Barking Up The Wrong Tree

A Parliamentary Commission on banking standards - comprising various Lords and MPs produced a hard-hitting report on the collapse of HBOS last week - in which they slated senior figures for their terrible stewardship of the bank.

Effectively the Commission found that HBOS would have gone under anyway - even without the wider economic recession - and that the UK's financial watchdog and regulator, the Financial Services Authority (FSA), was barking up the wrong tree.

I read two interesting articles covering this important story - one from The Guardian and the other from The Telegraph newspaper.

I particularly liked about the additional 'comment' in The Telegraph piece - which pointed out the fact that the politicians of the day were involved in this sorry saga - right up to their necks.    

Jill Treanor - writing in The Guardian

The roots of the HBOS crisis, according to the banking standards commission, was 'a culture of perilously high risk lending'. 

Banking group HBOS was not driven to point of bankruptcy by the global financial meltdown, but by its own strategy of high-risk lending, over-ambitious growth targets and poor controls, according to a hard-hitting report by the parliamentary commission on banking standards.

The report, which found that HBOS had a funding gap between its loans and deposits of more than £200bn at the time of its downfall, reveals that a "brash" culture developed inside the bank following its creation in 2001.

The funding gap meant it had to rely on borrowing from other banks in the wholesale markets. While this was the "immediate cause" of the collapse of HBOS, it was not the "fundamental issue" the report found. Instead, it concluded that if the problems at the bank had only been ones of liquidity, it would not have needed a combined capital injection of £28bn from the taxpayer and Lloyds to keep it afloat and "there would have been no losses to the UK taxpayer". Instead, the report says, the key problem was vast, and reckless, lending to UK and overseas companies.

Lord Turnbull, the member of the commission who led the HBOS investigation, said: "This is a story of a retail and commercial bank, rather than an investment bank, brought down by ill-judged lending, poor risk control and inadequate liquidity. Its strategy was flawed from the start."

Sir Charles Dunstone, the founder of Carphone Warehouse and former non-executive director of HBOS, had pointed out in his evidence that under the Vickers ring-fencing proposals intended to shield retail banks from riskier investment banking operations, nearly all of HBOS would have been inside the fence.

In 2001, the bank's chief executive, Sir James Crosby, set ambitious targets for returns to shareholders. He planned to ramp up lending in an attempt to challenge the "big four" banks. But HBOS had a risk department – meant to be on alert for bad lending decisions – that could not keep up with the pace of growth, and a management structure that left decisions about lending to division heads.

The damning report begins with a warning by a former finance director of HBOS telling the board in January 2004 that the Financial Services Authority felt that the rapid growth being pursued "may have given rise to an accident waiting to happen".

But it notes that the FSA – disbanded by the government last weekend – failed to act on its own concerns. "The picture that emerges is that the FSA's regulation of HBOS was thoroughly inadequate," the report said.

"From 2004 until the later part of 2007, the FSA was not so much the dog that did not bark as a dog barking up the wrong tree," the report said, as the regulator moved its focus from prudential risks to a new regulatory system that let banks mark their own homework – using their own models to measure risks – and implement new rules on treating customers fairly.

"The experience of the regulation of HBOS demonstrates the fundamental weakness in the regulatory approach prior to the financial crisis and as that crisis unfolded. Too much supervision was undertaken at a too low a level – without sufficient engagement of the senior leadership within the FSA."

While the FSA missed opportunities to prevent HBOS from "pursuing the path that led to its own downfall … Ultimate responsibility for the bank's chosen path lies, however, not with the regulator but with the board itself."

The commission estimated that £47bn of losses was incurred – £25bn in the corporate division, £15bn in Australia and Ireland, and £7bn in the bank's own HQ in its Treasury operations. The report says that those losses on their own would have been enough to bring the bank down. "Both the relative scale of such large losses and the fact that they were incurred in three separate divisions suggests a systemic management failure across the organisation. Together they would have led to insolvency," the report said.


Fraser Nelson - writing in The Telegraph

So today, a country that loves to hate bankers will be given three new world-class villains – a peer, a knight and a commoner – still prowling around Britain with their licence to bank unrevoked. And herein lies the danger. There will be a temptation to believe that, were it not for these wicked men, HBOS would have been fine. That the crash was caused by the greed and incompetence of a handful of bankers – and if they’d been better people, we would have no recession. There is so much venom dripping from the report that it almost looks as if the suspects are being framed.

Not so long ago, politicians were infatuated with bankers. Indeed, there is suspiciously little in the report about how Lord Stevenson and Sir James came by their fancy titles. The answer, of which the Labour members of the commission are all too aware, is that Gordon Brown pretty much governed in coalition with the banks. His appetite for tax revenue was every bit as great as theirs for profit. The financial services sector paid two fifths of all corporation tax collected – and every bonus it handed out was split 60/40 with Brown and Blair.

Take Sir James, today denounced as the “architect of the strategy that set the course for disaster”. In 2006, he was asked to become the architect of something rather different: a government strategy on identity fraud. The next year, he was made deputy chairman of the Financial Services Authority, and a co-architect of banking regulation. The year after that, he was appointed by Alistair Darling to rewrite the rules on mortgage lending. This fit a pattern. If there was a problem – on skills, or the NHS – a senior banker was called in to publish a mammoth report. In many important regards, Britain had become a bankocracy.

Of course, heaven has no rage like love turned into hatred, and so it is with Labour and the bankers. Its MPs helped to strip Fred Goodwin of his knighthood because they saw in his very title conclusive proof of their former collusion.

Financial greed is always dangerous, but when paired with political vanity it becomes lethal. By working hand-in-glove with the financial sector, Labour ran a form of crony capitalism – and allowed the banks to have loans of up to 35 times their assets. Brown’s government was so dazzled by the tax haul, so swept up in the party spirit, that it left the teenagers with the car keys and a case of tequila. The crash was inevitable.

This is the real, scandalous truth about the financial crisis. If the HBOS trio really were as wicked as the commission suggests, why didn’t the regulator shop them? Today’s report takes us close to the answer. The FSA, it says, was not so much the dog that didn’t bark, as the dog that was barking up the wrong tree. It focused on small savers and tended not to bother the financiers – who were regarded, by Brown, as untouchable.

Sir Mervyn King, the Bank of England Governor, has normally refrained from admitting as much. But in his final weeks in the job, he is becoming more candid. Last month, he gave evidence to the commission, and came as close as he ever has to admitting what was really going on. “Before 2007, the only time there was a speech about regulation from the prime minister was when there was an attack on the FSA for over-bureaucratic regulation,” he said. “That was the climate in which the regulators operated. It was extraordinarily difficult. They knew that if they were tough on a bank, the chief executive would go straight to No 10 or No 11 and say: 'This was an attack on the UK’s most successful industry’.”

Sir Mervyn does not make such accusations lightly. So when he suggests that Downing Street acted in collusion with the bankers, it ought to be taken seriously. It is certainly something the Tories would normally seize on, given their enthusiasm to link Ed Balls and co to the crash. But Sir Mervyn also warned that the problem persists under the Coalition. He was, he said, “surprised at the degree of access of bank executives to people at the very top”. The climate may have changed, but this backdoor access “probably has not”.

The problem, then, is not just that the cosiness that led to the crash is still around, but that it has gone way beyond cosiness. The Chancellor ultimately controls the Bank of Scotland, Lloyds and the Royal Bank of Scotland – and when politicians have a train set, they are sure to play with it. Crucially, George Osborne wants the Treasury to retain control over how much banks should lend (decided by how much capital they should keep in reserve). If the Bank of England had these powers, it would likely rein in lending, as the recent Vickers Report suggested. As things stand, the Treasury hoards the power, and banks are regularly berated (especially by the anti-Business Secretary, Vince Cable) for not lending enough.

There’s a good reason for this caution, summed up by a joke currently doing the rounds. What’s the surest way to start a small company in Osborne’s Britain? Start a big company, and wait. A tad unfair, perhaps, but it explains the mood. Banks are not lending for the reason that cash-rich companies are not investing: fear of another crash. The Government still thinks it can rig the banking system. It still places its faith in dangerously underpriced debt. It still thinks that the remedy for our hangover is some salt, some lemon and another round of tequila. Even bankers are looking on aghast.

The financiers, after all, did not cause this downturn. They added to the drama, but the basic problem was (and remains) one of overspending. The £1.2 trillion national debt, with which the Chancellor is wrestling so unsuccessfully, does not contain a penny of bail-out money. The crisis Britain faces is one of government spending – something concealed during the artificial boom, but now exposed. Deporting every banker in London will not change this simple fact.

When the South Sea Bubble burst in 1720, there was a suggestion in Parliament that the bankers should be tied into sacks with poisonous snakes and dropped in the Thames. The language has been moderated since, but the sentiment has not. The name-calling of today’s report will grab the headlines, but its smaller points are more important. The great error came when politicians grew too close to bankers. Their closeness persists today. And until they are properly separated, none of us should breathe too easily.