George Kerevan: The fall guy for a generation of financial fools?

GEORGE Kerevan questions whether Peter Cummings was made a scapegoat over his finanacial dealings or truly acted like a knave

Fining the former head of corporate lending at HBOS, Peter Cummings half a million quid and banning him from working is without doubt the most draconian action taken against any senior banker as a result of the financial crisis. But is he a knave or a useful scapegoat?

Before we get too concerned for Mr Cumming’s welfare, he retired in 2009 with a pay-off of £660,000 and a pension pot of £6 million. Neither the ban on working in finance (he’s 57) or the fine will bring him to the Poor House. That said, no one hands back £500,000 in cash without sweaty palms and a trembling hand.

The fine was imposed by the Financial Services Authority (FSA), the City’s official regulator – a job soon to be taken over by the Bank of England because the FSA failed to see the banking crisis coming, then was slow to do anything about it. One point for those who think Cummings is a sacrificial lamb.

Just what did Peter Cummings do? According to Tracey McDermott, who has the wonderful job title of ‘director of enforcement and financial crime’ at the FSA: “Despite being aware of the weaknesses in his division and growing problems in the economy, Cummings presided over a culture of aggressive growth without the controls in place to manage the risks associated with that strategy.”

On that reading, Peter Cummings did nothing fraudulent.

It remains to be seen if the same thing can be said of Sean FitzPatrick, former head of the failed Anglo-Irish Bank, who was arrested at Dublin Airport in July and charged with unlawfully lending the bank’s money to others who are alleged to have used the cash to … er, buy shares in FitzPatrick’s bank.

What Cummings is certainly guilty of is taking insane commercial risks with other folk’s money.

He was in charge of HBOS lending to the corporate sector, mainly for property construction.

There is a blindingly obvious cycle to the commercial property market. First, the economy expands, so office and retail space becomes scarce, and rents go up. This prompts a rush to build new offices and retail parks. Bingo, there is a glut of new property, meaning rents and property values take a nosedive. The person left holding the parcel loses his shirt. That person was Peter Cummings (though it wasn’t his shirt).

What Cummings did was to invest HBOS money in property deals long after it became obvious the market had reached its peak.

By the end of 2008, 56 per cent of the Corporate Division’s loans (£68billion) were in commercial property – higher than any other bank. Cummings was also happy to lend to ‘single name borrowers’ – private entrepreneurs.

By 2008, nearly a quarter of the Corporate Division’s lending (£34bn) had gone to just 30 individuals – none of them me. The FSA notes that three quarters of Cummings’ lending was “sub-investment grade”, meaning the borrower would have difficulty repaying if there was a downturn.

Where was HBOS getting the cash to make these loans? Answer: it was borrowing the money in the financial markets. Meaning, of course, that if the loans made by Cummings went sour, HBOS would be bankrupt.

This is what happened in September 2008. HBOS was then taken over by Lloyds, but the weight of debt in the HBOS portfolio meant the taxpayer had to rescue Lloyds.

Why did Cummings take such dangerous risks? Partly, I suspect, to show off. Partly because he got too close to, and was seduced by, some of those ‘single name borrowers’.

And partly for the bonus – he received £1.3m (twice his salary) for exceeding his profit target in 2007.

A more pertinent question is why did the HBOS board, chaired by Lord Stevenson of Coddenham, let him be so foolhardy, especially throughout 2008 when it was obvious the financial system had hit the skids? It wasn’t because they were ignorant of Cummings’ strategy.

The board happily approved his aggressive lending targets, perhaps in an attempt to stave off a slide in the HBOS share price.

For the FSA to single out Peter Cummings for punishment is less than fair. The FSA’s indictment of Cummings does not even bother to mention the name Andy Hornby, then the HBOS chief executive. Mr Hornby is now with Coral, the bookmakers (no irony intended).

Thus far, all we can pin on Peter Cummings is poor judgment. If we fined every manager who made a bad decision, we wouldn’t have many left.

In capitalism, the only certain way to ensure banks (or any firm) takes a prudent attitude to risk is through shareholder vigilance. If shareholders or bondholders don’t keep an eye on the business, it’s their fault.

Here lies the problem: governments have been giving shareholders and (more so) bondholders a free ride by bailing out banks too easily. Of course, governments should protect depositors, otherwise the entire payments system would implode.

But when the Government bailed out HBOS-Lloyds, you and I as taxpayers guaranteed to all those bondholders and hedge funds that lent money imprudently to HBOS, so Peter Cummings could throw it away on property speculation.

That general point does not excuse individual wrongdoing in the City. Back to Mr Cummings. The fine print of the 92-page FSA judgment on Cummings states: “Mr Cummings made repeated statements in internal business plans that the business was adopting a selective and cautious approach to lending”. If true, he was telling porkies.

The FSA also says that by April 2008 “it was apparent to Mr Cummings that a number of high-value transactions had begun to demonstrate signs of stress” but these were not identified as such in the accounts. This means “the full extent of stress in the Corporate portfolio was not sufficiently visible to others in HBOS, auditors and regulators”.

The April 2008 date is significant as that is when HBOS launched a £4bn rights issue.

I leave it to you to decide if Peter Cummings is a scapegoat or a knave.