There are still many lessons to learn from the financial crisis

MANY of us still remember vividly the events of 19 March 2008, when HBOS’s share price suddenly collapsed early in the morning, triggering intense interest in newsrooms and trading floors, and prompting the bank and the authorities to issue almost unprecedented denials. Laughably, HBOS claimed that it had “an exceptionally strong balance sheet.”

The episode had a major impact on the public, with many believing that speculators were trying to take out innocent banks; an episode of Spooks, the BBC TV series, featured a storyline inspired by this narrative. The FSA couldn’t pin down what happened: it concluded on 1 August 2008 that “despite the likelihood the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt … to profit by manipulating the share price.”

Yet despite all of the rubbishing of “scare stories”, on 18 September 2008 HBOS was forced into the hands of Lloyds TSB following an absurd deal brokered by Gordon Brown; the new Lloyds Banking Group had to be semi-nationalised. HBOS was brought down by genuinely bad banking. Those who thought that HBOS had a problem on that fateful March day were right – even though the actual rumours were wrong (assuming that the FSA’s description of them, in a document on its website, is correct).

James Crosby has now done the right thing. He ran HBOS until 2006 and then – in a reminder of the system’s farcical nature – was appointed by Brown to the FSA, becoming vice-chairman. The Labour government had quite a knack for picking winners. He was awarded a knighthood for running a bank; yet destroyed it. So it is right that he is giving up his title, as well as part of his pension.

There are important issues, however. First, while it is right that in some cases senior figures pay this kind of price – and it was right that Fred Goodwin lost his knighthood – more generally failure shouldn’t mean demonisation. Some companies do well and others fail. It shouldn’t be illegal to go bust (as long as laws aren’t broken). The personal costs of failure shouldn’t become too large, or else nobody will have a go.

Second, business leaders should still be awarded honours – they create the wealth that pays for everything else, and are already culturally, albeit not financially, under-valued – but they should be given out with greater care.

Third, it shouldn’t only be bankers that are singled out. What about Sir David Nicholson, the CEO of the NHS, who has presided over a catastrophic number of avoidable deaths as part of the Mid Staffs scandal? What about Sir Alan Greenspan, blower of bubbles extraordinaire, also knighted by Brown? Why have so many failed politicians that wildly over-spent ended up with seats in the House of Lords, once the electorate kicked them out? Why do civil servants award each other so many honours, often as rewards for failure?

Finally, we should never forget the powerful economic forces that were the backdrop for HBOS’s corporate stupidity. The epidemic of errors across the industry didn’t happen spontaneously: they came about because of cheap money from central banks, implicit guarantees, moral hazard, silly capital adequacy rules, governments that backed cheap credit and homeownership at any cost, the supposed “end of boom and bust” and a widespread misunderstanding of risk. The errors were cheered on by shareholders, politicians, regulators and academics.

The business leaders in charge should pay the price – but so should all the other guilty parties.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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