s Houdini-like escape from the chief executive’s role at the age 49 in July 2006 merits further investigation. After all, it was Crosby who was responsible for dreaming up and implementing the flawed strategy so brilliantly described by Moore. This involved piling up the bank’s exposure to a tottering UK property market, cavalier lending to people who lacked the means to repay their loans, reliance on wholesale markets to fund the whole thing, and basing the whole thing on the delusional assumption that UK property prices were on a permanent upwards trajectory. What happened on the corporate side (not treated in Moore’s memo) was even more egregious.
Lord Dennis Stevenson, the bank’s chairman, cannot evade responsibility for this forever. He might be better educated and smoother than some of his banking peers, but as chairman he must take responsibility for the catastrophic failures at HBOS. Stevenson, who earned somewhere between £735,000 and £1.47m each year, was the bank’s chairman from the completion of the Halifax / Bank of Scotland merger in September 2001 until its ignominious end.
To readers unaware of the amoral internal culture that infected HBOS under Crosby’s and Stevenson’s leadership, theirresponse to Moore’s warning may seem astonishing. To those who are aware, it is unsurprising. One thing is clear however. Crosby’s tenure as deputy chairman of the Fundamentally Supine Authority, which commenced in November 2007 (he became an FSA director in January 2004 despite clear scope for conflict of interest given his continuing role as HBOS’s chief executive at the time) must end, and it must end now.
Confidence in the FSA is already at rock bottom. Unless its new chairman Lord Turner grasps this nettle, it’s going to sink through the floor.
Here are some other choice cuts from Paul Moore’s 5,000 word testimony.
When I was Head of Group Regulatory Risk at HBOS, I certainly knew that the bank was going too fast (and told them), had a cultural indisposition to challenge (and told them) and was a serious risk to financial stability (what the FSA call “Maintaining Market Confidence”) and consumer protection (and told them).
I told the board they ought to slow down but was prevented from having this properly minuted by the CFO. I told them that their sales culture was significantly out of balance with their systems and controls.
I was told by the FSA, the chairman of the audit committee [Tony Hobson, a former finance director at insurer L&G and now chairman of left-leaning Northern Foods] and others that I was doing a good job. Notwithstanding this, I was dismissed by the chief executive [Crosby].
My concerns on this appointment [of ex-sales manager Jo Dawson, who had no risk management experience, as his successor] were reported to the FSA but despite the clarity of their guidance on assessing fit and properness they permitted her to become an Approved Person. It is extraordinary that the FSA permitted this, when this role is so important to the fulfilment of their statutory objectives. Maybe they felt constrained as James Crosby was a non-executive director of the FSA at the time?
At the end of his testimony Moore added:
One final observation I would make about the HBOS disaster is this; wasn’t it actually Sir James Crosby rather than Andy Hornby who was the original architect of the HBOS retailing strategy? At first this was good in that it purported to be a “Customer Champion” strategy. The problem was that a reduced margin strategy is predicated on the need for improvements in cost control and at the same time massive increases in sales. It is now clear that this disastrous “grow assets at all costs” strategy was what led to HBOS’s downfall and humiliating demise by the forced acquisition by Lloyds.
Sir James is still the deputy chairman of the FSA and advises the government on how to solve the mortgage crisis. Some might now also question what his “contribution to financial services” has in fact been when this will have led to millions of people in excessive debt, tens of thousands losing their jobs and many more whose balance sheets have been impacted by the precipitous fall of the HBOS share price – apart from the reduction in competition in the retail financial services market threatened by the new Lloyds Group?
Shouldn’t the Committee be asking him to testify?
I sincerely hope McFall and his colleagues on the Treasury Select Committee listen to Moore’s suggestion and get Crosby in front of them soon.
Here are some further quotes from Moore, a level-headed individual whose motive appears to be to ensure that banks are better managed in future, or at least prevented from repeating the crass mistakes that they have made in the recent past.
There were many, many more people in internal control functions, non-executive positions, auditors, regulators who did realise that the Emperor was naked but knew if they spoke up they would be labelled “troublemakers” and “spoilsports” and would put themselves at personal risk.
And finally the memo reveals that Carphone Warehouse’s Charles Dunstone, a non-executive director of HBOS was “very chummy” with Andy Hornby. Despite this, Dunstone was made chairman of HBOS’s retail risk control committee (a division of the audit committee).
Of course, [Dunstone] was supposed to be to challenge Hornby. He obviously had no technical competence in banking or credit risk management to oversee such a vital governance committee. Another HBOS non-executive said to me one day of him and his role “Well, they got that appointment wrong, didn’t they”.