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Tuesday, 13 December 2011

Hostile crapshoots

The FSA wants hostile takeovers by banks to be made illegal, on the basis that it is too risky.

I can't say that I disagree with any of that, but if the FSA had been doing its job properly then hostile bank takeovers would not have been possible. RBS would not have been permitted to blow many billions of capital on a pool of assets that it didn't understand.

The reason there is no criminal penalty for such reckless behaviour is simple.  There is a presumption that banks are sufficiently tightly regulated that they wouldn't be able to do the boardroom equivalent of staking all their chips on red at the roulette table.  There are already criminal offences if directors act recklessly or negligently.  Further sanctions should be unnecessary for banks because they are regulated.

The FSA report reads as follows:
RBS management and Board undoubtedly made many decisions which, at least in retrospect, were poor. They took risks which ultimately led to failure. But if they had taken similar risks in a non-bank company, the question of whether regulatory sanctions were applicable would not have arisen. That is because in non-bank companies the downside of poor decisions falls primarily on capital providers, and in some cases on the workforce, and to a much lesser extent on the wider society.
The ABN AMRO acquisition illustrates the point. The due diligence conducted was inadequate to assess the risks. But it was typical of all contested takeovers, and in non-bank sectors of the economy launching a bid on the basis of limited due diligence might be a reasonable risk to take if the Board believed that the upside opportunities justified it. If the acquisition went wrong, shareholders would suffer, and it would be for them to decide whether to sanction the management or Board by firing them.
The glaring hole is that the FSA was not doing its job.  RBS bought ABN for £50 billion on the basis of 2 ring binders of data and a CD, That is probably too little to support a £10 million overdraft facility, let alone an equity purchase 5,000 times the size.

For the FSA there is a simple 5 step bank supervision process

  1. Why are you doing that?
  2. I really don't think you should be doing that
  3. I said I really don't think you should be doing that
  4. Stop that
  5. You're fired

But if RBS' purchase of ABN is to be treated as a criminal act in future, what is the FSA's reaction to the supposedly friendly but similarly blind pucchase of HBOS by lloyds, which was forced through as a political imperative by Brown & Victor Blank  ...   with scarcely a murmur from the FSA.


Anonymous said...

Hmmm. I had always understood that Victor Blank was more of a 'victim' than an instigator.

Brown had, I thought, led him Satan-like to the top of the mountain and shown him the wealth, prestige, peerage (oh, and market-share) that could be his if he would just put HBOS out of our misery. There was no time for anything so tiresome as due diligence, so Victor and Eric Daniels should just take Brown's word (as a gentleman, pshaw) that "it'll all be okay".

It's hard to see Victor Blank as anyone's patsy, but that was the way I had heard it. Wrong?

Alex said...

Blank was an old Labour party supporter. He was a pretty smart lawyer at Clifford Chance, but at Charterhouse he wouldn't have been a banker so much as an M&A man. When Brown popped the question at a drinke party, Blank wouldn't really have had much of a clue about the riskiness of the HBOS assets (unlike Daniels who was a real banker out of Citi's HNWI/retail side). Blank would have been more worried about getting FSA/ government/ EU approval, but with his pal Gordon leading him up the aisle, the marriage would have been a done deal as far as Blank was concerned.

Anonymous said...

And a very good M&A man he was. I recall the brilliance (at the time, of course!) of the Woolworths buyout. Daniels had, in my view, always demonstrated that he was in tune with Lloyds' traditionally responsible approach. Indeed, it was condemned at the time for its caution, as opposed to the 'exciting' growth of the two Jock banks.

The impetuous nature of the HBOS rescue was so entirely at variance with Lloyds' culture, that the key is surely the degree of pressure which was applied to those two astute men. I wonder if anyone will tell the full story in their memoirs ...

Alex said...

I suspect Daniels will just be happy to get out of the UK and back to the US.

He was invited to run a conservative British bank and being a long term UK resident he probably thought fair enough. After a few years he gets the PM telling him he wants him to do the country a favour, and its all going to be fine with the FSA (who one would reasonably presume had their collective finger on the pulse).

Then it turns out that HBOS is not just a dog but a dead dog, and the press are all over Daniels forcing him to lose bonuses. If it was me I would have packed my bags and left in 2008/9.

Anonymous said...

The 'guilty men' in all this are, increasingly, Brown's toxic dirigiste cabal.

Without them, regulation of the banks would have remained with the Old Lady. That would have thwarted the banks' hubristic expansion fuelled by inter-bank borrowings. It might arguably also have stopped the management of the banks being removed from bankers into the hands of jumped-up slash-and-burn accountants like Fred Goodwin and retailers like Andy Hornby.

Under BoE regulation, neither Northern Rock, Alliance & Leicester nor Bradford & Bingley would have failed so publicly. the Old Lady would have been ahead of the curve, doing her job and forestalling crisis.

Had it not been for Brown and his poisonous crew, and their insane policies, the 2 Jock banks would have grown organically, and would not have failed so spectacularly. Lloyds-TSB would still be the respected name it was, and 'we' taxpayers would be countless billions richer.

Years ago, I was at a presentation in Geneva at which Roger Nightingale was castigating the management of the respected Midland Bank for their catastrophic purchase of Crocker Bank and subsequent fire-sale to Wells Fargo, which largely led to the destruction of Midland. "They should be dragged through the streets in tumbrils, for public humiliation."

One of the Swiss gently observed that one of the architects of the deal was dead. "So what?", said Roger, "He should be dug up and have knives stuck in him." And that's pretty much how I feel about the damage that Gordon Brown and his chums have done. Yet they seem largely to escaped censure, and Ed Balls even has the nerve to masquerade as Shadow Chancellor, pretending financial competence.

Alex said...

I think if you search back through the pages of this blog, I have been saying the same thing for the last 3 years or so, both about the FSA, bank supervision and the fact that so many people running the banks that failed were not bankers in the old fashioned sense (i.e. someone who knew how to lend money that they were likely to get back).

In the US, no-one would get to run a licensed deposit taking bank (as opposed to a trading investment bank) if they were just an accountant, a trader or a retail specialist like some of the heads of UK institutions.