The secrets and lies of Gordon Brown

Gordon Brown recently branded Goldman Sachs “morally bankrupt” and asked the FSA to investigate it. Yet he has turned a blind eye to serious corruption and moral bankruptcy at a bank he bailed out, HBOS .

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 mis-selling them billions of dollars worth of synthetic collaterized debt obligations that were designed to fail.

I’m surprised 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 (HBOS), now part of Lloyds Banking Group also defrauded its own customers. The scam led to some 200 companies being allegedly “stolen” from their rightful owners by the bank and its crooked associates in 2004 to 2007, as part of the BoS Reading fraud.

The scam may originally to have been conceived by the bank as a means of pumping up corporate and commercial lending (even to companies incapable of servicing their loans) and deceiving shareholders about bad debts. However, when the bank realised the scandal had got out of hand in around August 2006, and decided to “hive down” the Reading loan book, which meant putting around 200 of its own business customers… out of business.

Brown was first alerted to this in a detailed letter from one victimised company, a letter which he acknowledged, on 6 October 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 what had happened, Brown ploughed ahead with the government-sponsored rescue takeover by Lloyds TSB of the basket-case HBOS, 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 scandal. However the regulator, at least initially, preferred to 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 jumped to attention, responding to Brown’s request for an investigation into the so-called “giant vampire squid” within a matter of hours. Why the contrast?

Moorhouse has said, if there is going to be an investigation into the HBOS scandal, 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 seems 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 to 2008. 

PwC, the incumbent auditors at Lloyds TSB, became auditors to the enlarged Lloyds Banking Group in January 2009 and earned £63m from auditing Lloyds/HBOS last year.

E&Y, BoS’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 through which HBOS sought to cover up the BoS Reading fraud (notably the astonishing saga of Corporate Jet Services) between March and September 2007.

As I said, 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 key facts. As far as I’m aware, no directors of effected companies were interviewed.

From April 2007 about 50 of HBOS’s corporate clients, many of which had been trading successfully until they were sucked into BoS’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, to take ownership of victimised 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 almost certainly 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 indeed the government off the hook, and about as worthwhile as the so-called “independent” investigation into the sacking of HBOS’s former head of risk, Paul Moore, which HBOS’s former chairman Lord Stevenson commissioned from the bank’s well-rewarded auditors KPMG.

In broader terms, it’s increasingly apparent that HBOS was leading its investors a merry dance 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 via a rights issue.

By March 2008, the Edinburgh-based bank was finding it impossible fund itself 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 only became 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 what was almost certainly a fit of electioneering pique.

The prime minister was made aware that HBOS was actively defrauding its own customers on 6 October 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, which the Treasury acknowledged, 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 possible that Brown and Darling buried the pertinent information about HBOS in the so-called “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.

• 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 5 February 2010 but revised and given a different headline on 18 April 2010