18 April 2010
Gordon Brown’s hypocrisy towards the banking sector knows no bounds. The doomed prime minister recently branded the investment bank Goldman Sachs as “morally bankrupt” and asked the FSA to investigate. Yet Brown has ignored corruption and moral bankruptcy closer to home. Has he “forgotten” that, eighteen months ago, he was alerted to one of several alleged frauds that tipped HBOS over the edge?
Gordon Brown recently branded a bank which has been a close adviser to the UK government as “morally bankrupt”. He levelled the charge at US investment bank Goldman Sachs, whose reputation is in tatters after the SEC charged it with defrauding clients by misselling them billions of dollars worth of synthetic collaterized debt obligations that were designed to fail.
I’m a little surprised that Brown is so outraged by Goldman’s behaviour given that he appears to be complicit in covering up similar scandals back home. For Halifax Bank of Scotland, now part of Lloyds Banking Group, whose Mound head office is pictured above, also allegedly defrauded its own customers. Some 50-200 companies built-up by UK-based entrepreneurs and other investors were allegedly “stolen” from them by the bank and its associates in 2006-07, as part of the BoS Reading fraud.
The scam was originally conceived by the bank as a means of pumping up corporate lending (even to companies incapable of servicing or repaying their loans) and deceiving shareholders about the bank’s true level of bad debts. One purpose may have been to enable the bank’s management, including former head of corporate Peter Cummings, to extract bigger bonuses.
When the bank recognized the scandal had got out of hand in late 2006 or early 2007, it decided to “hive down” the Reading loan book, which meant putting at least 50 corporate customers out of business. Brown was first alerted to this scandal in a detailed letter from one victimized company, a letter which he acknowledged, on October 6th, 2008. But far from pronouncing on the “moral bankruptcy” of HBOS, he either ignored or sought to bury the scandal.
Despite his likely knowledge of the scandal Brown ploughed ahead with the government-sponsored rescue of the basket-case bank, neglecting to inform the very people with the greatest interest in finding out — Lloyds TSB’s board of directors and shareholders, as well as UK taxpayers — who, like lambs to the slaughter, were obliged to shoulder the burden for HBOS’s self-destructive behaviour.
Ten months ago, in June 2009, eight MPs and a Treasury minister asked the Financial Services Authority to launch a no-holds-barred investigation into the Bank of Scotland Reading debacle. However the regulator would rather continue to sweep the whole thing under the carpet, as part of a wider cover-up of abuses that occurred at HBOS under chairman Lord Stevenson and chief executives Sir James Crosby and Andy Hornby. Jean Moorhouse, the FSA official responsible for supervising Lloyds Banking Group, has admitted that, nearly a year after the group of UK politicians requested a probe possibly culminating in criminal charges against the perpetrators, the FSA has … er … yet to even launch any official investigation.
With Goldman Sachs the FSA responded to Brown’s request within a matter of hours. Why?
Moorhouse has said, if there is going to be an investigation, it won’t be carried out by the FSA but will be “outsourced” to an anonymous third party firm “chosen between the bank and the FSA”. This is clearly a farce. It is almost certain to be one of the ‘Big Four’ accountancy firms — and is tantamount an admission that the FSA wants another whitewash. At least three of the ‘Big Four’ accountancy firms — Ernst & Young, KPMG and PricewaterhouseCoopers — are heavily conflicted, earning millions from Lloyds Banking Group either as auditors, insolvency practitioners, advisers or consultants. As with 99.9% of law firms in this country, they would be extremely unlikely to bite the banks that feed.
To give you a flavour of the sums at stake, KPMG earned £55.8m in audit fees and £45.1.million in non-audit fee from HBOS in 2000-08. PwC, the incumbent auditors at Lloyds TSB, became auditors to the enlarged Lloyds Banking Group in January 2009 and earned £63m for auditing Lloyds/HBOS last year alone. E&Y, Bank of Scotland’s auditor until 2000, last year secured a consultancy contract to oversee post-merger integration of Lloyds Banking Group’s IT systems, for which the fees are said to be £300m over three years. It’s also worth pointing out that KPMG and PwC were behind some of the highly questionable prepacks and administrations (notably the astonishing saga of Corporate Jet Services) between March and September 2007 through which HBOS sought to cover up the alleged BoS Reading fraud.
Between October 2006 and March 2007 HBOS decided the best way of putting a lid on the scandal was to “hive down” the circa £1bn loan book of Reading-based director of mid-market high risk, Lynden Scourfield. Around this time, an “investigation” was carried out by PWC, apparently at the FSA’s behest. However this is widely believed to have been a whitewash/cover-up, ignoring many of the facts. As far as I’m aware, no directors of effected companies were interviewed.
From April 2007 onwards about 50 of HBOS’s corporate clients, many of which had been trading successfully until they were sucked into Bank of Scotland Corporate’s high-risk black hole, were put out of business. Many of the administrations, handled by among others KPMG and PWC, seem to have been expressly designed to allow directors and associates of HBOS’s favoured “turnaround consultants”, Quayside Corporate Services including owner David Mills take ownership of victimized firms. Even if legitimate bidders, including the companies’ rightful owners, made higher offers for the assets, these were spurned by both the administrators and the bank.
If the FSA’s next attempt at an “investigation” into this scandal is to be outsourced to PWC or another member of the ‘Big Four’, it would clearly be farcical. It would of course end up being a transparent whitewash; a cover-up whose sole aim would be to strive to get HBOS’s former board, the FSA and the government off the hook, and about as worthwhile as KPMG’s so-called “independent” investigation into the sacking of HBOS’s former head of risk, Paul Moore.
In broader terms, it’s increasingly apparent that HBOS was leading its investors a merry dance with false information about itself in 2007 and 2008 — and was probably trading whilst knowingly insolvent even as it sort to persuade its own investors to pump in additional cash. By March 2008, and probably much earlier given the credit crisis kicked in in August 2007, the Edinburgh-based bank was finding it impossible to obtain funding at reasonable rates on the wholesale markets and was basically bust. Yet the FSA endorsed management’s myth that the bank was funding successfully. Short-sellers knew otherwise. The markets scented blood.
The horrific state of HBOS’s balance sheet was, conveniently, only made fully apparent after Sir Victor Blank, chairman of Lloyds TSB, had been coerced into buying the busted bank, by which time Stevenson and Hornby (and their “superlative used-car salesman” adviser, Simon Robey of Morgan Stanley) had fled the scene.
My overall point? Brown should have thought twice before labelling Goldman Sachs “morally bankrupt” in a desperate fit of electioneering pique. Brown was made aware that HBOS was actively defrauding its own customers on October 6th, 2008, ahead of the completion of the sale of the bank to Lloyds TSB. The letter, written by Nikki Turner of Cambridge-based music publishers Zenith Cafe, stated. “I would ask you to give this situation your attention, as a matter of extreme urgency. Not least because, if it continues, the shareholders of HBOS should know the truth about the cavalier way their money is lost, prior to voting on the merger you have been instrumental in ensuring completion. Also, those people about to lose their jobs should know who let them down.”
Yet for reasons best known to themselves, Brown and his chancellor Alistair Darling decided to keep the information from Lloyds’s shareholders and from the UK taxpayers whom they were relying upon to rescue the worthless HBOS.
Coda: it seems that Brown and Darling buried the information about HBOS in the “secret dossier”, whose existence became apparent during the Competition Appeal Tribunal hearing in November 2008 — all copies of which have, according to HBOS’s QC David Sellar, since been destroyed. I wonder why (or if) that happened?
- For more on BoS Reading read Banking’s Abu Ghraib or Examining HBOS
- Losses from BoS Reading were erroneously put at £250m by the BBC and Daily Mail in May 2009 because a BBC ‘File on 4’ documentary on the scandal limited its investigation to five of the 50 companies affected.
- This post first published as “True losses from HBOS Reading fraud = £925m” on February 5th, 2010 but rewritten on April 18th, 2010