{"id":7416,"date":"2018-09-10T22:19:43","date_gmt":"2018-09-10T22:19:43","guid":{"rendered":"https:\/\/sceptical.scot\/staging\/?p=7416"},"modified":"2026-04-18T19:34:32","modified_gmt":"2026-04-18T19:34:32","slug":"life-savings-lost-hbos-crash-apocalypse-now-part-2","status":"publish","type":"post","link":"https:\/\/sceptical.scot\/staging\/2018\/09\/life-savings-lost-hbos-crash-apocalypse-now-part-2\/","title":{"rendered":"Life savings lost in HBOS crash \u2013 Apocalypse Now: Part 2"},"content":{"rendered":"\n
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People really watched in disbelief \u2013 and I do mean watched, because the share price was on the intranet and they could watch it daily, live, every 15 minutes \u2013 as they began to lose their savings. HBOS trade union rep<\/strong><\/span><\/p>\n<\/blockquote>\n\n\n\n

HBOS could not survive on its own. After Northern Rock, Brown and Darling were reluctant to nationalise another bank, so a private–<\/span>sector solution seemed the neatest answer.<\/strong><\/p>\n\n\n\n

Of the possible candidates as acquirer, LloydsTSB was the obvious first choice. It was conservatively run, with a strong balance sheet (dependent on the wholesale markets for only 25 per cent of its funding) and had come through the sub-prime crisis largely unscathed. It also had the most to gain. A takeover of HBOS would give it coverage in the North of England and Scotland, where it was weak, and provide scope to make massive cost reductions by cutting out duplication in back office functions and the branch networks. The HBOS board had often considered a merger between the two banks at strategy planning sessions, but the obstacle in the way had always been the Competition Commission. A combined bank would have a dominant market share in mortgages, personal savings and current accounts that would never be allowed in normal times. But these were not normal times.<\/p>\n\n\n\n

(Andy) Hornby, HBOS CEO,  knew the LloydsTSB chairman, Sir Victor Blank, well because they both served on the board of Home Retail Group, the Argos and Homebase retailer. He had also encountered Eric Daniels, Lloyds\u2019 chief executive, many times at bank meetings. Daniels, known as the \u2018Quiet American\u2019 in the City because of his unAmerican love of understatement, was a career banker. He had served with Citibank in Latin America and met his wife in Panama, where they still had a house with views from the Atlantic to the Pacific. He spent three years in London in the late 1980s running Citi\u2019s private bank during a previous property crash. He joined Lloyds in 2001 as head of retail and moved into the top job two years later. According to The Guardian:<\/p>\n\n\n\n

\n

With his slow American drawl, Daniels is the perfect foil to the bank\u2019s go-getting chairman, Sir Victor Blank. Although he admits to a love of \u2018\u2018over-wrought\u2019\u2019 Italian opera, Daniels is not a man given to histrionics. He even smokes with an air of quiet contemplation \u2013 leading journalists to describe him as the Marlboro man . . . When asked last month [August 2008] whether he would do any more deals he replied: \u2018\u2018Don\u2019t hold your breath. I don\u2019t buy a pair of shoes just because they are cheap.\u2019\u2019<\/p>\n<\/blockquote>\n\n\n\n

Hornby and Daniels had held tentative discussions over the summer, now they began urgent negotiations.<\/p>\n\n\n\n

In a state of panic<\/b><\/h2>\n\n\n\n

There was a symmetry to the beginning and end of the life of HBOS. On 16 September Hornby, his finance director, Mike Ellis, and main adviser Simon Robey of Morgan Stanley, met Daniels, Tim Tookey, Lloyds\u2019 finance director, and their adviser Matthew Greenburgh from Merrill Lynch, in the HBOS corporate flat in St James\u2019s. Seven years before it had been the venue for the meeting between Peter Burt and James Crosby when the merger between Halifax and Bank of Scotland had been hammered out. Then the air had been light with optimism and excitement. Now it was heavy with dejection and resignation. Daniels knew he had the upper hand and Hornby knew he could not leave the room without a deal. According to the The Daily Telegraph:<\/p>\n\n\n\n

\n

 ‘Andy was in a state of panic,\u2019\u2019 one person at the meeting said. There was a lot of aggression between the two teams. You always get that in a bid but this was compressed into a few moments and the stakes were enormous. Obviously, it got heated\u2019.<\/p>\n<\/blockquote>\n\n\n\n

The talks dragged on into the early hours of the following morning before the outline of a deal was agreed. HBOS would be bought by LloydsTSB at \u2018around\u2019 \u00a32.85 a share, a much higher level than the current share price on the Stock Exchange, but less than half of the value at the time the company had started life in 2002. The two sides broke up expecting to meet later that morning, but someone at HBOS leaked the news to Robert Peston at the BBC who wrote on his blog at 9 a.m. that a deal was close at near to \u00a33 a share. Daniels was furious and an hour and a half later Peston blogged: \u2018Maybe I\u2019ve slightly over-egged the price that Lloyds TSB will pay for HBOS. Perhaps it will be nearer \u00a32 than \u00a33.\u2019<\/p>\n\n\n\n

News of the deal did nothing to steady the HBOS share price and the value of LloydsTSB\u2019s shares also dropped as investors worried about what the bank was taking on. All bank shares were tumbling and in a desperate attempt to steady the market the FSA imposed a three-month ban on short selling and the Bank of England announced an extension of its special liquidity scheme, which was keeping several banks afloat.<\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

<\/p>\n\n\n\n

Thinking the unthinkable<\/b><\/h2>\n\n\n\n

There was still the competition issue to overcome and later that day Daniels met Darling to ask the Government to suspend competition law to allow a takeover to go ahead. Darling agreed to discuss it with Gordon Brown, but he was still not convinced that Lloyds knew what it was getting into or that a deal was possible at all. He instructed his officials to prepare two alternative statements, one welcoming a takeover by LloydsTSB, the other explaining the nationalisation of HBOS. Victor Blank had already raised the competition issue with the Prime Minister while they were flying back from a trade mission to Israel and Palestine, but had not got a final answer.<\/p>\n\n\n\n

The collapse of HBOS, with 30 million customers, was unthinkable, but neither of the alternatives was appealing for the Government either. It had taken nearly six months to decide to take Northern Rock into public ownership, and apart from the political opposition and practical problems it was also threatened with legal action by some shareholders for expropriating their investments. It did not want to go through that again on a much larger scale with HBOS if an alternative could be found. But allowing Lloyds to acquire HBOS had the potential to create a fearsome monopoly. The combination would give Lloyds market leadership in seven key product areas: in current accounts and mortgages it would have over 30 per cent of the market; in savings, credit cards and small businesses it would have over 20 per cent and it would also lead the personal lending and home insurance markets too.<\/p>\n\n\n\n

The Prime Minister\u2019s final consent to suspend competition law was signalled to Blank during cocktails before a dinner both men were attending during the week of the final negotiations, but a picture of the two in deep conversation published in the Financial Times on the day the deal was finally announced gave the impression that it was a political stitch-up.<\/p>\n\n\n\n

Sleepless and bedless<\/b><\/h2>\n\n\n\n

Later that day, 17 September, Daniels agreed to an offer at \u00a32.32, some 20 per cent less than his sighting shot a few hours earlier. Hornby had little option but to accept. Now began a second sleepless night as teams from both banks worked through the dark at the City offices of Linklaters, Lloyds\u2019 lawyers, to complete the paperwork. Tookey left the meeting at 4.15 a.m., only to find that his hotel room had been given to someone else. He slept for an hour on a colleague\u2019s couch in the Lloyds\u2019 City office before meeting Hornby at 7 a.m. in Daniels\u2019 office for the Stock Exchange announcement and the press calls.<\/p>\n\n\n\n

By the time of the press conference on 19 September Hornby had recovered his composure and Daniels had forgotten his anger. The two men shook hands, watched over by Sir Victor Blank. Both sides thought they had got the best from the negotiation. Daniels had acquired a bank bigger than his own, giving him a commanding position in the retail market without spending cash and giving his own shareholders a majority of the equity.<\/p>\n\n\n\n

He could hardly contain his enthusiasm: \u2018We just did an enormously good deal. This is fantastic. I rarely use superlatives, but this is really a good deal.\u2019 Hornby was congratulated by members of his board for pulling off \u2018an unbelieveably good deal.\u2019 The price may have been half what could have been achieved six months before, but it was well above the market price of the shares and he had secured the future of his bank.<\/p>\n\n\n\n

Both men were fooling themselves, but neither yet realised it.<\/strong><\/p>\n\n\n\n

For the Government it also looked like a good deal. Brown and Darling had not had to pledge any guarantees in exchange for LloydsTSB taking a problem off their hands and the strength of Lloyds\u2019 balance sheet would make it that much more likely that the money lent to HBOS by the Bank of England would be repaid. As an added bonus Lloyds made unsolicited pledges to keep the head- quarters in Edinburgh, to keep printing Bank of Scotland banknotes and to try to safeguard jobs in Scotland. This last pleased the Scottish Labour Party which was fighting a tough by-election in the constituency next to Gordon Brown\u2019s, but angered the MP for Halifax, where no such promise had been given.<\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

<\/p>\n\n\n\n

Back in the real world<\/b><\/h2>\n\n\n\n

The deal may have satisfied the two banks\u2019 boards, but it changed nothing in the real world. In the following weeks more US banks went bust and the Federal Reserve injected $85 billion into the giant insurance company AIG, which had insured sub-prime securities, to keep it afloat. Icelandic banks, which had expanded massively in the UK, were also collapsing, nearly bringing their country down with them. So were banks in Ireland. On the London Stock Exchange shares in LloydsTSB and HBOS continued to fall, the latter touching 90p at one stage. With each piece of bad news, the capital of banks was being eroded, the economy was getting weaker and their potential losses were climbing.<\/p>\n\n\n\n

Gordon Brown realised before the banks that they needed capital as well as liquidity. Some might be able to raise it from their shareholders, but the experience of HBOS in its summer rights issue clearly showed it could not. A plan was hammered out by teams from the Treasury, Downing Street, the FSA and the Bank of England. Darling explained it to the bank chief executives in late night meetings. They did not like it, but they could not reject it. The Royal Bank was in the worst position, but Fred Goodwin remained impassive. HBOS was next, but Hornby was unable to hide his terror and sat with his arms tightly clutched around himself. \u2018He looked as though he might explode,\u2019 said Darling.<\/p>\n\n\n\n

\n

\u2018I wouldn\u2019t put my money in his bank,\u2019 remarked one Treasury official. \u2018Just look at his body language.\u2019<\/p>\n<\/blockquote>\n\n\n\n

On 8 October the Government announced its funding package: \u00a350 billion in new capital, \u00a3250 billion in guarantees to underpin bank borrowing and \u00a3100 billion more for the Bank of England\u2019s special liquidity scheme. The Royal Bank of Scotland was the first to agree to take more capital, then HBOS and finally Lloyds. The scheme was portrayed as voluntary, but in fact it was mandatory and there were conditions: remuneration was to be cut, dividends sus- pended and Hornby and Stevenson were to be fired as soon as the merger was complete.9 <\/span>The HBOS chairman took it badly: \u2018He was absolutely furious,\u2019 a Government source told me. \u2018He didn\u2019t see what he had done wrong and why he couldn\u2019t stay.\u2019<\/p>\n\n\n\n

The takeover was finally agreed in October after the terms had been reduced again. Now HBOS shareholders would get fewer Lloyds shares in exchange for their old ones. The Government would be the largest shareholder, owning 43.5 per cent of the merged company; next came Lloyds shareholders with 36.5 per cent and finally HBOS with 20 per cent \u2013 less than half what they would have received with the initial offer. Since the Lloyds\u2019 share price was also falling, the cash value of HBOS was dropping by the day.<\/p>\n\n\n\n

Life savings flushed away<\/b><\/h2>\n\n\n\n

Inside HBOS staff who were also shareholders were watching their savings evaporate. Employee and trade union rep Margaret Taylor:<\/p>\n\n\n\n

\n

\u2018Since the 1990s staff had often taken part of their salary increase in shares or indeed all of it; after all there was a tax incentive to do so. It would not be uncommon for somebody working in the back office who had \u00a33,000 in a bonus to think \u2018\u2018I\u2019m going to put some of that into shares.\u2019\u2019 It is not uncommon for somebody working as a teller on \u00a315,000 to \u00a318,000, who\u2019s been with the company for 15 years, to have built up \u00a320,000 in shares. Most people thought that anyone who didn\u2019t buy into these schemes was crazy because it seemed that you were, you know, why wouldn\u2019t you? Based on their own experience the share prices had only gone up for a number of years.<\/p>\n\n\n\n

\u2018When the HBOS share price began to go down, nobody believed that it would collapse. It was at \u00a311 and then to go to \u00a39, \u00a38 . . . Staff couldn\u2019t believe that had happened but people did still have a feeling that they trusted their employer. Nobody sold their shares because they all thought that it would go back up. The message we got from senior management on a weekly basis was: \u2018\u2018This is a strong bank; today we have held a meeting with our most significant investors, and we have told them, we have told the City, this is a strong bank. We have a strong asset base.\u2019\u2019 People really watched in disbelief \u2013 and I do mean watched, because the share price was on the intranet and they could watch it daily, live, every 15 minutes \u2013 as they began to lose their savings.\u2019<\/p>\n<\/blockquote>\n\n\n\n

For the HBOS board there was one final humiliation before they were booted out without compensation. They had to face shareholders to recommend the deal.<\/p>\n\n\n\n

Daniels, however, put an optimistic gloss on events: if it was a good deal before, it was an even better one now, he claimed<\/p>\n\n\n\n

To be continued…<\/p>\n\n\n\n

 <\/p>\n\n\n\n

\n\n\n\n

This is the second part of Apocalypse Now: from Hubris: How HBOS wrecked the best bank in Britain by Ray Perman, available on Kindle<\/a>.  In Part Three:  Nemesis Strikes<\/em><\/p>\n\n\n\n

Image of Bank of Scotland HQ by Fay Young<\/em><\/p>\n\n\n\n

See also: Apocalypse Now and Then<\/a><\/em><\/p>\n\n\n\n

and How  Scotland’s Premier Banks Crashed the Economy: ten years on<\/a><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Who has paid the cost in the HBOS crash? Inside HBOS, staff earning \u00a315,000 -\u00a318,000, who were also shareholders, were watching their savings evaporate. Ray Perman continues the story of a banking disaster unresolved to this day.<\/p>\n","protected":false},"author":3,"featured_media":3442,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[125],"tags":[332,315,320],"class_list":["post-7416","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-politics","tag-banking-crisis","tag-hbos","tag-lloyds-tsb"],"_links":{"self":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts\/7416","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/comments?post=7416"}],"version-history":[{"count":2,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts\/7416\/revisions"}],"predecessor-version":[{"id":18811,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts\/7416\/revisions\/18811"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/media\/3442"}],"wp:attachment":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/media?parent=7416"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/categories?post=7416"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/tags?post=7416"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}