Last updated: December 4, 2012 8:57 pm

Ex-HBOS head was ‘dishonest’ or ‘delusional’

Lord Stevenson

HBOS's former chairman, Lord Stevenson

Lord Stevenson, the former chairman of HBOS, stood accused on Tuesday of living in “cloud-cuckooland” after it emerged that he had assured the City watchdog that his bank was “as secure” as it could be – just six months before it collapsed.

In one of the most dramatic sessions of the UK’s Parliamentary Commission on Banking Standards Lord Stevenson was confronted with two letters written to the Financial Services Authority in 2008 in which he asserted HBOS was a “highly conservative institution”. Six months later the bank sought government assistance.

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The letters were released after Lord Stevenson testified that the bank’s “governance was rather good” between 2005 and 2008 and “there was just no way we were encouraging a culture of excessive risk-taking”.

In one of the letters, dated March 2008, to Sir Callum McCarthy, then FSA chairman, he wrote: “I am not aware of any lurking horrors in our business or our balance sheet. Quite the reverse . . . HBOS in an admittedly uncertain and insecure world is in as secure a position as it could be.”

Lord Lawson, the former chancellor and a commission member, retorted: “Either you were being dishonest when you wrote that or, if you believed it, you were delusional.”

Lord Stevenson, who led Halifax into its 2001 merger with Bank of Scotland and served as chairman of the combined entity until 2008, said he “deeply regrets” that the board failed to rein in the bank’s corporate lending division. But he argued that “it wouldn’t have made any difference to the outcome” because HBOS’s problems stemmed from the unprecedented freeze of wholesale lending markets.

HBOS’s approach to growing its balance sheet was “much of a muchness” with its UK competitors, he said.

His claims drew derision from commission members, who are exploring the fall of HBOS as part of their effort to determine what cultural, regulatory and legal changes need to be made to restore trust in British banking. “You are living in cloud cuckoo land,” Lord Lawson said.

The Financial Services Authority censured HBOS for “serious misconduct” this year for pursuing an aggressive expansion strategy without appropriate risk controls. The final notice cited a “culture of optimism” that blinded the bank to the risk of growing its corporate loan book by 50 per cent between 2006 and 2008, a time when other banks were cutting back.

Lord Stevenson insisted that “the FSA got it wrong” – a stance criticised by commission members, who cited the two letters he wrote to the watchdog.

In his earlier letter, written to the FSA in January 2008, Lord Stevenson asserted that despite being a part-time chairman, he was “knowledgeable and well briefed” about the business.

In the second letter he stated: “How would we fare if liquidity completely dried up, you asked? Does that keep me awake at night? Well yes of course one worries about everything, but the answer is no!”

This outwardly cheerful outlook notwithstanding, Lord Stevenson did make one prescient request – that the Bank of England make clear that it would accept a wide variety of assets as collateral for liquidity lending.

Six months later, a wholesale lending freeze forced HBOS to seek billions in liquidity assistance from the BoE and then an emergency merger with Lloyds TSB. Six months after that, the corporate division’s losses on bad loans had ballooned to £7bn, forcing a taxpayer rescue of the combined group.

Lord Stevenson, a former chairman of Pearson, owner of the Financial Times, also drew the commission’s ire for continuing to serve as a nonexecutive director of another regulated financial firm after HBOS’s collapse. FSA records show that he was a non-executive director of Loudwater Investment Partners until last week. The FSA said he joined as a NED in 2007 while still at HBOS and the only way to remove him would have been to bring an enforcement action.

The FSA closed its investigation of HBOS in September by fining and banning Peter Cummings, head of the corporate division. A full report on why HBOS collapsed is expected in the middle of 2013.

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