According to the television executive Michael Grade non-executive directors are like bidets – no-one is sure what exactly they are for, but they add a touch of class.
Reading the recently released minutes of the Court of the Bank of England for the period of the banking crash in 2007-9 it is clear that ‘class’ was all they added. The Court was stuffed with the great and good – Lloyds TSB Scotland’s Lady Susan Rice, former BBC economics editor Peter Jay, TUC general secretary Brendan Barber, plus assorted knights and dames – but their attitude to the major crisis looming around them was one of detachment.
The minutes show they were taken by surprise by the collapse of Northern Rock in 2007, but don’t appear to have asked the obvious questions: why did it happen and who is next? My special interest, having written HUBRIS, is the collapse of HBOS, but it wasn’t even mentioned by the Court until June 2008, when it was reported that the bank’s rights issue “was being monitored.”
This is extraordinary. The very next paragraph in the minutes reports that the “Tripartite system” – the Bank of England, Treasury and Financial Services Authority – after some strained relations, was working well.
Yet we know from Alistair Darling’s account of his time as Chancellor that after Northern Rock his officials showed him a paper naming HBOS as one of the banks next at risk. It wasn’t difficult to spot – HBOS shared Northern Rock’s business model of going all-out for high market share of low-margin mortgage business and had the same fatal vulnerability: critical dependence on the wholesale funding markets.
Either no-one in the Treasury shared that paper with Bank executives, or if they did, the Bank’s officials kept it from the non-executives and the non-executives didn’t ask the key questions.
The HBOS rights issue, when the bank tried to raise £4 billion to shore up its eroding capital base, turned out to be the biggest flop in corporate history. Less than 10% of the new shares were bought by investors and the underwriters were stuck with the rest. The share price plunged. Prime Minister Gordon Brown was quick to spot the implication of this: if HBOS’s balance sheet continued to deteriorate, there was no way it could raise more capital in the market. Government would have to step in.
The Court did not meet again until September. By that time HBOS was bust and Lloyds TSB was negotiating the terms of a fire-sale takeover. There is no mention of this in the Court minutes.
Fire-fighting had been handed over to a sub-committee of three – Governor Mervyn King, chairman Sir John Parker and ex-investment banker Amelia Fawcett – called in the Bank’s Orwell-speak ‘Transco.’ On October 1 it approved a £10 billion loan to HBOS (now codenamed ‘Fox,’ while Lloyds was called ‘Lark’).
“It was noted that the Bank’s exposure to Fox and Lark was likely to be around £180 billion, without any further deterioration in funding conditions. This was very large. A plan was needed for that to be reduced in the near future. Given the gravity of the situation and the need on financial stability grounds to avoid the failure of Fox, it was stated that it was not possible to rule out the possibility that the Bank might at some point have to lend to Fox on an unsecured basis.”
Considering that £180 billion was twice the balance sheet total for the Bank at the time, that is a masterly piece of understatement.
By the Court meeting on 15 October, Gordon Brown had already announced the Government’s wholesale rescue of the banking system, with the recapitalisation of HBOS, Lloyds TSB and Royal Bank of Scotland and huge amounts of liquidity pumped into the market by the Bank. These events were reported to the Court in the briefest and blandest of terms. Yet they had huge implications for the Bank, for the banking system and for the UK economy, which is still suffering the consequences.
We have had to wait five years to find out what the non-executives of the Court did not know and what they did not do. We have had to wait even longer to find out how the FSA managed to miss the disastrous state of HBOS. Its promised report (now to be published by its successor, the Financial Conduct Authority) was scheduled for 2014. We are still waiting.
What the belated publication of these Bank of England minutes show is that the Court served no useful purpose in the run-up to the financial crisis. Like the non-executives of HBOS itself, they were not told the true state of affairs and they did not ask.
At least you can use bidets for washing your socks.