Skulking in Gresham Street

February 26th, 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, arising largely 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 in the bank’s Gresham Street head office, having declined to give any broadcast interviews about the sea of red ink that engulfs his 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 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 Banking Group’s 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 which has, bizarrely, not yet 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 his preferred “turnaround consultants” Quayside Corporate Services (now subsumed into Core Enterprise Management) 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 is treating the victims with contempt, the regulator seems to think 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.

But this would be a wholly inadequate solution. Apart from anything else, the approach is anathema to scores of businesses that were mangled by the BoS Reading debacle and whose assets were later expropriated by Quayside / Core Enterprise Management personnel.

Understandably, the victims are reluctant to co-operate with the FSA if it means handing over their voluminous evidence to an unnamed third party. In such a scenario, they fear their evidence might be misused, perhaps to enable the FSA and Lloyds / HBOS to persevere with the cack-handed cover-up initiated in 2007.

One doesn’t have to be a conspiracy theorist to imagine that, in such a scenario, the bank and its investigator might use the victims’ evidence (which by the way is copper-bottomed and has taken the victims two and half years to compile) to close off certain lines of inquiry, perhaps by shredding BoS Corporate documents that might incriminate the bank.

Paul and Nikki Turner, on behalf of the victims of the BoS Reading scandal, are so exasperated with the FSA’s behaviour they have issued a press release decrying the stalemate between FSA and the victims. The release states: “The situation is fast becoming an outrage. The transparent manipulation of facts and circumstances by the FSA are, it seems, the only transparency about the organisation.”

The release continues:-

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 approavch 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?

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