Hubris: How HBOS Wrecked the Best Bank in Britain (23 page)

Cummings was not Green’s only supporter in HBOS. In 2004 Green bid an eye-watering £9.5 billion for Marks & Spencer, the UK’s biggest clothing retailer, but walked away
when the price got too high. Green was prepared to put in £1.6 billion of his family’s money and HBOS were to fund the rest alongside other banks. Had the deal succeeded Green had
invited Lord Stevenson to become senior non-executive director on the board, an appointment which the Bank claimed would not lead to a conflict of interest because as yet he held no position in M
& S and had received no money from the company. The move led to one of the few clashes on the HBOS board when some non-executives objected to the chairman approving the Bank’s involvement
in the M & S bid. The tense atmosphere was defused by Sir Ron Garrick, who offered to read the papers and make the decision in Stevenson’s place.

The Green-Cummings connection was to be a source of opportunities for HBOS which only a select handful of other bankers could access. ‘FOPs’ – the Friends of Philip –
were a small group of high-rolling individuals who were transforming the British corporate landscape with a series of audacious debt-funded deals. The FOPs included Tom Hunter, but also the Reuben
brothers, David and Simon, who had made their fortunes in metals, trading and property, the property developers Robert and Vincent Tchenguiz, Nick Leslau, another property entrepreneur, Alan
Leighton the retailer and Bernie Ecclestone, the owner of Formula One motor racing. They worked
hard and played hard, often meeting at parties on each other’s
Mediterranean yachts, in Riviera mansions or London apartments. Green was a spectacular party-giver, but the soirees at Robert Tchenguiz’s London home could rival them. Housed in the former
Royal College of Organists premises close to the Royal Albert Hall, it boasted two swimming pools, one on the roof terrace, the other in the basement.

The group shared many things in common. They came from modest beginnings. The Tchenguiz family had twice lost everything in Iraq and Iran, before the sons re-established the family fortune in
Britain, Leslau had started on a milk round and traded umbrellas on a market stall and Ecclestone had begun his working life dealing in motorcycle spares. They worked outside the establishment. Not
for them the tedious formality of normal City convention. They worked directly, took big risks with their own money and understood the power of leverage.

Few bankers were privileged to drink vintage champagne from the bottle in Monaco clubs with this crowd, but among them were Mike ‘Woody’ Sherwood, of Goldman Sachs, Bob Wigley, of
Merrill Lynch, the only woman of the group the American Robin Saunders, and Peter Cummings.

Cummings’ appeal came from the impression that he could commit large sums of HBOS money on his own say-so – an idea that Green did little to dispel:

HBOS insiders are adamant that Cummings could not and did not authorise big loans on his own. HBOS corporate had a system of credit committees for each part of the business, each chaired by a
managing director. Above these was a credit committee for corporate
as a whole chaired by the director, although after 2005 this was Cummings himself. This arrangement might
have provided a review and checking mechanism while there was a separation between the deal originator and the chair of the committee, but Cummings continued to be personally involved in
deal-making while he was in overall charge of the corporate division. If there was no time to put a deal through the committee system, Cummings had to seek authorisation from two other directors
and for very big deals from the chief executive. His ability to act fast and make decisions even at night, insiders insist, was because of the short lines of communication within the Bank.

‘Peter’s clients, without exception, loved him, but he never bypassed the credit committee and when he said “We’ll do that” it was always subject to the
Bank’s safeguards, or he would say, “I’m not going to be able to back that up, we are not going to do it.” They knew exactly where they stood,’ a board director
remembers.

The deals came thick and fast, in retail, properties, leisure and hotels. Then there were the ones that got away. Green tried for Safeway and M&S, Hunter for Alders and House of Fraser,
Hunter and Leslau for Selfridges. Sometimes members of the group acted together, sometimes alone and occasionally they were competing against each other. Each time there was ‘leverage’
– huge amounts of debt, often provided solely or in part by HBOS.

By 2003 Cummings was estimated to have lent £2.3 billion to the retail sector,
⁶
much of it to men who had become his personal
friends. The Bank supported the Barclay brothers in their £750 million purchase of Littlewoods, the stores and pools group, and Tom Hunter’s £310 million takeover of Wyevale
Garden Centres, with HBOS providing lending and Uberior Investments, one of the group’s subsidiaries, buying 20 per cent. As the economic good times continued the deals got bigger. In 2004
Hunter appointed the merchant bank Rothschilds to find him deals at over £1 billion. There would be no problem in raising finance, he said, to which Cummings commented: ‘If the deal was
right, that would be correct.’
⁷

HBOS was now increasing its concentration on property and property-related sectors and starting to initiate deals and put together consortia to bid for companies. In 2004 it even bought its own
headquarters when investors including Tom Hunter’s West Coast Capital, Prestbury Investment Holdings and Bank of Scotland
Corporate paid £150 million for 33 Old
Broad Street, London, the meeting place of the HBOS board and offices of HBOS Group Treasury Services, and the insurance and investment subsidiaries Clerical Medical and Insight Investment. It also
lent money and took venture stakes in property transactions led by David Murray, the owner of Glasgow Rangers Football Club and head of a metals business.

But much bigger deals were to come. In 2006, after a contested battle, HBOS corporate bought McCarthy & Stone, Britain’s largest builder of retirement homes, for £1.1 billion in
partnership with Hunter, the Reubens and Vincent Tchenguiz. As before, HBOS provided the debt and took part of the equity. By now it was also initiating deals, finding the targets and putting
together entrepreneurs to front the bids. Shortly after the McCarthy & Stone purchase, Hunter and HBOS acquired the house builder Crest Nicholson for £660 million. There were also big
purchases in hotels – a joint venture with Saudi Billionaire Prince Alwaleed bin Talal to buy the Savoy for £220 million and £750 million to buy the de Vere group with a party of
eight investors.

The corporate loan book was increasing at an extraordinary rate and outstripping the growth of other banks. In the City some eyebrows were being raised at the speed and scale of HBOS
corporate’s deal-making, but Cummings calmed fears by describing the Bank’s ‘aggressive sell-down policy’ to pass some of the debt on to other banks. In the 18 months
leading up to October 2006 it had originated 14 per cent more deals, but was only holding on to 8 per cent more of them. On one deal, he added, the bank had sold 90 per cent of its
exposure.
⁸
‘German and Irish banks were falling over themselves to buy loans from us,’ remembers one manager, ‘we had no
difficulty in selling down.’

As its reach extended, the corporate division opened an office in Mayfair, separate from the rest of the business. It began promoting itself in European capitals, holding receptions in the
Louvre for a thousand French business people and Stockholm’s maritime museum for businessmen in Sweden, where it financed a hostile bid for Capio, a Swedish healthcare group. In 2006 HBOS
topped the list of debt providers to European buyouts, with 11 deals in the previous six months. The specialist buyout bank 3i came second.

At the beginning of HBOS’s life corporate banking was very much
the junior partner. It lent £35 billion, only a quarter of the total provided by the retail
business, mainly in mortgages. It provided over £500 million in profit to the group, but that was dwarfed by the £1.4 billion earned by the retail business and lagged behind the
£770 million earned in insurance and investment. The British economy was in the doldrums in 2002, but corporate banking still managed to grow its lending by a third. As the economy rebounded
in 2003 it pushed its lending up to £50 billion and its profit by 21 per cent to £826 million. In time business banking was folded into corporate and the combined division overtook
insurance and investment as the second largest contributor to group profits. By 2004 profits topped £1 billion and by 2007 it was making more than £2.3 billion and had passed the retail
bank as the group’s largest profit earner.

The total amount lent to customers also rose dramatically, from £35 billion in 2001, to £78 billion in 2004 and £109 billion in 2007.

A lot of the growth was coming from the property sector, which accounted for more than a third of all lending. Ideally a bank would want to match its lending to the profile of the whole economy,
but as Bank of Scotland was dependent on corporate transactions it was pulled into those activities where most deals were being done. The Bank’s risk assessors looked into the problem:
‘It was something we were aware of, and we would have liked to redress the balance, but we did not see any need for immediate panic. It was an issue we would get to over time.’ The Bank
reviewed its portfolio and satisfied itself that it was well diversified between activities – property investment, construction, house building, housing associations, office and factory
development. It was not over-exposed to those areas which had been prone to overheating in the past – particularly the London office market. Also its lending was covered by prudent covenants,
which specified conservative loan-to-value ratios and strong cash flow from rents. Bad debt provisions were low. The market was past its trough and there was no cause to be concerned.

The first years of the new century seemed a good time to invest in property. Prices had been depressed by slow growth in the economy but interest rates were coming down from their peak.
Commercial property, long the Cinderella of the sector, was seen by some investment analysts as due for a rerating and in residential property Britain still suffered from a housing shortage which
should continue to support price increases. Over the four years from the low point in
the market in 2003, commercial property prices rose by over 40 per cent. HBOS rode the
boom, lending to property developers and taking part in developments itself as a joint venture partner. It was not alone. According to Bank of England figures, banks lent an extra £80 billion
to commercial property companies during this period, taking the sector’s proportion of total lending to an all-time high.
⁹

There was no fear of an economic slowdown; in fact the HBOS corporate department prided itself on its counter-cyclical strategy, lending more when prices were low and the competition was backing
off, lending less when prices rose and competition intensified.
¹⁰

My wife and I got our first mortgage from the Halifax Building Society in 1976. It was not an easy or a pleasant process. Apart from a few local authorities, building societies
were the only source of home loans at that time and they were strictly regulated. The Bank of England turned the mortgage tap on and off to prevent overheating in the housing market, but even when
the money was flowing it was not a simple matter to borrow; you first had to negotiate a moral and financial obstacle course.

There was no point in even asking for a mortgage unless you could demonstrate a habit of thrift, which you did by opening a savings account and making regular deposits. Only when you had done
this for a period of months, or even years, could you get an interview with the branch manager, who was usually a daunting authority figure. I was working for the
Financial Times
and my
solicitor advised that I play to the vanity of the local Halifax manager by asking for his views on the economic outlook before broaching the subject of our application for a mortgage. The ploy
worked and he agreed to lend us the money, but that was the beginning rather than the end of the process. The society would lend a maximum of two-and-a-half times my income, plus half my
wife’s income. They would not take my word for how much I earned; I had to produce my three most recent payslips and even then the branch wrote to my employer to seek written assurance that I
was in a permanent job. My wife was a freelance writer, so to prove her income they demanded her latest tax assessment from the Inland Revenue.

The society would only advance up to 85 per cent of the value of the house – the value being determined by a surveyor appointed by them, reporting to them, but paid for by us. The survey
came up with a figure which was less than the price at which our solicitor thought we would have to pay to get the house, so to make up the difference
we had to resort to
subterfuge. My wife told her bank that we had already bought a home and obtained a loan ‘to buy furniture’. This had to be hidden from the building society because any suggestion that
we were borrowing to provide the deposit would have led to the immediate withdrawal of the offer. The survey also caused another problem. The house was 100 years old and did not have a damp-proof
course and the Halifax decided that until we got one, they would withhold one third of the total loan. This was a severe blow. We were already stretched to our financial limit – we could not
afford to bridge the gap and pay for the work to be done. We resigned ourselves to losing the house but were saved by an unsolicited temporary loan from my wife’s great-aunt.