26 February 2010
Lloyds Banking Group, AKA “the most hated bank in Britain“, today unveiled higher-than-expected annual losses of £6.3bn. The Gresham Street-based bank also admitted that bad debts, largely arising from the poisonous legacy of Peter Cummings, HBOS’s former head of corporate lending, soared to £24bn in 2009. As BBC economics correspondent Hugh Pym pointed out on the Today programme this morning, the latter figure is “equivalent to the annual budget of a Whitehall department.”
However the bank’s US-born chief executive Eric Daniels has refused to explain to the general public what is going on at his disaster-prone institution (see BBC – The Editors).
The ‘Quiet’ American is instead skulking away inside the bank’s Gresham Street head office, having declined to give any broadcast interviews about the sea of red ink that has engulfed the state-rescued bank. Instead he is spoon-feeding guff to credulous business hacks. This contrasts sharply with the more transparent approach adopted yesterday by his counterpart at Royal Bank of Scotland, Stephen Hester.
Amazingly, Daniels refused even to answer relatively innocuous questions from the BBC reporter Joe Lynam outside his Gresham Street hideaway (See this clip from BBC News). That was seriously misguided.
I suspect Daniels is scared that some vaguely rigorous or well-briefed broadcast journalist might ask him about the true challenges facing his bank. I covered most of these in my Is Lloyds the new Enron? post of October 9th, 2009, which provided investors with 13 reasons to avoid the bank’s £13.5bn rights issue.
The reasons I gave at that time included doubts over the accuracy of Lloyds’ financial statements; the inaccuracy of its claim that bad debts have peaked (see today’s FT Alphaville analysis here); the risk that the integration being carried out by Mark Fisher will fail to produce the promised £2bn synergy savings, and the true cost of refinancing the £165bn of ‘soft’ loans from the UK government once these expire — let alone whether this will be possible at all.
Other issues to which I alluded included the outcome of several FSA investigations into Lloyds Banking Group, including one into whether HBOS’s board of directors misled the Lloyds board when they sold them the Edinburgh-based bank in September 2008. Daniels visibly squirmed when quizzed about this by the Treasury Select Committee on January 12th. Could Daniels be running scared from a rerun of that experience?
Or has Daniels’s silence got more to do with another problem Lloyds faces that hasn’t fully erupted into the mainstream media. This is the Bank of Scotland Reading scandal, an alleged fraud in which the bulk of the £925m that BoS Corporate’s ex-director of mid-market, high-risk, Lynden Scourfield, lent to companies advised or controlled by preferred “turnaround consultants” Quayside Corporate Services mysteriously vanished.
This may represent one of the biggest bank heists in UK history. Yet neither Daniels nor the UK authorities are showing much enthusiasm for getting to the bottom of it, even though they were asked to do so by eight MPs and a Treasury minister last June. Instead a ridiculous game of cat and mouse is being played out between the scores of victims of the alleged fraud, the bank and the FSA.
While the bank continues to deny wrongdoing and treat its victims with contempt, the regulator thinks a Section 166 inquiry – FSA-speak for a ‘softly, softly’ inquiry outsourced to an unnamed professional-services firm, chosen by the bank, and in which only bank personnel are actually quizzed(!!) – will suffice. It won’t. Such an approach is anathema to scores of business people whose firms were mangled in the BoS Reading debacle and who claim to have had their assets expropriated.
The victims are reluctant to co-operate with the FSA if it means handing their evidence to an unnamed third party. In such a scenario, they fear it might be misused, perhaps enabling the FSA and Lloyds / HBOS to persevere with the cack-handed cover-up they initiated in 2007. They also suspect that, in such a scenario, the bank and its chosen investigator might use their evidence to close off certain lines of inquiry, perhaps by shredding evidence that might incriminate the bank.
On behalf of all the victims of the BoS Reading scandal, Paul and Nikki Turner, have clarified their stance in a press release. The release , issued on February 24th, reads:-
We are absolutely not obstructing the FSA investigation into events at HBOS Reading and have been fully co-operative. We would like to collaborate further, but the FSA is making it impossible for us to do so or supply any further substantial evidence, since it is refusing to tell us who we are actually supplying that information to and who those people are working for.
The FSA is now trying to blame us for a serious breakdown in communications resulting in a stalemate in co-operation. We don’t accept that blame — neither will we accept this ‘big brother’ style of manipulation. If, as they say, the FSA must adhere to their rules at all costs, even when the rules are illogical and biased towards the financial sector, then maybe it is time those rules change but we should not be blamed for having the common sense to challenge them.
The FSA have told us they have required HBOS to pay for a Section 166 report which will be carried out by an ‘independent third party skilled person’. We understand this could be a firm of accountants, solicitors or other relevant professionals. As we have now had four different versions with regard to whether it is the FSA who chose the firm or the Bank, we are concerned as to the independence of the third party.
We’re taking our request for the Firm’s name to the Office of the Information Commissioner. Despite the hurdles, we will find a way to give the FSA the information needed to complete a full investigation into HBOS, as requested by eight MPs and a Treasury Minister on June 2nd. We shouldn’t have to go to these lengths to get what is, in the end, straightforward and innocuous information.
We only hope that we will be able to supply our information while Hector Sants is still at the helm. Despite obfuscation by the FSA, we are convinced that Mr Sants taking this matter very seriously. We are not convinced that applies to others in the FSA. In any event, something needs to be done about the FSA’s inequitable due process. If not we can expect further catastrophes in the financial sector, as the present structure is clearly a case of the tail wagging the dog.
We did not invent this scenario, nor can we alter the facts to accommodate the concealment of an unpleasant reality. The banks -– both HBOS and Lloyds Banking Group — have had endless opportunities to bring this matter to a consensual conclusion. They have repeatedly refused to do so and persisted with their tactics of delay, denial, dilution. In this case the approach has failed. It is time for the FSA to start doing its job and become ‘very scary’.
- For an overview of the challenges facing Lloyds Banking Group, click Is Lloyds the new Enron?
- For a detailed expose of the BoS Reading scandal involving Lynden Scourfield and David Mills’s Quayside Corporate Services, click Examining HBOS
- For an in-depth analysis of HBOS’s calamitous seven-year life, click HBOS: When did the rot set in? And were investors asleep at the wheel?
- [paragraph on alleged expropriation of assets edited 23 July 2015]