A venerable Bank of Scotland General Manager, now long retired, once told me that Scottish bank managers looked deep into your soul and only when they were convinced you did not need the money would they agree to lend to you.
A similar sentiment came in remarks at the Parliamentary Commission hearings from Justin Welby, the next Archbishop of Canterbury. Recalling his time as an oil trader in the 1980s he likened trying to borrow from Peter Burt and Gordon McQueen at the Bank to “screwing blood out of a stone to get them to part with their precious money.”
How did we go from that to the situation described at the trial of serial fraudster Achilleas Kallakis, who was jailed for seven years? This former estate agent and his counterfeiter accomplice, pretended to be high rolling developers backed by a major Hong Kong property company. The fraud was simple: they rented offices in Mayfair, produced reams of fake documents and hired an actor to impersonate a Hong Kong executive.
Like all good illusionists they could rely on their audience to be easily distracted and to believe what they wanted to believe.
They didn’t have to be terribly sophisticated. Like all good illusionists they could rely on their audience to be easily distracted and to believe what they wanted to believe.
Bank of Scotland lent Kallakis €26 million to convert a 100 metre passenger ferry into a luxury yacht. They disregarded warnings from their own legal advisers and relied on letters of assurance from a Swiss lawyer, believed by the prosecution to be part of the conspiracy.
The Bank wasn’t alone. Allied Irish lent the fraudsters £750 million and other banks duped included Bristol & West (now part of Bank of Ireland), Barclays and GE Capital, which financed a private helicopter and a corporate jet.
Why were all these bankers so easily fooled? I believe it all becomes explicable when you understand the changes in management organisation in banks over the past 20 years. Under the old system, when managers stayed in post for years at a time, the originator of the loan remained responsible for it. When he (it was usually ‘he’) made the decision he had to weigh the profit the bank would make against the risk it was running. If the loan went bad it could blight his career.
By the time of the credit boom the two functions had been separated. The dealmakers worked to sales targets – and their bonuses and their future prospects depended on reaching or exceeding them. Risk assessment was outsourced to risk departments and risk committees, who were regarded within banks as a lower form of pond life.
As the FSA report into Bank of Scotland corporate found, the dealmakers had no problem in brow-beating the risk department and a “culture of optimism” reigned. But optimism is no substitute for hard headed risk assessment.