At last, four years after the collapse of HBOS someone is questioning some of the top men who ran the bank. This week the Parliamentary Commission has quizzed Mike Ellis and Phil Hodkinson, the two finance directors, and next week will call Anthony Hobson, the non-executive chair of the audit committee.
Two years ago the Treasury Select Committee went through a ritual humiliation of Lord Stevenson, the chairman, and Andy Hornby, chief executive, but apart from extracting the obligatory grovelling apology from each, no real light was shed on the failings of the board and management to realise the depth of the hole into which they had dug themselves.
They clung to the belief that it was all the fault of the international money markets. If they had not seized up following the US sub-prime crisis, HBOS would still be with us.
Ellis, who was FD from 2001-4 and then came back in 2007, tried the same argument and despite the fact that he claimed he was not trying to be evasive, came across as precisely that. He also seemed defensive. When asked why particularly HBOS was threatened by the disruption of the money markets, he retreated into a recitation of all the prudent steps the bank had taken to increase the maturity of its borrowings, rather than directly answering the point.
Frequently he answered a question with: “I was not there,” even declining to comment on the £7 billion of losses Lloyds was forced to declare on the HBOS loan book for 2008 because he was no longer employed when the accounts were struck – even though he was finance director throughout 2008 when the losses were steadily mounting.
Hodkinson, who was FD in the intervening period 2004-7, was much more direct and precise, and at least gave a plausible explanation of why the bank was brought down, even though it had “stress tested” two worse case funding scenarios, and had built up a safety cushion of £60-70 billion of highly rated securities which it could sell in times of trouble.
The first scenario was that HBOS would be downgraded by the ratings agencies, leading to a loss of retail deposits and would make it difficult to borrow on the wholesale markets. The second was that the wholesale markets would close to all banks.
What no-one had anticipated was that both things would happen at once. HBOS did get downgraded in 2008 as the quality of its loan book in retail mortgages, international and corporate property lending came under scrutiny and the wholesale markets effectively closed to all but the safest banks. The safety cushion was no use because no-one would buy the securities on offer.
The Commission hearings are the closest we have come to trying to get at the truth of the collapse of one of Britain’s largest banks. Having poked fun at Lord Turnbull for his “economical with the truth” reputation, I am impressed by his chairing of the HBOS panel. He has clearly read the papers and the few questions he asks are perceptive and pointed.
The decision to employ counsel was also a good innovation. David Quest, although not the Leveson inquiry’s Robert Jay QC, has done his homework and gets further than MPs and peers would be able to do alone. But this is not a judicial inquiry and Quest is not allowed to cross-examine, meaning that some crucial issues are not pursued.