They let the dogs out
Anyone watching British TV in 2002 will probably remember Howard from the Sheldon branch. The bald, bespectacled bank teller at a new bank called HBOS tried to attract deposits by singing clumsily adapted pop songs. The nadir of this allegedly amusing commercial effort was undoubtedly “Who gives you extra?”, a parody of the Baha Men’s “Who let the dogs out?”. Like Howard, who rapidly became a star, HBOS was trying to be something it was not.
“Hubris: How HBOS Wrecked the Best Bank in Britain”, Ray Perman’s timely guide to the bank’s spectacular 2008 demise, gives a comprehensive insight into what HBOS “extra” ended up being: an extremely unamusing forced takeover, and an 11.5 billion pound state recapitalisation.
HBOS should have succeeded. At its core was the venerable, 300-year-old Bank of Scotland, which used to conduct its affairs according to two simple rules. First, back loans with deposits of even longer maturity. Second, evaluate credit risk on whether a borrower could actually keep up payments, not on the value of his collateral. These principles served BoS well. Under former bosses Bruce Pattullo and Peter Burt in the 1980s and 1990s, the bank seemed to inhabit the promised land of retail banking: firm control of costs, strong capital, and returns on equity in excess of 20 percent.
It didn’t last. BoS wanted to grow more without relying on flighty and sometimes expensive wholesale funding. The search for deposits led Burt into discussions with NatWest (where he lost out to Edinburgh rival Royal Bank of Scotland), Abbey National and, finally, Halifax.
The merger with Halifax was a turning point. Out went Bank of Scotland’s staid but steady brand of customer relationships and cautious risk management. In came Chief Executive James Crosby, an ex-fund manager, and his sidekick Andy Hornby, a marketing maestro with a Harvard MBA. Together they changed the bank’s culture: revenue growth was highly valued and risk control was not. Bemused BoS staff dubbed Hornby’s shock troops the “Haliban”.
The result was indeed Perman’s hubris, followed by nemesis. By the time HBOS was forced into the arms of Lloyds TSB in late 2008, the commitment to deposits had been abandoned. When wholesale lenders finally noticed the riskiness of the HBOS loan book and walked away, the bank had to rely on the Bank of England’s emergency liquidity facilities for as much as 16 billion pounds every day.
After it all went wrong, HBOS executives blamed the unprecedented global liquidity crunch. In a way, there’s something in this. As long as liquidity was plentiful and cheap, banking was almost indistinguishable from retailing. Hornby’s ability to flog products seemed more valuable than boring risk management. But as Perman shows, HBOS would have hit the skids eventually, with all the liquidity in the world. After Lloyds took over HBOS, it divulged two-thirds of the loans in HBOS’s 116 billion pound corporate lending book were “outside their risk appetite”.
“Hubris” lacks gripping fly-on-the-wall revelations, in part because the key players involved in HBOS’s demise either declined to participate, or couldn’t because they were under investigation by the Financial Services Authority. But as a document of the long and short-term causes of one of British banking’s lowest moments, Perman’s book more than delivers. Its balanced treatment of the major players involved should be required reading for anyone wondering where to position the likes of Hornby in the credit crunch Hall of Shame.
It also gives an answer to the question that everyone has no doubt been pondering – what is Howard doing now? The answer is that he’s no longer at the Sheldon Branch. Appropriately enough for a bank that has had to relearn old virtues, he has gone back to his previous job: as a locksmith.