While researching my book on the credit crunch early last year, I met Lloyds TSB chairman Sir Victor Blank in a spacious office on London’s Gresham Street.
Blank, in his naturally laconic manner, was pleased that the bank he led had managed to avoid the worst of the toxic debt — based around US sub-prime mortgages — which had caused the credit markets to freeze over and led to the run on Northern Rock.
Lloyds was acutely aware of the dangers and had arranged a presentation at one of the bank’s regular board meetings, designed to demonstrate to directors why securitised debt had become poisonous and, as a result, Lloyds had stood well clear.
A securitised debt packaged up by investment bankers Goldman Sachs and certified by a credit ratings agency to be of the highest quality was deconstructed. When taken apart, only the top slice of the asset turned out to be of investment quality. The rest was quite simply sliced and diced trash.
The point is that, of all the banks, Lloyds TSB, under the direction of chief executive Eric Daniels and Blank, had been the most cautious during the credit boom.
While other banks had been lending crazily, Lloyds had been carefully focused on strengthening the capital of both its insurance offshoot Scottish Widows and the whole bank.
While other banks were buying assets at sky high prices, Lloyds was selling them off and pulling back from international operations.
Lloyds was the tortoise on the UK high street and Halifax Bank of Scotland — with its Asda-style marketing and high dependence on the wholesale markets — was the hare.
Yet it was not a bank without ambition and believed that the way forward -— a strategy formulated by a previous management team headed by Sir Brian Pitman — was consumer banking.
For several years it had sought to increase market share, most notably by bidding for Abbey National in 2001, and had been blocked by the competition authorities.
In more recent times it had held exploratory talks with Halifax Bank of Scotland but could see no way of doing a deal because of the competition rules. A joint Lloyds TSB-HBOS would have more than 30 per cent of retail deposits, almost the same proportion of mortgages and a fair chunk of current accounts.
A path appeared to open up for Lloyds when Blank travelled to Israel and Palestine as part of a business delegation with Prime Minister Gordon Brown (a personal friend). Blank later recounted in an interview with the Guardian newspaper that he told Mr Brown that if there was a need for a rescue of an ailing bank, the deal could not sit “becalmed for nine months while the competition investigation went on”.
If anyone knew the dangers of a delayed takeover, it was Blank.
As a lawyer at Clifford Chance he wrote the legal textbook on takeovers and then presided over scores of deals as chief executive at the merchant bank Charterhouse. Later, as chairman of GUS, the late Isaac Wolfson’s former Great Universal Stores, he presided over the break-up of the company, releasing terrific value for shareholders.
Just days after the trip to the Middle East, Blank saw Brown again at a dinner. HBOS shares were tanking, post the collapse of Lehman Brothers, and the Prime Minister reportedly told him that if Lloyds wanted to launch a takeover ‘“we will deal with the competition issues”.
The forced timetable of the rescue deal, announced just a few days later, meant that it was not just competition rules which had to be expedited but also the normal due diligence that goes with a deal of this size. As Daniels told the Treasury Select Committee, normally Lloyds would have put in “three to five times” more due diligence on HBOS.
Whether or not that would have discovered the losses in the corporate book of Bank of Scotland is not clear. What is known is that Bank of Scotland, run by Peter Cummings, had taken equity stakes in retirement home builder McCarthy & Stone and builder Crest Nicholson and made a number of property loans to entrepreneurs such as brothers Robert and Vincent Tchenguiz. Many are understood to have gone wrong as real estate values have plummeted.
Not surprisingly, the emergence of £11 billion of write-offs at HBOS — now part of the Lloyds Bank Group — has led to an uproar. Lloyds TSB shareholders, who for years enjoyed steady performance and good dividends, have seen their investment collapse.
Following last October’s recapitalisation of the banks, the government already owns 40 per cent of the enlarged Lloyds Banking Group. There is now a fair chance that it may have to increase that stake to bolster the capital base of what had been nicknamed the “big bank” or “Bank of Britain”.
As for Sir Victor Blank and Eric Daniels: their reputations as two of the most effective operators in the Square Mile are under strain.
They are learning the hard way that when you place your faith in government doing you favours — as they did when Brown and Lord Mandelson waived competition rules — it comes with a heavy price attached.