THE bankers who ran HBOS in the run-up to its dramatic collapse were to blame for “catastrophic” management failures that led to its downfall, a damning parliamentary report has found.
In the report published today, the Parliamentary Commission on Banking Standards unleashed a devastating critique of the failings of former chairman Lord Stevenson and past chief executives Sir James Crosby and Andy Hornby.
Their “toxic” misjudgments led to the bank’s crash and the £20.5 billion taxpayer bail-out needed to rescue it at the height of the financial crisis.
The commission concluded the three men, who have since moved on to new positions, should never be allowed to work in the financial sector again.
Peter Cummings is the only former HBOS director to have been penalised by the Financial Services Authority (FSA). He was fined £500,000 and banned for life from working in the City last September.
The commission, made up of MPs and peers, said it was wrong that he should shoulder the blame alone and called on the new City regulator to consider barring his three former colleagues from working again in finance.
The report said: “The primary responsibility for the downfall of HBOS should rest with Sir James Crosby, architect of the strategy that set the course for disaster, with Andy Hornby, who proved unable or unwilling to change course, and Lord Stevenson, who presided over the bank’s board from its birth to its death.”
The role played by Lord Stevenson was given special attention in the report, which identified bad lending (when someone cannot repay a loan), inadequate liquidity (not enough ready cash) and a lack of risk management as the key factors behind HBOS’s fall from grace.
The report said: “Lord Stevenson, in particular, has shown himself incapable of facing the realities of what placed the bank in jeopardy.”
It said the former HBOS bosses had failed to admit their mistakes and should apologise for their “incompetent and reckless board strategy”.
The commission said the higher echelons of the bank leadership had a “brash”, “aggressive” and “corrosive” culture that lacked self-knowledge.
Tory MP Andrew Tyrie, the chairman of the commission, said: “The HBOS story is one of catastrophic failures of management, governance and regulatory oversight. Primary responsibility for these failures should lie with the former chairman of HBOS and its former chief executives Sir James Crosby and Andy Hornby.”
Hen said the Financial Services Authority (FSA), which has since been replaced as regulator by the Financial Conduct Authority, should have done more to prevent the disaster.
Another commission member, Lord Turnbull, pointed out that when Bank of Scotland and Halifax merged to create HBOS, the organisation had a market capitalisation of £30bn. “Just seven years later, all that value had been destroyed,” he 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.
“In evidence to the commission, its leaders consistently refuse to acknowledge the extent to which HBOS contributed to its own demise, preferring to present it as a victim of circumstances.”
The report concluded that the bank’s bad lending played a key role in its downfall. The collapse was not, as Lord Stevenson appeared to suggest, simply down to the closure of global markets following the Lehman Brothers collapse.
The growth in HBOS loans when others were pulling back spooked the markets. The report said the market’s “justified fears” over the quality of HBOS’s lending were to blame for the group’s liquidity problems.
Seeds for collapse were sown in the strategy adopted by the new HBOS group, which saw the pursuit of “aggressive, asset-led growth” – an approach that entailed more risk.
That strategy led to losses in the corporate, international and treasury divisions – a consistently poor performance that suggested a “systemic management failure”. Added together, the losses in the three divisions would have led to insolvency had HBOS not merged with Lloyds to form the Lloyds Banking Group, the report said.
The corporate division had a reckless lending policy, which led to losses. The commission was “disappointed” the bank’s leadership attempted to blame the scale of the losses on the closure of wholesale markets.
“The lending approach of the corporate division would have been bad lending in any market,” the report said. “The crisis in financial markets was merely the catalyst to expose it.”
The “wildly ambitious” growth strategy followed by the international division, especially in Australia and Ireland, was also criticised. In those two countries, assets were reduced by £14.5bn between 2008 and 2011.
Senior bankers appeared to think the problems were down to weaknesses in the Irish economy. “The repeated reference in evidence to us by former senior executives to the problems of the Irish economy suggests almost wilful blindness to the weaknesses of the portfolio flowing from their own strategy,” the report said.
The losses experienced in the treasury division could be traced to a change in strategy in the run-up to the 2008 financial crisis. More emphasis was put on paper assets – a strategy that could potentially result in higher returns but at greater risk.
When the financial crisis hit, profit turned to loss, and charges attributable to the treasury division came to £7.2bn. The report said: “All relevant functions at HBOS, from the board downwards, did not properly understand the nature of the risks embedded in the treasury division’s structured investment portfolio, either from a credit risk or liquidity perspective.”
Risk directors were weakened by lack of experience and expertise. Power lay within the separate divisions of the bank and ambitious staff knew the best chance of career progression lay outside risk management. The report said responsibility for this weakness lay with Sir James, who designed the structure. But Mr Hornby and Lord Stevenson both failed to address the issue.
The report was also highly critical of the FSA, saying its regulation of HBOS was “thoroughly inadequate”.
The men at the helm
Sir James Crosby is working in the City as a member of the European advisory board at private equity firm Bridgepoint. His time as chief executive of HBOS, from 2001 to 2006, overlapped with a spell at the Financial Services Authority (FSA), the former City regulator. He joined the FSA in 2004 and was made deputy chairman three years later by Gordon Brown, an appointment not without irony given the contents of today’s parliamentary report. He assumed control of Halifax in 2001 when he brokered a takeover of Bank of Scotland to create HBOS. After his resignation in 2006, he was knighted for services to finance.
Peter Cummings was too ill to appear in person before the Parliamentary Commission on Banking Standards (PCBS) and was interviewed at his Scottish home.
He is the only HBOS chief to have been punished for his role in the bank’s collapse. He was fined £500,000 by the Financial Services Authority in September and banned for life from working in the financial sector.
According to the PCBS, Cummings’ division caused £26 billion of the £40-£50bn
of losses the bank has recorded since 2008.
Despite being paid £2.3m in 2007 and drawing a £344,000 annual pension, he claimed he could not afford the legal expense of challenging the ruling.
Andy Hornby is now chief executive of gaming group Gala Coral. His career has been chequered but well rewarded since he quit his £1 million-a-year post as HBOS chief executive.
He turned down a £1.6m pay-off, which included a boost to his pension, when he left HBOS. But he then found a £1m-a-year comeback job as chief executive of Alliance Boots.
But he did not last. Before he celebrated his second anniversary in that role, he quit, with insiders saying he had been struggling with stress.
It was four months later that he became boss of the bookmaker Coral. Since then, he has taken up a “two to three day a month” role as non-executive chairman of a private company called Pharmacy2U. Born in Yorkshire and brought up in Bristol, Hornby has also worked at Asda and has degrees from both Oxford and Harvard.
Lord Stevenson was Halifax chairman at the time of its merger with Bank of Scotland and took the same post with the enlarged group
Lord Stevenson has gone on to hold a number of non-executive board positions since leaving HBOS. He is also a cross-bencher in the House of Lords.
When he gave evidence to the commission, he was lambasted by MPs and peers for suggesting reckless lending by HBOS was not his fault as he was “only there part time”. As chairman of HBOS, he took home £815,000 a year in pay and perks.
The Scottish-born businessman was educated at Glenalmond College in Perthshire. He became chairman of Halifax plc in 1999, and when it merged with Bank of Scotland in May 2001, he became chairman of the merged HBOS group. He resigned in 2008 after the bank was hit by the financial crisis.
He has been involved in a host of businesses and organisations and has spoken frankly of a long battle with depression.