Archie Kane today admitted what everyone else has suspected for some time — that HBOS was effectively bust at the time Lloyds TSB saved it in September 2008. He told the Scottish Parliament’s economy committee “I think it’s quite clear now that HBOS could not have survived on its own. HBOS was finished as an entity.”
In answer to a question from Labour MSP Wendy Alexander, Kane also said: “I think it’s quite clear now that HBOS could not have survived on its own” [the relevant question and answer starts at 23 minutes 20 seconds]
Kane also admitted that HBOS had been unable to lend into the corporate market for the whole of 2008 due to its absence of funds and liquidity. The boss of Lloyds Banking Group in Scotland also repeatedly said Lloyds is still trying to “breathe life” into the Bank of Scotland — implying the bank remains on life support after the excesses of the Lord Stevenson era.
Archie Kane’s remarks actually begged more questions than they answered. The critical one is this: if Lloyds knew that HBOS was “finished as an entity”, why was it prepared to pay £12.2bn for it?
Kane, a main board director of Lloyds Banking Group and head of its insurance division including Scottish Widows (which he formerly ran), dropped these bombshells during a grilling by MSPs in the Holyrood Parliament. The one-hour and 45 minute session formed part of the committee’s inquiry into the banking crisis.
Answering a question from Labour MSP Lewis Macdonald, Archie Kane said: “We did a huge amount of due diligence before we acquired HBOS: in fact, everything that we could legally do, as one public company dealing another public company.” This strikes me as claptrap.
It certainly conflicts with what I’ve been told by sources who claim that from 16 to 18 September last year, as Lloyds’s Eric Daniels and HBOS’s Hornby thrashed out their disastrous deal, Lloyds didn’t actually do any due diligence on HBOS at all. It simply didn’t have the time. Instead it was forced to take at face value whatever it was told by the Edinburgh-based bank’s board!!
In response to another question from the Labour MSP Wendy Alexander, Archie Kane became a master of euphemism.
He said: “HBOS pursued a particular operating model and had a particular approach to risk that was different from other banks. Therefore, when the liquidity crisis hit, it was more vulnerable than other institutions. It has some issues on the corporate side, which have to be worked through and I think they’re well publicised and understood now… “
Archie Kane on HBOS’s deficient approach to risk management
Archie Kane added: “What did we find when we went in there [into HBOS]? We did find that the approach to risk culture and the approach to risk was not that which we would expect in our own organisation. Perhaps some of the management information was not as strong as we would expect in our own institution. And some of the decision-making was done in a fashion … we would not have handled decision-making in that way.”
He claimed that, at the time of the deal, Lloyds was “aware of the problems particularly in the commercial and corporate lending markets.”
He volunteered no information on whether Lloyds was made aware of the existence of the Bank of Scotland Reading scandal, in which the Edinburgh based bank allowed a firm of turnaround consultants to destroy the businesses of up to 200 business and corporate customers before, apparently illegally, seizing their assets.
Archie Kane claimed the only thing Lloyds’ board had failed to predict was “the steep and rapid decline of the economy in Q4 [the fourth quarter] of last year and into this year.” It almost seemed like he believed it was this, rather than dodgy or fraudulent lending by Bank of Scotland Corporate, that had caused bad debts to soar.
The SNP MSP Christopher Harvie was on form when he asked Archie Kane at what point ex-Lloyds chairman Sir Victor Blank and the prime minister became aware of the severity of the problems within HBOS.
Archie Kane refused to answer this, saying he did not want to “speak for” Sir Victor or Gordon Brown.
Instead, after digressing into the the febrile state of the markets last autumn, he said: “It was quite evident by the time we, as a board, got to the decisions on HBOS, that we knew that HBOS was in difficulty, there is no doubt about that I think that’s quite clear… and that HBOS was having real funding difficulties.”
He also refused to put a figure on the bad debts that Lloyds has inherited from HBOS — although did say it represents 80% of the total bad debts at Lloyds.
When asked by Harvie if Lloyds would be willing to consider exploring a more “mutualised” structure, Archie Kane seemed open to the idea. “Mutuality in and of itself is not a solution to the sort of crisis that we have been through. But I believe that mutuality has a very useful and vibrant role to play.”
Commenting on the scale of state support for his bank (which Kane refused to quantify), he said: “We acknowledge that the level of support comes with great responsibility to our customers, colleagues and the community at large.”
One could say it’s a shame that the enlarged bank continues to ignore these responsibilities on so many fronts.
Just one example: grilled by the Labour MSP Wendy Alexander on the bank’s shabby treatment of the Lloyds TSB Scotland Foundation, Archie Kane seemed largely oblivious to the reputational harm the bank’s approach is causing.
Perhaps most poignantly, Kane said: “We in the banking world have to learn from what happened recently.” Note his use of the present tense here. Clearly not enough has been learnt to date.
This blog post was published on 3 December 2009