HBOS in political context

It's pretty clear what went on at HBOS now. The bankers wanted to be left alone to make lots of money. Government was happy with this because they were getting significant tax revenue from the banks to finance state spending.

At HBOS Paul Moore was telling the hierarchy things they didn't want to hear - not just about its retail division but about the bank's risk profile across the board. Crosby sacked him and installed Jo Dawson to report directly to him. The FSA say she wouldn't have been approved as a fit person now because she had no risk evaluation experience - doubtless one reason for Crosby to choose her.

So why were the FSA so supine at the time? They flagged concerns to HBOS themselves but didn't follow them up, and they approved Jo Dawson. From Adair Turner's testimony to MPs it emerges that politicians put the FSA under pressure to regulate with a light touch.

We already knew that the FSA had received a letter on these lines from Mr Blair. It's inconceivable that he would have sent it without Brown's agreement - probably at his behest.

Usually a government has one central thrust. A chancellor is a big contributor to the general policy. But a chancellor's central role in governance is to manage the purse strings.

In Blair's government the chancellor considered himself semi-independent. He managed the purse strings for polices which suited his own personal political advantage. Blair did not dare to intervene. So the government had no counterweight, no one who was going to say whoa, hold hard, once Brown abandoned his initial flirtations with 'prudence'.

Economic checks and balances therefore scarcely existed at the heart of government, with the chancellor not at the centre of government's political strategy but pursuing his own - the classic schoolboy let loose in the sweet shop. Lower order issues such as the constraints of financial regulaton were not to be allowed to stand in the way.

Was this why Brown removed regulation of banks from the Bank of England as soon as he came to power and handed it to the FSA? For sure Eddie George at the Bank of England would have been a much tougher nut when it came to political pressure.

We can see the circle from increased bank profits in conditions of lax regulation, to increased danegeld in the form of taxes paid to the Treasury, which then in turn pressured the regulator to go easy on the golden geese.

Brown must have been at the centre of this.

And at HBOS James Crosby, faced with an energetic risk manager who took his role seriously, sacked him and got away with appointing a patsy.

More to life than economics

Usually it's political commentators who can be criticised for ignoring economics. Numbers? Gracious, they don't affect anything. Anyway, I might have to think hard. Pass the smelling salts.

But this morning both Wolfgang Munchau and Armageddon Evans-Pritchard have interesting economic angles yet stop short of the politics.

Munchau highlights problems in the east European EU economies in typically clear fashion but then veers off to claim that they should have got themselves into the euro faster. Space prevents him exploring just why they chose the slower route. Would the fast track have been practical politics? He says Slovenia and Slovakia are better off for having got themselves in. Is that true of all the PIIGS? What will happen to Austria, whose banks' exposure to eastern Europe is about 80% of the country's GDP?

Ambrose does look at internal German politics. Even if Germany can still afford to subvent other EU countries' debts, bearing in mind the problems of its own banks, "what about the solemn pledge to voters by Germany's political elites – promiscuously given over the years – that monetary union would never leave them on the hook for the debts of half Europe?" To be sure, Mr Steinbruck's erratic pronouncements are a poor guide to likely German policy, especially as his party's electoral prospects look poor.

Economic writers love to focus on the mechanisms which Germany might use to support the PIIGS' debts. But how would the politics work?

It's no good glancing at German politics in isolation or ignoring them entirely. What about politics in the PIIGS? Ireland and perhaps Spain are attempting to put their economies right. Would a lending Germany be content with their present speeds of adjustment? Even if they were, would there be a political price to pay? Wait for the backlash when the first German politician told the Irish that they should show their gratitude for German support by voting through the Lisbon treaty.

What of Greece and Italy? Is there any economic adjustment going on there at all? Germany was decisive in pressing down wages when it faced cost pressures. German voters would surely demand at least such actions from countries they subsidised. Even if Germany could deliver the huge sums required to make a difference, could fractured Italy and disorderly Greece deliver the adjustments? What cries of 'German hegemony' there would be. In political terms the cure might be worse than the present disease. Would it be realistic for Germany to help some PIIGS but not others? Choosing would be a naked sign of a lender's power.

Or might Germany be more inclined to channel its resources towards supporting the banks in its neighbour Austria, where order and adjustment are taken more seriously than in some of the PIIGS, and where German 'hegemony' might be - ahem - less controversial?

Ambrose raises another option.

Architects of EMU were well aware that a one-size-fits-all monetary policy for vastly disparate nations would create serious tensions over time. They gambled that this would work to their advantage. The EU would be forced to create new machinery to safeguard its investment in the euro. It would be a "beneficial crisis", bringing about the great leap forward to full union.

We are about to find out if they were right, he says.

They were wrong. If the vainglorious national politicians give up the rest of their power to run their economies, what is left to them? At present there are still plenty of policy areas where they can look busy enough to satisfy their own egos, and satisfy their voters that they still hold most of the reins.

But that next leap would strip bare their powerlessness (apart from France, which would still find ways round the rules). And at the same time the EU would become the whipping boy for enforced austerity measures. Domestic politics might force some countries from the EU in months.

In itself this might be a good thing. But it might take many years to clear German voters' debts from what by then would be non-EU countries. Would any German party care to defend such a position to their voters?

The economics are fascinating. But at every point those pesky politics intrude.

HBOS continued

Scotland on Sunday are on the HBOS case. They tell us the FSA issued a red flag letter to all the major retail banks in November, 2002 saying they must carry out urgent internal checks on whether they had enough capital to back up their loans in the event of a crash.

With regard to HBOS, the FSA has now revealed that, after making its concerns clear in 2002, it then carried out a full risk assessment of the bank. It concluded, in 2004, that "the risk profile of the group had improved and that group had made good progress in addressing the risks highlighted".

Phew. So that was all right, then! Yet in 2005 the FSA had to defend themselves against Tony Blair when he signed a letter to them accusing them of being too heavy-handed in their regulatory practices.

There's quite a bit more to emerge.

The Financial Times writes that Peter Cummings at HBOS was seen as "every property entrepreneur's dream". The committee notionally controlling him was in fact deferential, in the light of the profits he was generating - in the good times. Which tells us that the prudential banking culture wasn't strong enough.

In a wider perspective a Times comment piece considers HBOS alongside the Madoff and Stanford cases, and looks at the failings of regulators, press, politicians and boards.

Yet Madoff and Stanford were different beasts from HBOS. Madoff and Stanford seem to have been frauds and ponzi schemes, while HBOS was a major bank. The HBOS board was ostensibly heavyweight.

And what of the auditors? In the case of Madoff and Stanford they were tiny firms, pretty obviously chosen to be men of straw. And in the case of HBOS?

It was the HBOS auditors, of course, who wrote the independent report on Paul Moore's dismissal. There may be more to be said here.

HBOS: not me, guv, says Burt

The Herald has been talking to Peter Burt, who headed Bank of Scotland when it was folded into Halifax to become HBOS in 2001. He became executive deputy chairman of HBOS and left in January 2003.

Burt told The Herald that "wholesale funding was relatively low" at the time of the merger.

He highlighted rapid expansion of lending by noting the merged bank's assets had grown from £400bn in 2003 to £666bn in 2007, and added: "Obviously they didn't manage to keep the ratios where they were at the time of the merger. They just got it wrong. They just got greedy."

The Herald also covers Hornby's apparent lie that he deliberately reined back expansion in mortgages, already mentioned on this blog.

Chickens coming home to roost at HBOS

A second HBOS whistleblower has claimed that the bank dumbed down key risk controls.

Anthony Smith, who worked as a manager for HBOS until late 2005, said the risk culture at the bank changed totally that year after his boss Paul Moore was replaced as risk director by Jo Dawson, someone he claimed knew little of risk or regulation.

And someone has been doing a little checking of the public record. Andy Hornby told the Treasury select committee that after becoming HBOS chief executive in September 2006 he "pulled back" mortgage lending share from 14% to 8% in 2007 and stopped share-buyback programmes in an attempt to curb HBOS's risk position.

But in the HBOS Earnings' Presentation to shareholders in August 2007, Hornby said HBOS would regain as much as a 20% share of the mortgage market. Falls in HBOS's market share around the time were attributed to a failed retention strategy rather than a deliberate reduction.

The already plausible picture of a mis-run bank grows steadily more detailed.

And if Hornby has been caught out in one major lie, why should we believe anything else he says? One big lie is all it takes.

Jacqui Smith skewered?

Paul Waugh in his blog has picked up a further submission to the Parliamentary Commissioner about Jacqui Smith's expenses. He quotes the finding of the complaint against Ed Balls and Yvette Cooper.

If a Member has his or her family living permanently in their constituency home and has modest accommodation in London big enough only for themselves, and which they use only when Parliament is in session, then it would clearly seem to be a matter of fact that that Member’s main home is in the constituency.

In the case of Ms Cooper and Mr Balls, however, they maintain two properties sufficient for them to conduct their family life in both London and in Castleford.

When there is genuine doubt about a main home and the considerations are evenly balanced, then the Member and the Department should give particular weight to ensuring that the home the Member designates as their main home results in a smaller claim on the Additional Costs Allowance than would be the case if they designated the other property.

On the face of it this would skewer both Jacqui Smith and Alistair Darling's expenses claims.

They have both been particularly morally scummy because they both have free dwellings in London provided by the taxpayer.

They seem to have aimed for the largest possible claim on the Additional Costs Allowance rather than the other way about.

Labour minister sleaze. Any more?

Real bankers needed at HBOS & Lloyds

The people running the big banks weren't bankers like (say) Sir Brian Pitman, mean but cautious, who understands that bankers lend, and therefore must be pretty sure they're going to get their money back. They were red toothed businessmen.

RBS hired top sports stars on “reckless” contracts to entertain clients as part of a £200m sponsorship binge. Sir Fred Goodwin, the bank’s former chief executive, agreed contracts of up to five years just weeks before he was ousted last October.

Meanwhile, the HBOS story goes from bad to farce. The FSA say they had concerns about its risk profile from 2003. Seemingly they just allowed things to drift on and get worse. Did they trouble the Treasury with their concerns over a major bank? Apparently not. If they did, no one thought to tell the Chancellor. So says Mr Brown anyway (though if he really didn't know he should have done). Former Treasury mandarin Lord Burns says Brown's tripartite regulation structure - Bank of England, Treasury and FSA - was cumbersome and wasn't set up properly (though he was involved).

Sir James Crosby says he will fight Paul Moore's allegations, while Mr Moore says he has more evidence. The FSA told HBOS in 2003 that its risk profile was too high, yet Mr Moore was sacked in 2004 for proposing to reduce it.

I was obliged to raise the numerous issues of actual or potential breach of FSA regulations and had to challenge unacceptable practises… [it] was bound to upset some people.

It's easy to lend money you probably won't get back. In banking there have to be sales constraints. People with a sales driven retail background aren't likely to recognise that. In the end it's a self-discipline.

Lloyds' failure to audit HBOS's commercial lending area properly before taking the bank over was astonishing. If there were going to be any nasty traps, they must have known this was where they would be - especially as the lending book was heavily weighted to the property and construction sectors, a concentration which must have screamed that proper risking was just not happening at HBOS. Did they even fail to do a major sampling exercise? - which would surely have quickly shown that HBOS's view of their loans was much more optimistic than the Lloyds practice.

As we've said before, 'provisioning' loans isn't especially hard. First you have to understand the risks. This will have been done at the outset when the loan was agreed. Second, you have to weigh the likelihood of failure at each stage. Again, this should have been done already. But this should actually be easier than it was at the outset. Time has moved on, certain stages of the project have passed, and there is more information available to help you assess the risks that remain.

Daniels said that in the normal course they would have done three to five times as much due diligence as they actually did, but the chance to get a 30% share of the personal finance market was just too good to pass up. He and Sir Victor Blank seem to have got carried away. Maybe they were led on by Brown's cajoling. But in the end they shut their eyes and failed in what is essentially a simple exercise.

Mugabe has no morals

Well yes you knew that. The Sunday Times has uncovered a foreign residence.

Zimbabwe's President Robert Mugabe and his wife Grace have secretly bought a £4m bolt-hole in the Far East while his country struggles with hyper-inflation, mass unemployment and a cholera epidemic.

There's more.

The paper adds that the disclosures about the Mugabes’ Far Eastern interests are certain to anger Zimbabweans already outraged by extravagant celebrations laid on for the dictator’s 85th birthday this week.

But they won't learn about this from the Rhodesia Herald, where the country's real rulers, the Joint Operations Committee, even vet the front page story while they continue "orchestrating a campaign of political abductions and disruption aimed at bringing a swift end to prime minister Morgan Tsvangirai's power-sharing government, according to senior diplomats in the country". This includes arresting a new MDC minister. They want to force Tsvangirai to pull out, or humiliate him and make him seem a puppet.

He has done himself no favours by promising off the top of his head that state employees would be paid in foreign currency, without having the money to deliver.

Thick? Easy meat? We'll find out.

English votes on English issues

David Cameron has finally said that purely English issues would only be voted on by English MPs.

He promised to set up a special English-only committee at Westminster which would be closed to MPs from Scotland, Wales and Northern Ireland and which – apart from exceptional circumstances – could not be overruled by the Commons as a whole.

‘For English-only legislation, we would have a sort of English grand committee,’ he said.

About time too.

More moral stench at the top

We've had Jacqui Smith's dirty linen hung out to dry. That story continues today with people living near her sister alleging that the Home Secretary spends less time at her sister's house than she has claimed.

Importantly, the Home Secretary has a grace and favour residence. This would be cheaper to police, but of course she would only have one home, so she would have to pay for the upkeep of her family home herself.

If we must have homes allowances, why is there not a rule that your first home for parliamentary expenses purposes is the dearest property you own? That would catch the Speaker too, who also has his nose in the trough.

This moral stench is more important than private sector bonuses. Private sector executives are responsible to their shareholders. Jacqui Smith and Michael Martin are purloining taxpayers' money.

Now news that Alistair Darling is also grubbing deep in the expenses mire. The News of the World reports that he lives rent free in Downing Street and claims thousands of pounds in expenses for his Edinburgh home by designating a tiny London flat as his main home.

This is moral sleaze at least as bad as the Tories produced.

What hypocrites. Why do they think we should take any notice of their moral judgements?

Radical surgery for the banks?

Instead of talking, ineffectually, about bonuses, says Rachel Sylvester, "the Government should be forcing the banks to separate their high street operations and their risk-taking investment arms in order to make sure that consumers never again find themselves unwittingly involved in a high stakes game of poker".

There's no sign of anything so radical on the government's agenda. But it's not so many years since what were known as "the clearing banks" first ventured into investment banking to boost their profits. Then they came to feel at ease relying increasingly on relatively short term wholesale deposits to support big increases in their lending.

Well, we know what that led to, most spectacularly in the case of HBOS and the Icelandic banks - suddenly the wholesale funds weren't there.

So what is the government policy on the future of our major banks? Hanging on for dear life, I suspect.

Paul Moore and HBOS

Paul Moore is the risk manager who claims he was personally sacked by Sir James Crosby at HBOS for telling inconvenient truths. Sir James - who has now resigned from the FSA - Lord Stevenson, and HBOS itself deny Mr Moore's claims and say he was not forced out unreasonably. Sir James says it was due to restructuring.

Mr Moore said that he warned HBOS that it was growing too fast, that it was culturally indisposed to being challenged and that its sales culture was “significantly out of balance with their systems and controls”. He said in a previous interview that HBOS had been chasing sales too aggressively and with little regard for risk as early as 2002.

Mr Moore has also attacked the quality of HBOS's lending. In his memo he writes that

... there must have been a very high risk if you lend money to people who have no jobs, no provable income and no assets. If you lend that money to buy an asset which is worth the same or even less than the amount of the loan and secure that loan on the value of that asset purchased and, then, assume that asset will always to rise in value, you must be pretty much close to delusional?

But he believes the underlying cause of the crisis lay in HBOS's system of governance. 'There has been a completely inadequate “separation” and “balance of powers” between the executive and all those accountable for overseeing their actions and “reining them in”.'

He also 'told them that their sales culture was significantly out of balance with their systems and controls'.

Some defend Sir James's successor, Andy Hornby, saying he tried to rein in the expansion. Others claim he strengthened the sales culture around him, insulating the CEO even more from internal challenge.

Of course selling loans is not like selling beans. When you sell a loan, you want to get the money back. Conceptually it's pretty simple to measure the likelihood of this by computerised credit scoring. The system can also analyse loans that turn bad, seeking patterns both in the data supplied and the staff who supplied it. This is standard stuff, so Mr Moore's claim that 'their sales culture was significantly out of balance with their systems and controls' is all the more striking.

Similarly it's not difficult to build risk margin into construction lending, where HBOS had a strong market share. If costs rise, timescales lengthen and property values fall, is the project you're being asked to lend for still viable? If not, demand a higher customer equity stake.

Was HBOS deliberately deaf to dissenting voices? Mr Moore claims that the 'independent' report on his removal - by HBOS's own auditors - was defective, they didn't even interview everyone they should have. After dispensing with Mr Moore, what would the CEO have done if he wanted to stifle future dissent from the risk management side?

First, he would have made them report directly to him, so as to stop any other senior voices adding weight to their recommendations. He did that. Secondly, who would you appoint to head that function? Sir James appointed Jo Dawson, a sales manager with no experience in risk management - a clear signal of the importance he placed on the risk management function, someone from the very side of the bank which had been the source of the concerns which risk management expressed, someone who was likely to be out of sympathy with the concerns which her new area would express to her. The signal to the risk management function and to the bank at large must have been clear.

We don't know what was in Sir James's mind. But we can have a good guess and it ain't pretty.

Finally there's the issue of the quality of the lending that was doled out in the dash for growth. Individual sales targets for even quite junior members of staff became common in banks. Mr Moore claims that HBOS's control functions couldn't keep up with its sales culture. The quote above from his statement implies that what a traditional banker would call "bad" lending was at least condoned - with no negative feedback when the lending went bad.

This is where the public needs to hear from junior staff who were at HBOS then, rather than from senior executives with smooth generalisations. What was the sales culture under Crosby? Did it change under Hornby? If so, how?

Government disadvantages England

Jim Pickard reports on his Financial Times blog that

My colleague Andy Bounds broke the story last month that England’s poorest regions were losing out on millions of pounds of extra funding from the European Union - despite Wales, Scotland and Northern Ireland benefiting.

The government decided there wasn’t enough time for the regions to spend a sudden windfall after the collapse of sterling boosted the value of euro-denominated European Union grants by about a fifth.

The EU had offered to extend the spending deadline for unused regional aid. The UK took up the option for devolved regions - but rejected it for England.

Now it has emerged that the money in question is an astonishing £671m. The unspent cash will be recouped by the Treasury - which can now deduct it from future British contributions to European Union budgets.

By contrast, Wales is set to get up to £60m, Scotland £54m and Northern Ireland £25m.

How is this likely to go down in the poorer parts of England - Cornwall, the north-east, the north-west? Answers on a postcard.

Brown misspeaks the truth - Frank keeps busy

Brown spoke in PMQs of "re ... derpression" - correcting himself. His spokesman said afterwards it was a slip of the tongue. No siree, his master was correcting himself and his spokesman lied for him. Frank Field has the best line, speaking of a Freudian slump.

He also pegs energetically away at what he sees as faults in the welfare system.

The daily toll of redundancies, and these figures, make welfare reform more, not less, urgent. I had a few emails from across the country from people who have worked the whole of their lives and are gobsmacked when their national insurance contribution record delivers them a princely sum of £60.50 benefit a week. As these correspondents observe that is exactly the same sum as individuals who have never worked (although some have tried while others have never lifted a finger to do so), and they deeply resent this fact.

This afternoon I met Tony McNalty to discuss further the alarming figures that since Britain won the Olympic bid, and determined that the games should be held in Newham, over 50,000 new national insurance numbers in that borough alone had been issued to non-British workers. He is following up on this disturbing fact as I will be when I meet the Olympic delivery authority tomorrow.

But the Minister also promised to discuss within the department, and I hope within in the cabinet, the idea of reforming the national insurance jobseekers’ allowance so that it takes into account an individual’s work record. Surely someone who has paid five years’ continuous contributions should gain a larger benefit than £60.50 a week and similarly someone who has worked for ten years should be rewarded at a higher rate reflecting their years of contributions.

At the same time, with rapidly rising unemployment, it is important to reward people taking risk getting back into jobs. Those with good work records but now unemployed may be hesitant at taking a job which does not look too permanent.
The other reform I am therefore pressing on the Government is to make it easier to requalify for the insurance JSA.

When compiling new deal successes the Government judges a claimant as landing a full time job when they have been in work for thirteen weeks. I suggest therefore that a thirteen week period of continuous employment and contributions should therefore requalify a worker for six months’ insurance benefit. In this way claimants willing to take risks with the next job will be rewarded.

How's this for a state sector job?

Apparently "the Government office in Yorkshire" has a "regional alcohol manager". He's called Tony Goodall.

I wonder how many of these there are, what they cost us, and what they do?

Are they value for our money? I doubt it.

How government toss your money away

We all know state employees' pensions are better than we can get in the private sector which pays for them. Mike Denham summarises the ghastly truth here.

If all public sector employees were henceforth moved across onto the average private sector pension arrangement, the annual employer contribution would drop from £21bn pa to around £8bn pa (the average private employer contribution being £1600 pa). Plus, the vast bulk of the annual top-up would disappear (most private sector pensions now being money purchase/defined contribution rather than the infinitely more attractive index-linked final salary deals in the public sector).

The problem with this is that it would require understanding and grit from privileged, lightweight Georgie.

And Mike cites another study proposing that taxpayers save £1bn pa by drastically slimming BERR, "and a further couple of bill by scrapping the terminally useless Regional Development Agency quangos".

Together, he thinks, these proposals would save taxpayers around £10bn a year.

What does the state spend our money on? Is it even beneficial? Raedwald has a cracking piece.

In 1976 we were encouraged to organise street parties. Today there would be a hurricane of official discouragement; all adults would have to undergo CRB checks, £5m public liability insurance would need to be in place, and no-one would be allowed to bake a cake or make a sandwich for the party unless they had undergone food hygiene training and the environmental health had certified their fridge. There would need to be a risk assessment, a health and safety policy in place, an application to the council to stop-up the highway complete with traffic management plan, and if anyone wanted to sing, a temporary events licence, entertainments licence and police licence would be needed. If the street party involved a rum punch for the adults, then a whole spectrum of liquor licences would be needed. The licence conditions would specify bouncers, fire marshals and first aid and fire fighting equipment to be on hand; there would also need to be temporary toilets (with a sewer connection licence) as popping indoors for a pee wouldn't satisfy the statutory requirements. In short, in the space of thirty years the State has erected barriers of such formidable complexity that it has robbed the nation of any trust in ourselves.

Out in the shires, a quarter of all council tax is going to meet the soaring cost of the gold-plated pensions of town hall workers. Taxpayer subsidies for the pensions of local authority staff topped £5billion last year, according to figures from the Department for Communities and Local Government. An average council tax payer in the South-East contributed £324 to town hall pensions last year.

You'd naturally look at these numbers and think, this can't go on. The Conservative view is that 'Local taxpayers simply cannot afford to foot an ever-growing bill. At a time when some private sector workers face having to work until 68 before they get their pension it is just not sustainable or fair.'

Sue Cameron discusses in the Financial Times just how many graduates are applying for those priveleged senior civil service posts in these uncertain times. And -

What of more mature candidates who are looking to make a bob or two out of the taxpayer by joining Whitehall late on in their careers? I have discovered just the job - the Home Office is looking for a national identity commissioner (bear with me - this is a real little earner). This "independent" post will involve championing the interests of the public by providing "rigorous and impartial oversight" of the government's planned identity card scheme. Or as one Whitehall insider explained: "It's basically a selling job for ID cards - which means it's a hopeless task." (Opposition to this particular aspect of Labour's Stasi state is fierce.)

"Yet it could be a good number," he confided as we tucked into grilled sea bass and zucchini fritti. "The contract is for three years and there's a six-figure salary - I reckon you might be able to negotiate between £200,000 and £250,000. You'd have a year of absolute hell, of course . . . but there's going to be a general election next spring. Most people expect a win for the Tories, who are sworn to abolish ID cards. So you would then be relieved of your championing duties and you'd be able to collect £400,000 or even £500,000 on the way out. Not bad!"

Thus does this government casually toss our money into the air even in these uncertain times. Taxes would have to go up by between 3 and 4p in the pound to fill a £14billion black hole in Treasury revenues caused by the banking collapse, research will reveal today.

But they keep lobbing our money out with abandon.