Some years ago I served on the board of a well-run bank, with a traditional view of the way to avoid bad debts. I learnt that we should not take any step without first looking at the books. That is “due diligence” and is the essential safeguard. We now know that Lloyds Bank bought Halifax Bank of Scotland after only a cursory view of the books; little or no “due diligence” occurred.
Such inquiries as Lloyds made failed to detect what are now known to be over £200 billion of potentially toxic debts, far more than Lloyds could afford to carry. As a result Lloyds has had to buy £260 billion of reinsurance from the Government. The bank had lost its independence; the Government will own up to 77 per cent of its shares; the shareholders, including pension funds, have lost up to 90 per cent of shareholder value; the Government has acquired another £260 billion of contingent liabilities.
Three people share the main responsibility for this financial disaster: the chairman of Lloyds Bank, Sir Victor Blank, the chief executive, Eric Daniels, and the Prime Minister Gordon Brown. One would naturally expect Sir Victor and Mr Daniels to resign their posts. Whether or not the purchase of HBOS eventually proves profitable, the immediate consequences have been catastrophic.
The remaining private shareholders are furious. It is only possible for the chairman or chief executive to remain in office because they have the support of the Government. If they had not destroyed their bank's independence, they would have had to go already. As it is, they can hang on, but they are unwise to do so. They have lost their professional reputations as prudent bankers, and all banking depends on trust.
It is the Prime Minister's position that is hardest to justify. He played a vital part in the negotiation of Lloyds purchase of HBOS and in the Government's negotiation of the asset guarantees. In mid-September 2008, at the same time as the collapse of Lehman Brothers, Sir Victor met Gordon Brown at a reception at Spencer House in London.
The two men, who are old friends, discussed the possible purchase of HBOS by Lloyds Bank, including the possible waiving of the monopoly rules by the Government. On September 17 Lloyds announced the merger. The Prime Minister no doubt saw the merger as a way of protecting HBOS at moderate expense to the Treasury. On October 3 the Treasury announced a £17 billion bailout divided between the two banks. This was essentially a government-approved and government-sponsored act.
Before that fatal conversation Lloyds was still in pretty good shape, despite the crisis. Only about £50 billion of the toxic debt that had to be guaranteed arose from the Lloyds Bank business; more than £200 billion is the responsibility that Lloyds took over from HBOS. However, with the collapse of Lehman Brothers, it was apparent in September that the global crisis was acquiring a dangerous new momentum.
From the point of view of the Lloyds' shareholders, the Lloyds board or even the Government, it was already far too risky for Lloyds to take on the significant new obligation. Whether or not they knew how large the HBOS liabilities might be, the Lloyds management were very rash to take on any new liabilities in September 2008, let alone £200 billion of dubious debts, more or less sight unseen.
The Government had a responsibility to support the British banking system. Lloyds on its own was a big asset; Lloyds plus HBOS proved a huge liability.
It is usually a mistake for a prime minister to intervene in a commercial negotiation. The political point of view is not the same as the commercial. Gordon Brown was trying to solve the political problem of HBOS, which was partly a Scottish issue. He wanted to find a quick and cheap way out of the HBOS problem, though he could not have had any idea how serious that was. Lloyds did very little due diligence on HBOS; there was no evidence that the Prime Minister or the Government did any.
In these circumstances, the facts were not known and false assumptions were not challenged. The Prime Minister was most unlikely to have considered whether the purchase of HBOS would be in the interests of Lloyds' shareholders, yet once he had intervened he acquired a responsibility to them. Sir Victor is thought to have been eyeing HBOS already as a possible acquisition. As with Sir Fred Goodwin's purchase of ABN Amro, which destabilised the Royal Bank of Scotland, the purchase of HBOS was a temptation for Lloyds Bank rather than an opportunity; it was a bank too far.
It is bad enough that Gordon Brown has helped to destroy the value and independence of Lloyds Bank. What is even more serious is that he has massively increased the contingent liabilities that will face future governments.
We do not know their eventual size, but they are already disproportionate to total national expenditure. They will overshadow every over payment in future budgets until they have been worked off. Future governments will not be free to set their own budget expenditures; they will always have to consider the risk of a call on these banking guarantees. There will be less money to spend on all other requirements, including the National Health Service, education, welfare and our underfunded defence forces.
What the Prime Minister has done is to open his door to personal and political blame, the one thing he was determined to avoid. On his visit to the United States, he is reported to have suffered a spasm of anger or anxiety in front of some British journalists. “You want me to go on television and apologise, but I am not going to do it. I have nothing to apologise for. It is not my fault. Get in the real world.” In the real world, the disaster that has befallen Lloyds Bank is Gordon Brown's fault and his responsibility.
