For those who missed it like me, here’s a summary of the three hour long Treasury Select Committee meeting yesterday, where Sir Fred Goodwin and Sir Tom McKillop, respectively the former chief executive and chairman of RBS, along with Andy Hornby and Lord Stevenson of Coddenham, the former chief executive and chairman of HBOS, were given a grilling by the politicians led by John McFall.
Watching the show on the BBC, there were a few classic moments.
It starts with lots of grovelling and apologies followed by questions about their banking qualifications, pay, remuneration and bonuses.
Sir Tom McKillop: "The average salary in RBS is just over £27,000 and the maximum bonus was 10 per cent – the average payout around five per cent. I've been asking myself why investment banking has developed this culture?”
He says it's due to the culture of partnerships, the origins of investment banking. A bit like hedge funds today, thse partnership provide high payouts as a way of life because the leaders share the profit pool
Sir Tom is thyen asked about the extent to which RBS overpaid for ABN Amro, and whether much of this was down to Sir Fred Goodwin.
He replies that it wasn't just Sir Fred driving the ABN takeover. The deal was looked at in considerable detail and discussed at many board meetings. Sir Tom does admit however that "the deal was a bad mistake. At the time it did not look like that. It is easy in retrospect."
Sir Tom and Sir Fred Goodwin then make plenty of loaded comments about “there, but for the Grace of God, go I”, probably in reference to Barclays Bank’s failed bid.
Various questions then go forth around risk management; remuneration (again); the banking culture, management and morale.
Then Sir Fred is asked about his comment that "this is not a negotiation it is a drive-by shooting", in reference to the talks with the government on their bail-out plan.
He says the comment was a private one.
I bet it was.
There’s another classic line of questioning about the bank’s risk models within HBOS then and Andy Hornby responds "with the benefit of hindsight the reliance on wholesale funding left us in a vulnerable position."
Or could it have been the fact that Mr. Hornby wasn’t a banker perchance, but was a great retailer who sold one too many mortgages?
Nope, said Andy, as he reckons during his steerage that they tried to increase deposits putting hte blame firmly on James Crosby’s shoulders, his predecessor.
This is the very same Sir James Crosby who is now advising the government on how to untangle his mess, with 96% of readers of Thisismoney.co.uk voting that he should resign (which he did this very afternoon).
It also turns out during this line of questioning that there was actually a whistleblower in HBOS who raised concerns about the bank’s sales practices with the authorities. Apparently, the HBOS risk specialist claims he was subject to "threatening behaviour" when he raised concerns with top executives.
This all came out of the Credit Crash Britain programme, as discussed on 1st November 2008.
Anyways, there’s a lengthy exchange about why the bankers didn’t see the collapse coming and why HBOS was so over-exposed to the wholesale funding markets, finishing with Lord Stevenson saying that "a very carefully arranged risk management system did not spot the scenarios which have come. Stress testing did not stress test adequately. We have been very open about it and how that is changed in future is very important."
Too darned right.
Unfortunately the Committee won’t let that one go as Labour MP George Mudie says: "At the end of the day you sacked your [Paul Moore, Group Head of Risk at HBOS, 2002-04] because the warnings he made were tiresome. Four years later he was right and you were wrong … You sacked this fellow and replaced him with someone who had no risk experience of any kind."
Andy Hornby denies this was the case, although the HBOS Group Head of Risk who replaced Paul Moore is Jo Dawson, currently head of the Retail Division at HBOS, and formerly from Green Flag as a Business Development Director.
There’s then an exchange about non-executive directors and their role, and the fact that part-timing it means they will never understand the bank, its risks and exposures, business models and complexities.
Committee Chairman John McFall asks whether banks have just become too complex. The fact that the Board of RBS had what should have been a great line-up – Peter Sutherland, Bob Scott, Steve Robson, as well as Sir Tom and Sir Fred – shows that if even they cannot understand such complexity, who the hell can?
He actually gives the guys an olive branch at this point, stating that "we can't lay the charge that it's incompetence. The expansion of financial instruments increased the complexity to an extent that people didn't understand them."
Sir Tom McKillop of course then agreed, stating that securitisation, the parcelling up and selling on of debt, was meant to increase stability. "It's been perceived as making the system more stable. It has not turned out that way. Everyone has been surprised by that…including the regulators. We had no idea of how quickly it could all turn down.”
Yep … House of cards?
There’s a lot more chat about risk and securitisation, and then Sir Tom states that, towards the end of 2007, the Board became more preoccupied with capital ratios which is why, in January 2008, he sounded them out about a rights issue or asset disposals. That bit is interesting as RBS announced a 23.1p dividend on 5th March 2008, more than double the previous year.
This leads into more talk about the role of the FSA. Sir Tom says that there was a very “full and open relationship” with the FSA. “In addition to the meetings, in 2008 when there was concern about capital, he spoke to the chairman of the FSA about the RBS' boards options – and he encouraged them to raise capital."
23.1 pence dividend.
Andy Hornby backs up Sir Tom’s views, as do they all.
"It sounds a very comfortable and comforting relationship", says Mark Todd, MP for South Derbyshire.
Then back to HBOS and a lot of talk about Peter Cummings, the Head of Corproate Lending who appeared to be running an empire within the HBOS empire. This is denied by Lord Stevenson who says, unconvincingly, that "looking back, we did not foresee the deterioration of asset values."
Sir Fred was then asked about Greenwich Capital, RBS’s structured finance firm that created a massive hole for the bank.
Sir Fred stated that the issues of Greenwich Capital hit in March 2008 "in so far as there was sub-prime on our books it was wrapped up in investments which were credit grade … It was only in March 2008 that valuations fell off
in the wake of the Bear Stearns collapse."
Interesting, as Greenwich Capital cause a massive £1.5 billion ($2.2 billion) write down in December 2007!
After further challenges about loans policies, especially as many of them were for cars for American consumers, Sir Fred replied: "We are a bank, we lend to people to buy cars, to buy houses, it's what we do. We're America's sixth-biggest bank. We have 27,000 people working for us in the US."
I thought he had resigned, commented a few observers.
Jim Cousins, Labour MP for Newcastle upon Tyne, chips in with: "You have this vast loan book in the US. Was there any discussion of exchange rate risk?" and forces Sir Tom’s hand, as he admits that there was no discussion amongst the RBS board in the early days, of the difference in the way securitisation is recorded in US (GAAP) and UK style (IFRS) accounting?
Jim Cousins advises Sir Tom to take advice on criminal negligence.
This is serious stuff.
It then moves into lighter areas of how the power and awards given to the bankers may have gone to their heads.
And finishes with Sir Fred saying that "It's just too simple to put all the blame on me. It might help you close the book but it won't get you anywhere."
He’s right about that and what the committee achieved I don’t know, but it’s all good viewing.