Hubris: How HBOS Wrecked the Best Bank in Britain (39 page)
Read Hubris: How HBOS Wrecked the Best Bank in Britain Online
Authors: Ray Perman,Alistair Darling
There appeared to be no connection in their minds between the catastrophic end result and any failure in corporate governance by directors. Garrick stunned the hearing with his assertion that
the HBOS board was by far and away the best he had ever sat on. ‘My recollection of the culture and characteristics of the board was one of
openness, transparency,
high intellect, integrity, good working relationships between the chairman and chief executive, and a suitable diversity of backgrounds, mix of experience and expertise to maximise effectiveness .
. . If with the benefit of hindsight I was asked if I wanted to sit on this board again I would be saying yes.’
By December the commission had interviewed 16 witnesses from HBOS and the FSA, including travelling to the home in Dumbarton of Peter Cummings, who was recovering from an operation. A private
session was held to take evidence from an FSA official who felt he/she could speak more freely if his/her identity were not disclosed, although there was not much new in the transcript after it was
published. The commission had also received 20 written submissions, examined HBOS board and executive committee minutes and other reports spanning the life of the Bank and looked at letters and
papers from the FSA. It added up to the most thorough investigation of a bank’s strategy and actions undertaken in recent times.
At the beginning of December the pace and character of the hearings abruptly changed as the commission confronted the men who had led HBOS. In contrast to previous hearings, which were attended
by one or two commission members, all ten members turned out for the cross-examination of Sir James Crosby, with Andrew Tyrie in the chair, flanked by the senior of the commission’s two
barristers, Rory Philips QC. After his opening statement the tone of Tyrie’s questioning was direct and aggressive:
TYRIE
: I have just described a terrible catastrophe, and Lord Stevenson and Andy Hornby were also part of that. They have apologised – have
you?
CROSBY
: I have not had that opportunity; I would like to take it now. As you know, I stood down from the role almost three years before HBOS was taken over by Lloyds,
but nonetheless I was horrified and deeply upset by what happened. It was hugely distressing in every sense to see the impact on shareholders and former colleagues, and also the consequences
for taxpayers. I am very sorry for what happened at the Bank.
TYRIE
: What exactly are you apologising for? For the mistakes of the Bank, for which you were partly responsible?
CROSBY
: I am apologising for the fact that I played a major part in building a business that subsequently failed. I was not there for the
last
few years, but I think it would be wrong for me to dissociate myself from what happened in the end.
TYRIE
: So you do associate yourself with it?
CROSBY
: I think it would be wrong not to.
TYRIE
: Your total remuneration over the five years you were there was nearly £8 million, excluding your pension. Your pension is, I think, £572,000 a year
indexed. Did you volunteer to waive any of those entitlements when the Bank failed?
CROSBY
: No, I didn’t.
TYRIE
: Why not?
CROSBY
: Because I lost money, in the sense that I still had long-term incentives that were sitting there. I lost money, as I would expect to do. For most of those
incentives, the money you have talked about was either salary or incentives that had been earned over a substantial number of years.
TYRIE
: You do understand, don’t you, that the public will accept that firms fail and that people make mistakes, but they do not understand or accept that people
should profit from that? Do you grasp that the public think you have profited from your time with HBOS and you have not shown any inclination to waive any of that reward, even though you have
just apologised for the fact that you are partly responsible for the failure?
CROSBY
: Yes, I do understand that.
TYRIE
: You do know that Fred Goodwin, Dennis Stevenson and Andy Hornby all waived part of their remuneration?
CROSBY
: I understand that was associated with termination. I did leave a few years earlier, and I did not take any notice pay or anything when I left, or any
termination terms.
TYRIE
: It was not only termination in Fred Goodwin’s case; for example, he waived half his pension. You mentioned a moment ago that you had potential
remuneration benefits from the long-term incentive plan – the LTIP. Did you sell any of the shares in it that you had acquired up to 2006 between 2006 and the failure of the company?
CROSBY
: I believe I did.
TYRIE
: How much?
CROSBY
: Probably two thirds. I can’t remember exactly.
TYRIE
: So you got out before the crash.
CROSBY
: In effect, yes, but not knowingly. It was just because I was,
essentially, balancing my portfolio of assets some time after I had
left, and it did not make good sense to have that concentration.
TYRIE
: You can understand that when the public hear you say, ‘Well, I was balancing my portfolio of assets,’ they are not going to be very impressed. You
are talking about selling two thirds of the holdings that you had, at a time when the messages were getting increasingly strident that there were serious problems with the company that you had
just left, and you were busy bailing out of it.
CROSBY
: I am not sure that – well, I certainly did not see it that way at the time. I did not believe that that was what people were saying, and it was
certainly no part of my motivation.
TYRIE
: Do you not think it is reasonable for people to say that now?
CROSBY
: I can see why people would think that, but it certainly was not any part of my motivation or my thinking.
When Phillips took over questioning the hearing began to resemble a trial rather than an inquiry, and it was clear who was in the dock:
PHILLIPS
: Can I say straight away that the thrust of what I am going to be suggesting to you is that the seeds for what went wrong at HBOS were sown
during your time as chief executive. Do you understand the point I am making?
CROSBY
: Yes.
PHILLIPS
: The plans and the strategy that you developed straight after the merger were directly responsible for the eventual disaster, which the Chairman has
explained, in 2008. That is the suggestion I am making. Do you understand it?
CROSBY
: Yes.
In further persistent exchanges Crosby was forced to admit that lending in the corporate division of HBOS had been incompetent. The two-hour grilling ended with undisguised contempt from
commission members towards the former chief executive. Labour MP Pat McFadden asked Crosby if he had considered giving up his knighthood, and Tyrie ended the session with further pointed
questioning:
TYRIE
: For the purposes of the approved persons regime, do you consider yourself to be a fit and proper person to run a financial company?
CROSBY
: I have no plans to apply to be considered as such.
TYRIE
: I have a list of the jobs you have at the moment in front of me, but I am just asking you that question.
CROSBY
: I do not expect that, if I applied, I would be approved, given my history.
TYRIE
: So you do not think that you are a fit and proper person to run a financial company?
CROSBY
: I think I am too closely associated with the problems at HBOS for that to be the case.
In their examination of Andy Hornby immediately after Crosby, the commission cast him as the junior member of the gang of three identified as most to blame for the fall of HBOS. A number of the
commission members left the room, Lord Turnbull took over the chair and David Quest led the questioning rather than the senior counsel Rory Phillips. Hornby too clung to the notion that the closure
of the wholesale funding market was what finished his bank and seemed unable to understand that the scale of the losses on lending had made HBOS hopelessly insolvent.
When Lord Stevenson gave evidence the following day, the commission again turned out in force, with Tyrie and Phillips leading hostile questioning. Stevenson had described himself as
‘part-time and non-executive’ to the committee, implying that he had an Olympian detachment from the day to day running of the bank, yet he had written to the FSA describing himself as
‘part-time, but not non-executive’. In an increasingly tetchy exchange Tyrie forced Stevenson into admitting that much of the lending in HBOS had been incompetent
TYRIE
: A moment ago, you said ‘competence’ was an emotive word. Actually, it is the word used to describe whether people are fit and
proper for the purposes of the approved persons regime by the FSA. Do you want to review your assessment of the word ‘competence’ as emotive?
STEVENSON
: I find it difficult applied to – if it is abstract – the abstract concept of lending. Applied to people, it begins to make more sense to me.
There was a lot of mistaken lending, but whether it was incompetently done I cannot judge.
TYRIE
: Are you, in your view, a fit and proper person to run a financial
institution for the purposes of the approved persons regime?
STEVENSON
: I am absolutely the wrong person to ask.
TYRIE
: Well, I am asking you, and you are going to be asked until you give me an answer.
STEVENSON
: Well, it is rather academic and I am way past wanting to do that and I am not familiar with the criteria for it, so I have no idea. My answer is I
don’t know.
TYRIE
: Has this thought crossed your mind from time to time?
STEVENSON
: Well, it is a somewhat academic thought, since (a) I have no intention of working in financial services – not surprisingly after the experience that
has taken place – and (b) frankly, at my ripe old age, I would much rather spend time with my grandchildren. So, I don’t think it has really, and my answer is I don’t
know.
TYRIE
: Have you held any approved positions since 2009?
STEVENSON
: I don’t think so.
TYRIE
: Are you a non-executive director of Loudwater Investment Partners?
STEVENSON
: Yes . . . no, no, I am not. I used to be.
TYRIE
: When did you cease to be?
STEVENSON
: Some time over the last year.
TYRIE
: We have looked this up, and it appears that you ceased to be a non-executive director last week.
STEVENSON
: That is nothing to do with this session at all. I have taken on two very major responsibilities –
TYRIE
: Okay, well, I am not interested in the major responsibilities.
STEVENSON
: I am just –
TYRIE
: I want to clarify the position with respect to the approved person regime. Are you aware whether the position that you have been holding at Loudwater
Investments is one that the FSA deem an approved position?
STEVENSON
: Not as I sit here, no.
TYRIE
: So it hasn’t crossed your mind either?
STEVENSON
: It may have done, but this is going back a large number of years to when I first took it on.
TYRIE
: Okay. When did you take it on?
STEVENSON
: Five years ago; six years ago – something like that.
TYRIE
: So you are on a board; you don’t know whether you are an approved person for the purposes for the approved persons regime.
STEVENSON
: No, but, I said –
TYRIE
: You came off it last week. Did you know you came off it last week – a week before you give evidence to us?
STEVENSON
: I knew the decision was taken some months ago that I had come off it and it was being implemented, but I didn’t know last week because I had taken on
two other major responsibilities and I didn’t have the time.
TYRIE
: Well, let’s go back to the question I asked: are you, in your view, a fit and proper person for the purposes of the approved persons regime?
STEVENSON
: And the answer I gave you is I don’t know.
TYRIE
: You don’t know.
Stevenson also adopted the ‘innocent victim’ defence, citing the closure of wholesale markets as the factor which brought down the bank. Archbishop Justin Welby was not
convinced.
WELBY
: What I am baffled by is that it is clear from the figures that your capital was wiped out.
STEVENSON
: That’s true.
WELBY
: Which is the definition of a complete banking failure. To use an analogy, it seems to me that you are saying that it is like someone who has a fatal heart
attack at home and is in a bad car crash on the way to hospital in the ambulance, and the cause of death is put down as the car crash – the car crash being the failure of the wholesale
market. There seems to be no realistic analysis or acceptance of a completely failed banking model and culture that wiped out your capital. That is what I am at a loss to identify.
STEVENSON
: I understand your question, and it is a question that has been bobbing beneath the surface of a lot of the others. The commission’s objectives are to
learn from the past and to learn for the future.
WELBY
: Well, that is what I am looking for really.
STEVENSON
: I am not trying to defend something or gloss it over – I really am not – so if I may try to put it the context of the timing of it. I am
wondering whether to use your metaphor of the heart attack and the car crash. I think I will. We were not aware – this may be a fault – until very late in 2008 that we were
suffering from a heart attack. That is the truth. As I said to you before, we published our half-year results for the corporate bank, which had perfectly
normal,
historic provisions. We were not very worried about the housing cycle. We perhaps – this is a point that has been made – were not worried enough about the commercial property cycle.
But to be quite clear, had Lehman’s not been allowed to go bust and had the wholesale markets not closed, I think it is a reasonable presumption that we would not have hit the liquidity
buffer, so we would not have had our car crash.
Now, the million-dollar question – which, I think, in response either to Mr Tyrie or Mr Phillips, we touched on very early on – is if you look at the volume of provisions in our
corporate book, what percentage of them resulted from the huge diminution in the world of asset values as a result of the closure of wholesale markets, and what percentage of them resulted from
mistaken or incompetent lending, whichever it is? I do not have an answer to that, but it is a reasonable question. I just proffer it for what it is worth. But we really did not know that we
had a heart attack. If we had not had the car crash, perhaps we would not.