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We Can't Blame The Bankers For The HBOS Collapse: There Weren't Any Bankers There

This article is more than 8 years old.

The Bank of England has just published the long awaited report into the collapse of Halifax Bank of Scotland, more formally known as HBOS after their merger. And the really interesting thing about this report, together with the others into that great crash, are that in the UK experience all of this was absolutely nothing at all to do with investment banking, casino capitalism, securitised mortgages or any of the other things that people tend to blame it all upon. More impressively, we can't even blame this on the bankers: because to a reasonable approximation there weren't any bankers at the company, not at the top at least. It's not even a story of inadequate regulation: there was plenty of law to cover what was going on, it just wasn't used. That is, a story perhaps of bad regulators, but not an absence of them nor regulatory powers.

The Bank of England report is here and this paragraph needs to be understood by everyone:

This Report produced by the FCA and PRA explains why HBOS failed in October 2008 and sets

out conclusions and recommendations. The story of the failure of HBOS is important both to
provide a record of an event which required a major contribution by the public purse, and
because it is a story of the failure of a bank that did not undertake complicated activity or
so-called racy investment banking. HBOS was at root a simple bank that nonetheless managed
to create a big problem. In covering the failure of HBOS, the FCA/PRA Report describes a period
which is by now well-known and on which much commentary has already been written. For that
reason, the general conclusions to be drawn from the Report are not new. Moreover, the
recommendations have been kept concise by not including points where in our view major
changes resulting from the lessons of the financial crisis have been implemented. Instead, the
recommendations cover areas where work is under way but further steps are being taken to
complete implementation.

HBOS just didn't do any of the things that people blame the crash in general upon. There was, to a reasonable approximation, no investment bank there, no involvement in securitised loans like MBS, nothing in the CDS or CDO book, no high frequency trading. The bank went bust the old fashioned way: it lent too much money to people who couldn't pay it back.

And that's simply it.

The three great failures of the time were as follows. Northern Rock, which suffered a wholesale bank run. This stuff happens in fractional reserve banking and while their strategy was at risk of this it wasn't an absurdly awful strategy for them to follow. Their loan book, which the government took over, has just been sold at a profit for example. Perhaps they should have got liquidity assistance but they weren't systemic so they didn't and that's that then.

The second was RBS, and they went bust simply because they grossly overpaid for ABN Amro. Yes, there were subsidiary issues as well, but that's the main over arching one.

And now we've the third, HBOS, which went bust as banks have been going bust for millennia. Simply lending to people who don't pay the cash back. Lloyds got into horrible trouble, entirely true, but that's because they were armtwisted into taking over HBOS to stop it entirely collapsing into a pile of smoking rubble. If the government had supported HBOS, instead of getting Lloyds to do it and then having to support Lloyds then Lloyds would not have run into trouble.

But note what this means: it was nothing to do with the investment banking side of anything. Nothing to do with traders chasing bonuses, nothing to do with securitised loans, nothing to do with casino capitalism at all. And yet all of the work to prevent this happening again is on the regulation of the bonuses of traders who had nothing to do with it, on the securitisation of loans, similarly bereft of responsibility.

We might even conclude from that that those who set public policy don't understand what they're doing. Or even, possibly, that they do but have an axe to grind and any excuse is good enough.

Finally, we can't even blame the bankers here:

Key to this failure was a lack of managers with knowledge of risk management, the report found, and a board with little experience of banking.
Just one non-executive director had experience of banking and he was appointed only in May 2007, when much of the damage had already been done.
Meanwhile the bank appointed group risk directors with little experience in the area.
Even the chief executives lacked experience. Mr Crosby was an actuary by training, rising through Halifax Life rather than the banking division, while Mr Hornby’s background was in the retail sector.

Because, again to a reasonable approximation, there were no bankers involved in senior management or oversight.

But, even though we know now that it wasn't bankers or casino capitalism to blame all of the policy focus is still on bankers and casino capitalism. Sigh.

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