On 19 September 2008, with HBOS heading for the rocks, CEO Andy Hornby shakes hands with Lloyds CEO Eric Daniels. Watched over by his chairman, Sir Victor Blanks, Daniels claims ‘an enormously good deal’. Both men fail to spot warning signs of a looming catastrophe: a staggering £10 billion black hole of debt. Now read on.
Scotland has been home to many lost causes, and consternation at the loss of the country’s oldest bank provoked a rash of hopeless attempts to save it.
Sir Peter Burt, Bank of Scotland’s last chief executive, called his old adversary Sir George Mathewson, now retired from the chairmanship of the Royal Bank of Scotland, and the two wrote to the HBOS board with a typically radical and outspoken alternative future for the company: Stevenson and Hornby should be kicked out, to be replaced by themselves; the Lloyds deal should be rejected and HBOS should continue as an independent company, bolstered by the injection of government capital and loans.
The move sought to tap into an increasing disquiet among HBOS shareholders that they were being herded into accepting the Lloyds offer without knowing the full facts. ‘A properly recapitalised, properly run and independent HBOS appears to be in the interests of the shareholders, its employees, its customers and all stakeholders, avoiding the dangers of an anti-competitive over-mighty leviathan,’ said a statement from Burt and Mathewson. ‘There has been a complete absence of both transparency and debate on whether or not HBOS shareholders are receiving reasonable terms.’ Predictably, the proposal was rejected by the HBOS board and in a circular to shareholders Lord Stevenson raised the spectre of total nationalisation if the Lloyds deal was rejected.
Burt and Mathewson continued for another fortnight before throwing in the towel. They had received 40,000 messages of support from small investors, but the institutions which held the vast majority of HBOS shares were not enthusiastic and neither was the Government. Burt finally admitted defeat:
The Government’s statement has raised several hurdles very high and has made it crystal clear that they do not want and are not prepared to facilitate HBOS remaining independent. The deal had been billed the deal of the century. It is a very good deal for Lloyds. I wish them well through gritted teeth. It’s very sad. A lot of people will lose their jobs and families will be devastated by it unnecessarily.
He also criticised the ‘apparent apathy’ of the HBOS board for failing to explore other options at the time of the Government’s bailout.
Cooked up at a cocktail party
A separate attempt to provide another choice was made by Jim Spowart, the man who had founded Intelligent Finance, the HBOS telephone and internet bank, but had left in 2003. He tried to interest Bank of China in making a counter-bid, but again met with a blank refusal by the Government to consider alternatives. ‘Tens of thousands of extra families will now see their lives blighted by unemployment and its resultant misery,’ said Mr Spowart. ‘Why? Because politicians put their own egos and political agendas before the welfare of the people they purport to represent.’
In December 2008 a last-ditch attempt was made by a group of Edinburgh businessmen who launched a challenge to the Government’s agreement to set aside competition policy. A special sitting of the Competition Appeals Tribunal was convened at short notice in London to rule on the appeal before the HBOS shareholders’ meeting, but rejected it as having no basis. Trustees of the company pension scheme also threatened action, demanding that Lloyds say how it would make up the £3–£5 billion shortfall in the HBOS pension fund, but that too failed.
The deal had to be agreed by both sets of shareholders. As a concession made at the time of the Lloyds merger with TSB, that company was registered in Scotland, although for all practical purposes based in London. It chose the Scottish Exhibition Centre, a vast, cold, industrial shed on the banks of the Clyde in Glasgow for its meeting. Sir Victor Blank did his emollient best to sell the deal, but small investors were not impressed. ‘The [Lloyds] strategy has been very successful . . . why does the board think it is in the interests of shareholders to compromise that success?’ asked one. ‘I find it profoundly disturbing that this deal was cooked up at a cocktail party with the Prime Minister who set aside competition law. Most of us think this deal stinks,’ said another. One investor, who travelled from Devon, said the board was ‘putting its head in a noose’ with the HBOS deal and added: ‘It smacks of an ego trip.’ Sir Victor, with the proxy votes of institutional shareholders in his pocket, knew the deal was safe and announced its approval by 96 per cent.
A foregone conclusion
For its meeting HBOS kept clear of its Scottish and Yorkshire heartlands, where most of its small shareholders lived, but many journeyed to the equally soulless National Exhibition Centre in Birmingham anyway. They heard Stevenson and Hornby apologise for the state into which the bank had sunk. The chairman told the meeting he had spent £1 million buying HBOS shares during the past year. ‘You might ask what kind of chump is that? Andy Hornby has put every single cent of his bonuses into the company’s shares – not into yachts and grand houses.’ Again, the result was a foregone conclusion, but that did not stop small shareholders from voicing their disgust. One said he was appalled that the board had ‘turned a £50 billion company into a basket case in 12 months’ and he demanded the board return bonuses they had received in previous years.
Among the attendees was Mike Blackburn, the last chief executive of Halifax before the merger with Bank of Scotland. His remarks echoed the feelings of many Scottish ex-managers: ‘I don’t think you can put all the blame on what has happened in the US,’ he said. ‘HSBC, for example, has not had recourse to Government money. There is a benefit to banking being boring. Banking is as much about saying ‘no’ as saying ‘yes’.
The deal was now cleared to go ahead, but the ground was still shifting and it was apparent no one knew exactly the real state of HBOS, including its own management and board. In November it issued a trading statement for the first nine months of the year, which showed a significant deterioration in its performance. Arrears on mortgages and unsecured personal loans were again up; so were the provisions against bad debts in the corporate banking division, with property-related lending particularly hard hit. The corporate investment portfolio – the nest egg built up by Peter Cummings – was showing a loss of £93 million, compared to a profit of £124 million three months earlier. There were also further write-downs to the American mortgages held in the treasury division and losses from the collapse of Lehman Brothers, US bank Washington Mutual and the Icelandic banks. One piece of good news was the sale of BankWest in Australia, which brought in much needed cash, but also prompted another write-off of goodwill in the balance sheet.
From bad to very much worse
Despite some small good patches, the general message was negative, but there was no hint of the bad news that was to come so soon afterwards. A month later a trading statement showed a much worse position: mortgage bad debts again up, to £700 million, and £1 billion lost on unsecured lending. In corporate, the losses had nearly doubled in a month, from £1.7 billion to £3.3 billion, while the loss on the investment portfolio had gone up by eight times to £800 million. Write-downs in the treasury division now totalled £4.5 billion. What was most shocking was not that these figures were so awful, nor that the pace of losses seemed to be accelerating, but that the management did not appear to know about them just a few weeks previously.
‘HBOS is flying blind,’ said the Financial Times. ‘That the bank was apparently unaware that October was one of the worst months in its 313-year history when it issued its interim trading statement on November 3 is an alarming indictment of its information management systems. That is why yesterday’s profits warning, which was accompanied by the announcement of £3.2 billion of fresh write-downs to duff debts incurred in October and November, knocked a fifth off the value of its shares.’
Given the scale of the problems and the rate at which they were increasing, there now began to be doubts whether Lloyds was strong enough to save HBOS, which was admitting that it would have to write off £8 billion in the full year. That would consume more than half the new capital it had raised from its summer rights issue and from the Government injection. Just two months previously the FSA had ‘stress tested’ British banks – inventing worst-case scenarios and calculating how much capital they would need to survive them. But the worst cases were not worst enough. If HBOS’s losses continued at the same rate, its capital would soon fall below the danger level, meaning that it would have to raise more. But from whom? With its shares still falling and future losses still unquantifiable, the private sector would not provide it. That left the taxpayer and the prospect of Government control.
Stalinesque purge of HBOS managers
Lloyds’ takeover was finally completed in January 2009. Only two of the HBOS top team were kept on: Harry Baine, the company secretary, and Jo Dawson, head of retail and insurance. In fact the purge of HBOS managers was to reach almost Stalinesque proportions. Lloyds committed itself to the replacement of all the senior management responsible for the collapse of HBOS. No ex-HBOS executives were to be on the new Lloyds Banking Group board and of the nine senior executives reporting to Daniels, only one was ex-HBOS. Further down the organisation, despite HBOS now making up more than managers accounted for less management.
In Greek mythology there is retribution against those guilty of hubris – arrogance before the gods. Now she visited the HBOS board. Lord Stevenson and all the non-executive directors were fired. Andy Hornby, whose head had been demanded by Gordon Brown as a condition of the Government bailout, had already gone. He had been retained by Lloyds on a £60,000 a month consultancy to help with the integration, but a public outcry forced him to give it up.
Colin Matthew and Peter Cummings were the last survivors from the old Bank of Scotland. Cummings’ leaving triggered a wave of vilification in the press that continued for several years. He was described as a reckless gambler, a man who almost single-handedly wrecked the bank. Reporters door-stepped his home in Dumbarton and photographers lurked to snatch grainy pictures of him and his wife shopping at the local supermarket. He was bracketed with the Royal Bank of Scotland chief executive Sir Fred Goodwin as the focus for public anger at the collapse of the two banks and, like Goodwin, his generous pension was seen as an ill-gotten gain. The Sun headlined: ‘Bungling Fred ‘‘The Shred’’ Goodwin was last night joined in Britain’s banking hall of shame – by Pete The Pocket.’
Nemesis, however, did not force them to go empty-handed…
To be continued…
Featured image: LloydsTSB: colour of your money by Ged Carroll CC BY 2.0
This is the first part of Nemesis Strikes: from Hubris: How HBOS wrecked the best bank in Britain by Ray Perman, available on Kindle. In the final part: Lloyds losses felt across Britain
See also: Apocalypse Now and Then
And finally: How Lloyds losses were paid – by mass casualties