A round up of some of the week’s most significant corporate events and news stories.
Corporate person in the news: Sir James Crosby
“Some of our competitors are inclined to look at the UK and equate it to Jurassic Park – that it can’t grow any more,” declared Sir James Crosby, three years after overseeing the merger that created HBOS, one of country’s biggest banks. “We are not close to agreeing with that. We see lots of opportunities and will continue eating their lunch,” writes Jennifer Thompson.
So much for optimism. Describing those good times eight years later Sir James – the knighthood received for services to the financial industry – exasperated a parliamentary commission by repeatedly answering questions as to why the bank had failed with the phrase “with the benefit of hindsight”.
The subsequent report by MPs and peers examining the demise of HBOS, published earlier this month, named Sir James as the “architect of the strategy that set the course for disaster,” a path that culminated in the group being rescued by Lloyds TSB at the height of the financial crisis, which then needed a £21bn taxpayer bailout.
Less than a week later those words were the catalyst for HBOS’s former chief executive to ask for his knighthood and nearly a third of his £580,000-a-year pension to be removed amid an intensifying public and political backlash.
It was a dramatic comedown for the man who oversaw the creation of HBOS out of Halifax and Bank of Scotland and was initially feted for his success in overseeing the group’s expansion.
The Leeds-born fund manager-turned-actuary-turned-banker joined Halifax, a building society, to set up a new bancassurance business in 1994, rising to become chief executive of the now-demutualised lender in 1999.
Like his protégé and successor as chief executive Andy Hornby, Oxford-educated Sir James was relatively young, just 45, when he took the helm of HBOS, formed from a merger with Bank of Scotland in 2001.
That deal propelled the new entity to the forefront of British banking. With 25m customers, it provided about a fifth of British mortgages and was the country’s largest savings institution – and was determined to become even bigger. Lending across all the bank’s divisions shot up and by the end of 2006 it had nearly £600bn in assets.
Sir James’ departure in July that year – still only in his forties – came as a surprise to the City.
But all was not well. The bank’s corporate lending division concentrated on lending to riskier sectors such as property and construction, as well as becoming heavily exposed to Ireland.
That course of aggressive lending also exacerbated the institution’s high reliance on wholesale market funding rather than more conservative deposit finance.
In an interview with the Financial Times on his retirement Sir James described himself as “intrinsically quite a lucky person”.
Fortune proved less benign to the bank he left behind. When wholesale funding markets dried up as the financial crisis took hold in 2008, HBOS’ board looked to Lloyds for a takeover.
With the HBOS name no longer in existence and its riskiest assets pushed into Lloyds’ “non-core” division, to be wound down over time, the story of the collapsed lender generated fewer headlines.
But then the Parliamentary Commission on Banking Standards arrived. The panel of MPs and peers devoted several months to questioning senior figures in the financial industry. In their sights were those at the helm of HBOS in the heady pre-crisis years, and they were spurred by the desire to translate failure into constructive lessons for the sector.
When the commission’s report characterised HBOS as “an accident waiting to happen”, saying the scale of the disaster could not be explained by the financial crisis alone, Sir James’ response was swift.
In contrast to Fred Goodwin, the former chief executive of Royal Bank of Scotland who spent months opposing a reduction to his pension and removal of his knighthood, his decision was reached within days.
Sir James said at a hearing in December that he was “very sorry” for what had happened at HBOS. He expressed his regret again this week as he requested that his title be removed.
He started to think about ways to respond to the report last weekend, to reflect both his apology and in response to the growing backlash against the bank’s former management, said one person close to him, adding that there had been no direct pressure to do so from politicians. Sir James declined to comment.
But while the tale of his rise and fall offers a painful primer in how not to run a bank, it has provided other insights.
While the Parliamentary Commission on Banking Standards made no recommendations concerning Sir James’ title or pension, the reaction to their report demonstrates the clout the commission, expected to make its final report on the industry overall next month, commands.
The backlash over financial reward to former executives also shone a light on how top executives often accrued pension benefits at a faster rate than other employees, leaving them with generous retirement packages.
And if nothing else, Sir James showed his ability to make a realistic appraisal of the public mood.
India goes into reverse while China pulls away
This week saw contrasting fortunes in two of the fastest growing car markets, write FT reporters.
Strong economic growth and consumer confidence helped lift first-quarter car sales in China but in India they contracted last year for the first time in more than a decade.
Car sales in India have expanded rapidly over the past five years, attracting extensive investment from global motor groups hoping its market will match the fast growth seen in China over the past decade.
However, data from the Society of Indian Automobile Manufacturers showed sales for the year to March falling 7 per cent to 1.9m compared with the year before, providing a stark contrast with the industry body’s prediction of growth of about 10 per cent a year ago.
In China, light vehicle sales rose 17 per cent to 4.42m in the first three months of the year.
In March alone, sales of cars, sport utility and other passenger vehicles climbed to almost 2m, the China Association of Automobile Manufacturers said.
European and American car brands continued to take market share from Japanese rivals in China in the first quarter, analysts added, as the continuing political impact of a dispute over a set of islands left Japan’s carmakers struggling to recover ground.
Meanwhile, many experts still expect India’s car market to become the world’s third largest by 2020, behind only China and the US.
Swaps focus as watchdog subpoenas ICAP brokers
The shadowy world of interest rate swap trading was thrust into the spotlight this week after a leading US derivatives regulator subpoenaed brokers at ICAP and traders from 16 global banks as part of an investigation into claims of possible market manipulation, writes Michael Mackenzie.
Every day before 11am in New York, 16 banks provide the rates at which they would buy and sell a benchmark swap. The rates are collated to provide the ISDAfix, named after the International Swaps and Derivatives Association.
For the past decade ICAP has published the page where ISDAfix appears, using prices supplied by banks that transact swaps. That means traders are keen to do business with ICAP because they want the screen to reflect their trades. So lucrative is the business for ICAP that its brokers call its rate-swaps desk in Jersey City by a more catchy sobriquet: “Treasure Island”.
The world of tight relationships between dealers and their brokers is coming under intense pressure after regulators uncovered abuse in the setting of a different interest rate gauge: the key global floating rate benchmark known as Libor. But the ISDAfix probe by the Commodity Futures Trading Commission shows regulators’ concern extends well beyond Libor into crucial if obscure benchmarks.
It will also shine a light on interest rate swaps, an area of the derivatives market key in helping companies and investors protect themselves against sudden changes in interest rates.
Lagardère severs last remaining ties to EADS
Some 10 years after the death of his father, Arnaud Lagardère finally severed the last remaining ties this week between his family-controlled company and EADS, the Franco-German aircraft maker, writes James Boxell.
Jean-Luc Lagardère, a famed French industrialist, was a driving force behind the creation of EADS in 2000 but his son has for some time made clear his ambition to sell out of the aerospace group to concentrate on media and services.
On Tuesday, the younger Lagardère got his wish as the Lagardère group that he now heads sold its 7.4 per cent stake in the Airbus parent company for €2.3bn.
The sale price vindicated the Lagardère group’s opposition to the financial terms of last year’s doomed attempt by EADS to merge with Britain’s BAE Systems. The price for Lagardère’s stake was 45 per cent higher than its value on the day the EADS-BAE deal collapsed in October.
The big question for Lagardère investors is how the company spends the proceeds. After tax is paid on the €2.3bn, shareholders are hoping for a special dividend of about €1bn within the next few weeks.
The rest could go on reducing the company’s €1.7bn of net debt or on smaller acquisitions in its travel retail unit, which runs airport shops, or on digital publishing assets.
The co-ordinated sales of the Lagardère and Daimler stakes will reduce French and German state-controlled interests in the company to about 12 per cent each, from 22.5 per cent previously.
ConocoPhillips’ Arctic drilling plans put on hold
ConocoPhillips became the latest big oil company to step back from Arctic exploration when it announced this week that it was putting its plans to drill in Alaska’s Chukchi Sea next year on hold, writes Guy Chazan.
Conoco said that the decision was driven by the uncertainties surrounding “evolving federal regulatory requirements and operational permitting standards”.
It came six weeks after Royal Dutch Shell froze plans to drill off the north coast of Alaska this year.
Norway’s Statoil has also said it will not drill the acreage it operates in Alaska’s Chukchi Sea any earlier than 2015.
Conoco’s move underscores the regulatory hurdles facing oil companies trying to tap the hydrocarbon riches that are thought to lie under the Arctic seabed, as well as frustration about how the rules keep changing.
Shell has estimated that the Chukchi and Beaufort Seas hold 25bn barrels of crude. But the company has struggled to get its ambitious Alaskan exploration programme off the ground.
Dogged by equipment failures, legal challenges and regulatory scrutiny, it has spent nearly $5bn without completing a single well.
Conoco is far less advanced than Shell. It spent $506m on 98 exploration leases in the Chukchi Sea in 2008, and later paid $144m more on seismic tests, biological studies and well-planning.
Conoco said that it still lacked the regulatory approvals needed to proceed with drilling next year.
New Windows operating system adds to gloom for PCs
Microsoft’s latest Windows 8 operating system was supposed to turn the public on to non-Apple tablets, but it has only succeeded so far in turning them off traditional PCs, writes Chris Nuttall.
At least that’s the interpretation of first-quarter global PC shipment figures made by the IDC research firm. The 14 per cent fall on a year ago to 76m units was the worst contraction recorded since IDC began measuring quarterly numbers nearly 20 years ago.
Microsoft introduced Windows 8 in late October, so this was the first full quarter to measure its effect on the market.
Normally, a new operating system would be expected to boost consumer interest in PCs, but IDC said the reverse had happened.
“At this point, unfortunately, it seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed the market,” said Bob O’Donnell, IDC PC analyst.
Windows 8 is optimised for touch and the tiled interface on its opening screen is friendly to tablet users. But IDC said touch screens on notebooks and PCs were making them more expensive and users were put off by the radical new interface that removed the familiar start button and desktop opening screen.
There is also no evidence so far that Windows 8 is taking significant market share in tablets – a hope of Windows PC makers aiming to grow in that market. Shares of Hewlett-Packard, whose PC shipments declined by nearly a quarter, were down more than 6 per cent on Thursday on the news.
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