On the HBOS collapse

In a damning report into the downfall of HBOS, the Parliamentary Commission on Banking Standards lays the blame squarely at the door of the trio that led the bank from its creation in 2001, via the merger of Halifax and Bank of Scotland, until its collapse in 2008.

“The HBOS story is one of catastrophic failures of management, governance and regulatory oversight,” says commission chairman Andrew Tyrie. “The commission concluded that primary responsibility for these failures should lie with the former chairman of HBOS, Lord Stevenson, and its former chief executives, Sir James Crosby and Andy Hornby.”

OK, let\’s take that at face value.

Does this mean that we should therefore regulate spivvy trading, tax transactions and generally close down the speculators?

No, not really, For HBOS didn\’t really do those sorts of things. They went bust the old fashioned way. They lent too much money to people who couldn\’t pay it back.

This won\’t stop the idiots of course but HBOS was in fact \”investing\” in the \”real economy\”. Lending money to people who actually did things. Among the things those people did was lose the money: bye bye bank.

And all of these calls that banks must abandon casino banking, must return to their roots in financing real activity…..this is what HBOS was doing and this is what bust the bank.

As I say, this isn\’t going to stop the idiots using HBOS as an example in their rhetoric. But we can at least laugh at them for their idiocy as they do.

25 thoughts on “On the HBOS collapse”

  1. Presumably if the UK had a statistically significant sample of building societies left they’d have gone bust with higher incidence than the banks did?

    And – serious question – is the “casino” part of the financial world really entirely devoid of blame? Personally I blame 9/11 or rather the FED’s longer-than-necessary-term reaction to it. But the “casino” part is basically investing on behalf of mega-rich individuals and giant companies. And, all great things (great for the poor etc.) about liberal globalisation acknowledged, it has resulted in a lot more of those with a lot more (absolutely and relatively) in idle wealth they can’t consume, thus invest. I find it hard to believe that that played no part in the asset bubbles.

  2. is the -casino- part of the financial world really entirely devoid of blame?

    No, not entirely, but it really depends on the banks involved.

    RBS was taken down by Fred’s desperate inability to please the markets – despite ever rising profits (some of which were undoubtedly less real than they appeared), the shareprice stayed low. Hence the ABN “an acquisition too far”. Which, coupled with the general banking collapse, killed the bank.

    HBOS & Northern Rock – primarily normal banking lending with poor risk judgement (commercial at HBOS, mortgage at NR.)

    Investing on behalf of shouldn’t be a risk to the bank rather than its customers – it is investing on the banks own behalf that is risky.

    Of course, if we are in an “asset bubble” period – and there are definitely still some unjustified share prices out there (except in the ‘somebody is daft enough to pay that sense), then all investment becomes subject not just to “less than amount invested” but catastrophic risk.

  3. I keep wondering when the supposed “thinking classes” are going to notice that it was the pure retail banks that, with the glaring exception of RBS, were the ones that went bust and caused all the problems. The ones with the large investment arms were the ones that survived, unless they were foolish enough to do something Gordon Brown suggested, like Lloyds.

    Perhaps around the same time as they realise that insisting banks both increase their reserves *and* their lending might be contradictory?

  4. I was under the impression that the major problem with HBOS, RBS and TSB was lending long and borrowing short. Come Gordon’s big bust and the drying up of global liquidity, the business plans went tits up. The banks were led by the nose by the politicians,( see Gordon’s Mansion House speeches) who have spent the time since denying all responsibility.

  5. the major problem with HBOS, RBS and TSB was lending long and borrowing short

    That is just the definition of a bank, really. They take small amounts of short term cash and put it in a big enough pile from which they can lend.

    The fact that the pile is never composed of quite the same stuff from day to day is irrelevant until there is a bank run.

  6. OK, someone needs to speak up for the bank bashers. Agreed that it was just the one casino (RBS) that went belly up, compared with three boring banks (NR, HBOS and Bradford & Bingley). But it was RBS that mattered, not the others.

    Same in the states. Loads of tiddlers, but Lehman was what mattered.

  7. Luke,

    Why did RBS matter?

    My pov? Only because of the political response to NR. All of them should have been allowed to go bust. With protection for the insured depositors.

    And, frankly, what caused RBS to go bust was not ‘casino banking’, it was paying too much for a takeover (both in terms of too much for what they thought it was worth and much too much for what it was actually worth). Whereby the risk should have devolved on to the shareholders. It shouldn’t have been propped up by the government – except as required by law and then for just long enough to transfer the customer accounts to another bank. But that couldn’t happen because, for party political reasons, Northern Rock had been 100% guaranteed.

  8. Presumably if the UK had a statistically significant sample of building societies left they’d have gone bust with higher incidence than the banks did?

    No…

    HBOS & Northern Rock – primarily normal banking lending with poor risk judgement (commercial at HBOS, mortgage at NR.)

    The quality of Northern Rock’s mortgage book wasn’t its primary problem…

    it was just the one casino (RBS) that went belly up, compared with three boring banks (NR, HBOS and Bradford & Bingley).

    Northern Rock took a big gamble…

    Northern Rock went bust because it was relying on the (short term) money markets for most of its funding. It couldn’t (by law) have done that if it had remained a building society. This was a profitable business for it so long as the money markets were willing to lend to it, but relying on that was a huge gamble. It failed not because its mortgage book was necessary so bad that the default rate would be unsupportable, but because the money markets couldn’t tell whether the book was that bad. So they stopped lending to it.

  9. Slightly O/T….

    One thing that’s got me wondering over the past couple of days is why was it OK to genralise about bankers and stigmatise them all when, as we are seeing, only a few were at the root of the problem, but its not OK to do the same over Philpott?

    When a large section of the population are asking questions about welfare and Philpott surely its right for Osborne, as a an elected politician, to raise the subject in terms of policy? Just like it was right for politicians to raise the subject of bankers when everyone was clamouring for their heads to roll?

  10. why was it OK to genralise about bankers and stigmatise them all when, as we are seeing, only a few were at the root of the problem, but its not OK to do the same over Philpott?

    Partly because there was a systemic failure of the banking system and, to my knowledge, Philpott is a one-off.

    Partly because of envy – many people envy and therefore resent (what the press tell them about) banking salaries. With the huge variety of human taste, I’m sure there must be a few people who envy Philpott (at least before his conviction) but I hope I don’t know any of them.

    Partly, because it is actually ‘OK’ in both cases. It may not be ‘correct’ or ‘helpful’ but we shouldn’t be in the position of imposing yet more restrictions on speech.

  11. It failed not because its mortgage book was necessary so bad that the default rate would be unsupportable, but because the money markets couldn’t tell whether the book was that bad. So they stopped lending to it.

    In what way is that not ‘poor risk judgement’ on behalf of the management of NR? And, frankly, their over 100% of valuation loans didn’t strike me as ‘good risk judgement’ at the time, if you demand we limit ‘risk’ to ‘individual loan risk’.

  12. We should not forget that Gordon Brown manipulated the inflation figures, for the sole purpose of making the Bank of England set interest rates too low. This help fuel the desperate search for yield, and hence an ignoring of risk.

    This was of course less of a reason that the happier fact that a billion new workers in China and elsewhere joined the global labour market and killed inflation dead for a decade. Hence money was far too cheap for far too long.

  13. So Much for Subtlety

    The main thing about the recent collapses is that they were almost all former Building Societies. The old Banks did just fine unless they were taken over by a BS as with HBOS or Gordon bullied them into taking a failed bank over.

    I would mark that up to the wisdom of Etonians and the Old Boys Network. Coutts did just fine for instance.

  14. It wasn’t just NR’s 100%+ mortgages, it was their self-certification ones that basically encouraged people to lie about their incomes.

    And it was notorious; when I was looking at getting a mortgage, in the first year of being self-employed so with no idea what my income was (let alone proof of it), the broker’s comment was “don’t worry, Northern Rock will lend to you”.

  15. Richard, anecdata alert. I conducted/supervised litigation over a hundred plus separate home loans, generally self-cert, that went pear shaped over the last few years. Northern Rock did not crop up much. HBOS, Bradford and Bingley, yes, loads of subprime loan packagers like GMAC, but not much NR.

    And NR were by no means the worst in their loan process. I think the prize goes to GMAC who had one scheme where they did not ask what you earned – there was no need to lie. In other cases, just about every statement of income was obviously false (admittedly I only saw the ones in default).

    I suspect that NR were lending to people to buy their own homes, and those people have hung on. It is buy to let that where the defaults are. Interestingly the big banks (except HBOS) hardly showed up at all, at least in the grotty end of the market where I was operating. Nor many building societies, apart from Chelsea. It is BB, HBOS, and loads of loan packagers whose names I forget. Where they dumped the loans I do not know.

  16. Paul,

    Actually Northern Rock was relying on mortgage securitisations to fund lending. It only built up excessive short-term funding when sub-prime started to dry up and it found that securitisations took longer and generated less. The warning signs for Northern Rock were obvious for months before it collapsed – its funding costs were rising significantly and questions were being asked about its stability. I should add that the dud mortgages that finally killed it were the ones it DIDN’T sell, not the ones it did. Granite (its SPV) didn’t fail.

    The Parliamentary Commission have made it very clear that lack of liquidity was NOT the reason for HBOS’s failure. Yes, its funding was withdrawn after Lehman. But it was insolvent. It would have failed anyway.

    Luke,

    HBOS at the time of its failure was the UK’s fifth biggest bank. Please don’t tell me it wasn’t important.

  17. Luke (16),

    Out of interest, do many of these cases include people who took equity release by increasing their mortgages? A group that I have very little sympathy for if that money was used for holidays or other luxuries, banking on house prices forever rising.

  18. Frances: up to a point. Certainly NR was in the business of securitizing its mortgages, but that wasn’t the problem. The problem was that it was funding the mortgages, pending securitization, not from deposits but from money-market borrowing.

  19. Looks to me like Paul just repeated what Frances said.
    And does one have to be a banker to understand these things? Most small traders will tell you, buying on credit stuff you’re not damned sure of flogging is a quick route to going bust.

  20. Looks to me like Paul just repeated what Frances said.

    He’s good at that, i.e. making a stupid point, being corrected, and then claiming he was making that corrected point all along and denying ever making his initial comment.

    This would not be such a retarded method of conducting his affairs were the entire conversation not able to be seen by simply scrolling up.

  21. My point, and there’s nothing stupid about it, is that Northern Rock’s downfall was in funding mortgages with short-term borrowing. I disagree with Frances only in so far as she seems to contradict it.

    Tim N has adopted the Rovian tactic of imputing one’s own faults to one’s adversary.

  22. Tim N has adopted the Rovian tactic of imputing one’s own faults to one’s adversary.

    Strip away the usual pomposity and shallow affectations and we’re left with:

    “I’m not, but you are, ner-ner!”

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