Hubris: How HBOS Wrecked the Best Bank in Britain (3 page)

The purpose of the inquiry was officially to ‘learn lessons’ from the HBOS debacle, but it also tapped into a simmering public anger that there had been no proper explanation for a
disaster which had cost taxpayers £20 billion, seen over 2 million small shareholders lose most of their investment and would deprive 40,000 employees of their jobs. Worse, the men at the top
of the Bank had appeared to walk away without sanction. They had not been named and shamed, let alone prosecuted, no bonuses had been clawed back, and the principal players had gone on to other
well-paid and prestigious jobs, some in financial services. The FSA, which was supposed to regulate the industry, had produced a report blaming one man, corporate banking director Peter Cummings. A
promised more comprehensive report was so long delayed that the FSA was abolished before it was published.

For those affected by the HBOS disaster, the commission’s public examinations became compulsive viewing on parliamentary television. They also received widespread attention from press and
broadcasting. At last people were being held to account. I wrote in my preface to the first edition of this book that I had tried not to apportion blame. The parliamentary commission had no such
inhibitions, and
An Accident Waiting to Happen
, its report on the collapse of HBOS, published in April 2013, provoked a storm of public indignation against the men who had led the Bank
– the chairman Lord Stevenson and the two chief executives, Sir James Crosby and his successor Andy Hornby.

The report itself was comprehensive, detailed and damning. But although the commission was able to cross-examine some witnesses who had refused to speak to me, and to obtain board minutes and
other corporate documents which I was denied, its conclusions were no different from mine. I have therefore left the main narrative of the book, which covers a longer period than the parliamentary
report, unchanged, and I detail and analyse its findings and their implications in new final chapters to this edition. Since this book first came out, many former HBOS employees have contacted me,
and I include some of their stories in the new chapters.

It is a sorry tale: how human weakness and pride destroyed two solid and once-respected institutions. We need to know the story, but is that enough to prevent it happening again?

Edinburgh

June 2013

Banker to the Stars

The family of retail billionaire Philip Green knows how to throw a party. For his 50th birthday the tycoon’s wife Tina organised a three-day bash in Cyprus which
reportedly cost £5 million. Rod Stewart and Tom Jones provided the music, the guests were expected to wear togas and the birthday boy himself dressed as the Emperor Nero. The tycoon’s
55th was even more exotic, with the Greens flying 100 guests 8,500 miles in two private jets to an eco-spa on a private island in the Maldives, where singers Ricky Martin and George Michael
performed.

There were no togas for son Brandon’s bar mitzvah in 2005, but no expense was spared nonetheless. The Greens took over all 44 rooms and nine suites of the Grand Hotel on Cap Ferrat, one of
the most luxurious and expensive hotels in the South of France. Rooms can cost up to £1,000 a night, but
The Sunday Telegraph
speculated that the Greens would have paid much more to
ensure exclusivity at a time when the hotel could expect to be busy with stars attending the Cannes film festival
¹
. In addition to its
Michelin-starred food and extensive cellar, including rare vintages of Château d’Yquem from 1854 and Château Lafite Rothschild from 1799, the hotel boasts an auditorium with
outstanding acoustics designed by Gustave Eiffel, of tower fame. It was not big enough for the Greens’ party of 200 so they built their own. A synagogue is also an essential part of a Jewish
boy’s coming of age and the hotel did not have one, so that was constructed too. These weren’t flimsy structures. So much wood and stone was used that guests marvelled that the
buildings were only temporary.

Some guests arrived in the charter flight from London laid on by the Greens, others came from nearby Monaco in a fleet of luxury cars and a few in their own speedboats. It was a private party
and locals moaned that public footpaths around the hotel had been closed for the event, but paparazzi lurked under the Aleppo pines in the grounds, or behind rocks on the Mediterranean shore to
snap
celebrities such as television impresario Simon Cowell, pop star Beyoncé, who was providing part of the entertainment, racing driver Eddie Jordan and film director
Michael Winner. From the world of business came Tom Hunter, the Scottish entrepreneur, Royal Mail chairman Allan Leighton and the property-developer brothers Robert and Vincent Tchenguiz. There
were also the high-powered international investment bankers who had part-financed Philip Green’s string of acquisitions of high street fashion chains – Mike ‘Woody’
Sherwood, top banker in the UK for the mighty Goldman Sachs and worth a reputed $48 million
²
, and Bob Wigley, Chairman of Merrill Lynch in
Europe.

And there was Peter Cummings.

Short, balding and smartly dressed in black tie, Cummings looked no different to many of the business people present, but he was not like them. He had been educated at St Patrick’s High
School, Dumbarton, not expensive private schools like Sherwood and Wigley. He did not own his own yacht like Green and Hunter, although he counted scuba-diving as one of his hobbies. He did not
have an apartment in Monaco – in fact he still lived in the modest semidetached home he had bought with his teacher wife Margaret in the town in which he was born and went to school. He had a
reputation among those who knew him well for being quiet, thoughtful and meticulous. He gave to charities – the Maggie cancer support centres and a school in Malawi, which he was quietly
co-funding with his wife – but not in the ostentatious way of some of the millionaire philanthropists at the Riviera party. He was a banker, but not for one of the glamorous Wall Street
investment houses like Goldman or Merrill and his had not been a quick rise to the top.

After school Cummings had taken the path many bright kids had chosen in an age when university entrance was only considered for the fortunate few. He had joined Bank of Scotland as a trainee and
studied at night for his banking diploma. The Bank moved him around – unspectacular jobs, but he broadened his experience and steadily climbed the hierarchy: regional manager in Carlisle,
manager of the Glasgow Chief Office, head of corporate recovery, director of corporate banking. His experience had also given him something many of his younger competitors lacked. He had worked
through three recessions as well as the prolonged boom of the first decade of the twenty-first century.

Among other bankers he was envied, despite his unglamorous early career. No one had a closer relationship or had been able to pull off such big deals with Philip Green.
Bank of Scotland had backed Green through a succession of larger and larger buys, culminating in the purchase of the Arcadia group in 2002 which had brought him household names such as Burton,
Dorothy Perkins, Evans, Wallis, Miss Selfridge and Top Shop. Green borrowed more than £800 million to secure the deal, but paid it all back in two years. The Bank earned handsome fees and
huge kudos, but there was more. Green allowed Cummings to buy a small shareholding in the business for the Bank, a privilege given to no one else. When Green paid his wife the biggest personal
dividend in UK corporate history a year later, the Bank made £100 million profit – one hundred times what its stake had cost.

On the strength of his relationship with Green, Cummings had been able to meet and work with entrepreneurs like Tom Hunter, the Tchenguiz brothers, hotelier Rocco Forte and property magnate Nick
Leslau. These were the high rollers, the guys who did the big deals and were fêted by the press. Newspapers began to call him ‘Banker to the Stars’ and within HBOS, the
conglomerate which Bank of Scotland had joined in 2001, he was seen as a star in his own right, responsible for a growing proportion of the group profits. The Bank commanded respect and admiration
far beyond its size and modest roots and rivals wanted some of the action. Cummings had turned down several lucrative job offers from international investment banks, but when he ‘sold
down’ his deals – reducing risk by offering part of the loan to other banks – there was no shortage of takers.

The bank Peter Cummings joined had been very different to the one of which he became a director 35 years later. Then it had been an institution with modest ambitions with, some would have said,
a lot to be modest about. It was not even the biggest bank in Scotland let alone being taken seriously as a challenger on a UK scale. It was conscious of the weight of history on its shoulders,
conservative in its outlook and particular about the people with whom it did business. There was an instinctive distrust in the Bank for anyone regarded as ‘flashy’.

The thought that one of its senior managers might be seen in the same company as men and women who appeared regularly in the
gossip columns of the cheaper newspapers and
magazines would have filled the directors of 30 years ago with horror. When he had been making the tea in the Dumbarton branch, Cummings cannot have dreamed that years later he would be sipping
Louis Roederer Cristal Vintage Champagne in such exalted company on the Côte d’Azur. Nor that his bosses would have thanked him for it and assured him it was part of the job.

Nor can he have foreseen that a few years later his star would have fallen so precipitately. His bank would be scorned for its overweening ambition and short-sighted risk-taking. Newspapers
would accuse him of bringing down his bank almost single-handedly and call him ‘the banker of last resort’ – the man who lent money when everyone else was too sensible to do so.
Associates who previously wanted to get close to him would now give anonymous quotes to journalists saying that all along they had thought he had been too aggressive and taken too many chances. The
financial regulator, which had given his bank a clean bill of health, would pursue him to admit to things he had never believed he had done.

How had it happened?

Base metal into gold

To understand why the Bank met the end that it did, I went back to its beginning. We live in turbulent times but they are not unique. The era into which Bank of Scotland was
born at the end of the seventeenth century shared a remarkable number of characteristics with the first years of the twenty-first. A long-standing political dynasty had recently come to an end. One
head of government (in this case the monarch, Charles II – not universally liked, but with a deft enough touch to ensure his survival) was replaced by his unpopular brother, James II, who
lost his throne in short order. The new leader who deposed him, young and fresh-faced William III, announced a power-sharing agreement, although a co-regency with his wife Mary rather than a
coalition. The first years of their reign were marked by unrest at home and expensive wars abroad. To pay for them, the Government borrowed heavily, depressing the economy. Does it sound
familiar?

The end of the seventeenth and start of the eighteenth centuries was an Age of Reason and an age of science. The philosopher René Descartes was not long dead and John Locke was laying the
ground for modern political thought. Isaac Newton, one of the greatest scientists and mathematicians of all time, was at the height of his powers and Robert Boyle had published the treatise which
was to lay the foundations of modern chemistry. New discoveries were being made in every field and examined in literature and debate. Alongside science and mathematics there was a new interest in
economics and the disciplines of banking, finance and accounting as mechanisms for expanding trade and economic well-being. Yet despite the spread of rational thought, belief in magic was still
strong. In Salem, Massachusetts, they were hanging witches. In Europe the study of the occult was a respectable intellectual pursuit. Newton himself was deeply interested in alchemy and the quest
for the mythical Philosopher’s
Stone, which was said to be able to turn base metal into gold. Among the financial rationalists there were also alchemists – men who
saw banking as a way of creating profit from nothing – another parallel with our own era.

Scotland in the 1690s was still nominally an independent country with its own parliament and institutions, although it had shared a monarch with England since James VI of Scotland had succeeded
Elizabeth I in 1603. The relationship between the two countries was ambivalent. Many Scots had followed the king to London and played important parts in the city’s life and commerce, but
Scottish goods still faced high tariffs when imported into England. Scotland was decidedly the smaller and the poorer partner. Its population, at about a million, was a fifth of the size of its
southern neighbour and its economy was much less developed, relying heavily on agriculture and natural resources like coal.
¹
This became
apparent when a series of bad harvests brought famine and hardship at home and reduced the surpluses available for export. Importantly, Scotland also had a much weaker and more fragmented financial
system, which restricted credit and cramped growth.

The renaissance states of northern Italy had developed banking in the fourteenth and fifteenth centuries, and the Netherlands, the leading financial power of the seventeenth century, had
established the Bank of Amsterdam in 1609, but before 1694 neither Scotland nor England had banks. There were bankers, wealthy landowners or merchants who lent money at interest, but they acted as
individuals rather than in organised companies. Goldsmiths were especially prominent and had their booths around the cathedral of St Giles in Edinburgh.
²
The most famous was George Heriot, known as ‘Jingling Geordie’, a prosperous smith who became both jeweller and banker to the court of James VI and followed his best
customer to London in 1603. Churches sometimes also lent money: the elders of Alyth Church, Strathmore, Perthshire, a prosperous village at the meeting point of several drovers’ roads,
charged 4–6 per cent on their loans and members of the congregation who were late in meeting their repayments could expect to be denounced from the pulpit.
³
But those able to lend money and those able to borrow it, were the exception rather than the rule. Credit was hard to come by.