Hubris: How HBOS Wrecked the Best Bank in Britain (10 page)

It gave rise to a gallows humour:

Question: What is the definition of an optimist?

Answer: A Royal Bank manager whose wife irons five white shirts on Sunday evening.

The changes signalled the end of the branch manager as a territorial potentate, the local representative of the bank to any customer, whether that was a firm employing a thousand people, or a
widow eking out her meagre savings. In his place came the ‘Relationship Manager’, whose geographic area was much less important than his (or her) understanding of the needs of the
customer. It now became possible to say ‘or her’ because although women had been entering banking in increasing numbers they had not progressed to branch manager status. Project
Columbus cleared out a raft of older male employees and in their place promoted women who previously had been confined to clerical or branch teller jobs. (The exception in the Royal Bank being
‘The Ladies Branch’ in Edinburgh’s Princes Street, which was entirely staffed by and exclusively for women.) Despite the fact that girls frequently topped the prize list in
Institute exams, very few made it beyond middle management to the top grades of the Royal Bank. The same was true of Bank of Scotland and the Clydesdale Bank.

Mathewson also slaughtered a few sacred cows. His bright young PhDs showed that Charterhouse, the upper-crust London merchant bank bought a few years before over dinner at an IMF meeting in
Washington, was not earning its keep. Mathewson sold it and fell out with its suave Chief Executive, Victor Blank, who had also been a main board director of Royal Bank.

The top jobs in the reorganised groups did not necessarily go to experienced bankers. Although Mathewson put Tony Schofield, a long-serving bank executive in the Royal’s English
subsidiary, in charge of the retail bank, he brought in Iain Robertson to run the corporate bank, based in London. Robertson was an accountant by training, but had spent years in the civil service
and had followed
Mathewson as chief executive of the SDA. When he joined the Royal he had only a couple of years experience at NatWest.

Changes were also occurring at Head Office. No longer were time-served bankers with their Institute exams acceptable as heads of specialist departments like finance, marketing, computing or
personnel. In came professionals with no banking experience at all, but university degrees and professional qualifications in accountancy, marketing, information technology or human resources. The
effect on the Royal’s performance was rapid and profound. From coming last in surveys of customer satisfaction, the Royal now regularly came top. With its new confidence it expanded in
America, developed its insurance arm, began to innovate in technology and started to challenge the Bank in corporate lending and structured finance – even poaching one key manager, much to
Pattullo’s annoyance. Profits zoomed. By 1994 they were ten times what they had been in 1991. By the end of the decade they were over £1 billion.

The staff who survived the upheaval benefited. They liked being part of a winning organisation, one lauded for its customer service rather than castigated for its failings. Their numbers
increased rapidly, as did their remuneration. They were now in an environment where their progression depended on their performance, rather than length of service or ‘Buggins’s
turn’. The non-financial benefits of working for the bank increased and care was taken to ensure that the premises in which they worked were pleasant and efficient. Staff wanted to share in
the success which they were helping to achieve. Staff bonuses began to be earned regularly as targets were hit or exceeded and it began to be commonplace to take annual payments in shares rather
than cash.

But other consequences were less apparent at the time. Collegiate management was now a thing of the past. Senior managers did not have time to dine together every working day, nor to take coffee
together. Common values and problems discussed over coffee or lunch gave way to analysis, feasibility reports and business plans. Broad experience conceded to narrow expertise. The new HR
professionals wanted to control management education of new recruits, not to outsource it to an arm’s-length body like the Institute of Bankers in Scotland. They were looking to create
competitive advantage, not to have their key managers go through the same courses as their competitors, so they began to organise their own
training and education courses.
Enrolments for the Institute’s banking courses declined and with them its financial viability. It began to be regarded not as the bedrock on which Scottish banking expertise and reliability
was founded, but as a fusty old institution which needed the dust blown off it. To survive, the Institute began to offer new shorter courses, like modules in mortgage appraisal and telephone
selling. The old concept of the well-rounded banker who had studied all aspects of the craft was disappearing.

From its lofty perch on The Mound, Bank of Scotland contemplated these changes by its upstart rival – a stripling yet to reach its 270th birthday, whereas the Bank was preparing for its
tercentenary. The older guard thought some of the changes flashy, dangerous and bound to end in tears. Younger managers looked on in awe and realised their revolution had not gone far enough.

The most boring bank in Britain

In 1988 Bruce Pattullo had split the top job at the Bank in two. He took the new title of Chief Executive, concentrating on growing the group by acquisition. His old title,
Treasurer, which went back to the early days of the Bank, was now effectively managing director of the domestic banking and finance operation, and he gave it to his brightest lieutenant, Peter
Burt.

Burt, like Pattullo, was middle-class, having been educated at Merchiston, one of the more academic Scottish public schools, and St Andrews, smallest, oldest and most exclusive of the Scottish
Universities. After graduating he had taken an MBA degree at the prestigious US Wharton business school and started his career with Hewlett Packard, one of the new breed of successful computer
companies where the management style could not be more different from that of Scottish banking. Hewlett Packard had open-plan offices and its shirt-sleeved employees called each other by Christian
names no matter how junior or senior. Even the founders were known as Bill and Dave. Chains of command were short and hierarchy was not important. Innovation and experimentation were encouraged and
so was teamwork. Returning to Edinburgh, Burt had worked briefly for a high-tech spin-out company and then for the merchant bank Edward Bates, putting together financial deals for the North Sea oil
industry.

Bates had collapsed in the secondary banking crisis in the 1975, throwing Burt and his colleagues out of work. He was unemployed for three months – not a long period by today’s
standards – but he had recently married and had his first child and he felt the anxiety of uncertainty and repeated rejection acutely. I wrote about him during the 1990s and played down the
episode in my article, for which he rebuked me. The experience had marked him and it was not something he wanted to hide.

In his search for a new job he had been interviewed by Bruce Pattullo, then running the Bank of Scotland Finance Company, who had not had a vacancy, but had been impressed
enough to send Burt up to The Mound, where he had been hired in the new ‘Special Duties’ department of the International Division. It was a period when the Bank of England was
restricting sterling lending so Bank of Scotland was exploring ways to lend in foreign currencies. The Bank’s reputation in the oil industry was growing and Burt worked on some of the major
North Sea field financings. Through ability and hard work he had worked his way up, becoming a divisional general manager in 1983 and general manager leading the international department two years
later. His brain and drive made him the obvious successor to Pattullo.

Like his boss, Burt was a tennis player, but his sporting enthusiasm lay elsewhere. He was an exceptional amateur golfer and drove himself as hard on the tee as he did at work. An interviewer
once asked him why he played golf and got a rhetorical question in reply: ‘Why did I turn to banking?’ The interviewer concluded: ‘Despite him putting golf on the same level as
banking, you get the impression that one is a passion and the other a job that enables him to follow his love. In golf, he says, ‘You are competing against yourself, nobody else – and
every so often you hit a perfect shot and there is no reason, other than human frailty, why you shouldn’t do it every time.’
¹
Human frailty was not something Peter Burt allowed to hold him back in banking any more than in golf. His
annus mirabilis
came in 1993 when he achieved two personal goals – getting
the Bank’s cost/income ratio below 50 per cent and taking the amateur record at the championship Muirfield golf course with a round of 69, which stood for many years.

He had a sharp mind and a quick wit which could sometimes wound, not always intentionally. For some this made him difficult to work with. One non-executive director remembers that although Burt
was never a bully, his rigorous reasoning could intimidate subordinates into not standing up to him or putting counter arguments in case a flaw was found in them. Burt was an admirer of the Hewlett
Packard style of ‘management by walking around’, but his own style was not exactly pedestrian. David Jenkins, the Bank’s Economist recalled seeing him running down the first floor
corridor at the Bank’s international division, tripping at the top of the stairs
and falling head-over-heels right to the bottom, where, to the amazement of those
watching, he sprang up and continued running to his next appointment. Jenkins was one person who was not intimidated by Burt’s intellect, but admired and liked him. The two men became close
colleagues and Jenkins used his sense of humour to turn Burt’s barbs aside and tell him home truths if the occasion demanded. When Jenkins retired (and, sadly, died shortly afterwards), his
counsel was missed.

In 1990 Tom (now Sir Tom) Risk retired and Bruce Pattullo took his place as Governor, but continued as Group Chief Executive. While Peter Burt ran the domestic banking business, Pattullo tried
to find acquisitions to expand the Bank abroad. It had opened a New York branch and had long had a representative office in the Texas oil capital of Houston. Gradually it opened small offices in
other large US cities, but it hankered after a slice of the huge American domestic banking market. With over 15,000 registered banks, there was no shortage of opportunities, but America had been a
graveyard for British banks. One by one the Big Four London banks had bought US subsidiaries, only to fail to make them profitable and be forced to dispose of them at a loss. Even with this
history, Pattullo was keen to buy a US bank, but his Scottish caution kept getting in the way.

Bank of Scotland had good contacts in Texas through its work in the oil industry. The dramatic rise in oil prices following the Middle East war had prompted a massive boom in the state,
particularly in property. But a rapid plunge in the price in 1986 brought about a collapse in the market and Texas banks, which had over-extended themselves, failed at a rate unprecedented in US
history. In all, 506 commercial banks went bust, including seven of the ten largest banks in Texas. The job of cleaning up the mess fell to the Federal Deposit Insurance Corporation, which
restructured banks, injected new funds into those which were salvageable and offered them for sale. Bank of Scotland joined two auctions, the first in 1987 for First City Bancorp and again two
years later for 20 banks, part of the Dallas-based MCorp. Either deal could have transformed the fortunes of the Bank, but it was unsuccessful in both. Pattullo later regretted his caution:
‘The Presbyterian instinct means that you don’t pay top dollar at the table.’

The Bank did take a minority stake in a Greek banking venture, but sold it again a couple of years later when it disapproved of the way
the management were stretching
their mandate. It also entered into a joint venture with a German department store group to offer credit cards, but it found Europe difficult and the US too expensive. It turned to the other side
of the world. New Zealand was a small country like Scotland, spoke English and had a similar legal and financial system. In 1987 the Bank took a stake in Countrywide Building Society, taking full
control in 1992. The country’s financial markets were deregulating and the Bank applied its skills and balance sheet to grow the business.

It was a modest and cautious purchase, but Pattullo felt emboldened by the experience to go further. Two years later he splashed out £437 million to buy Bankwest from the Government of
Western Australia, which had rescued the bank in the late 1980s. Such a bold move was out of character and the stock market reacted badly, marking down Bank of Scotland shares. But Pattullo had
thought it through and six months later sold 49 per cent of the new subsidiary on the Australian stock market.

The year 1995 saw Bruce Pattullo receive his knighthood and the Bank celebrate its tercentenary. The
Financial Times
Lex column marked the occasion by calling the company ‘the
most boring bank in Britain’ which had made dullness a virtue. ‘The business’s steadiness helps explain 300 years of consistent profitability and more recently how the Bank has
outperformed the sector by nearly 100 per cent since 1980.’
²

Pattullo, in a piece published at the time, gave his own view of the Bank’s longevity and recipe for success: ‘The culture in any corporation is important and can help a bank to ride
out the [trade] cycle. I would also argue strongly – and my friends in the City of London would be disappointed if I resisted the temptation to make the point – that not having
one’s headquarters within the Square Mile makes it slightly easier to resist some of the herd instinct and cyclical pressures to over-extend advances and rashly build up new directions . . .
Bank of Scotland’s Tercentenary in 1995 reminds us that our canny forebears must have resisted temptation many times over those 300 years.’