It seems to me to be gross bad taste to celebrate anyone’s death, but this does seem an appropriate moment to reflect on the impact on the co-operative and wider mutual sector of Margaret Thatcher. This becomes even more apposite because the death so nearly coincided with the publication of the Parliamentary investigation into the collapse of HBOS – the badly led and badly designed bank that emerged out of the demutualisation of the giant Halifax Building Society.
One of Margaret Thatcher’s most significant decisions as Prime Minister was to revolutionise the financial services industry. She led Britain away from its traditional role as a manufacturing nation – a trend which, in fairness, had begun already – towards a service economy. I still recall the respected Keynesian economist J.K. Galbraith warning her that the problem with this economic strategy was that “not everyone can open the door for everyone else”.
At the heart of this new service economy was the financial services sector. To make the UK a world leader we had the ‘Big Bang’ revolution in the City of London in 1986. The old atmosphere of insurance and stock broking almost as a gentlemen’s club was well and truly destroyed – perhaps (inadvertently) one of the most feminist acts by the first woman prime minister. In its place, the City became a multinational hub of the financial world, in which United States , Japanese and German banks were to play as big a role as UK banks.
Small traditional stock broking firms were bought by major international banks. The City expanded, more people were employed and the Government raked in much higher levels of taxes. So much so, that the Treasury regards itself dependent on the tax income – and the Mayor of London dependent on the jobs – even after the economic collapse of 2008 and the £66bn bail-out of two major UK banks.
The ‘Big Bang’ was just one stage in the Thatcher revolution that saw the privatisation of state-owned businesses and the consequent mass ownership of shares that were traded on the London Stock Exchange. The LSE was also substantially changed by the process and itself demutualised in 2000.
As part of the same ideological process of the privatisation of state-owned enterprises, we also saw the demutualisation of many of the largest and most successful building societies. This was achieved as a result of the Building Societies Act of 1986, which created a new legal framework for building societies, encouraged them to engage in activities beyond their traditional mortgage lending, to compete against banks and created rules for members to demutualise societies.
In practice, this meant that if someone were sufficiently fortunate to be a member of a society that had been prudently managed over the preceding hundred plus years, then the current generation of members could benefit through a ‘windfall’. While people in the mutual movement regarded this as immoral, the objection was ignored by the Government and the so-called ‘carpetbaggers’.
In addition, the Government ‘privatised’ the TSB Bank, which although not strictly a mutual, was also not owned by the Government. (Incidentally, the Adam Smith Institute – which has been very influential on the Conservative Party – is now promoting the ‘privatisation’ of Glas Cymru, despite this being a mutual, owned by its customers and not owned by the Government.)
The Building Societies’ Association lists ten societies that demutualised. The Bradford & Bingley was rescued by the Government following the banking crash. Birmingham Midshires was bought by the Halifax and subsequently rescued by Lloyds and the Government. Northern Rock was rescued by the Government. Bristol & West was acquired by the Bank of Ireland, which was rescued by the Irish Government following the financial crisis. National & Provincial was acquired by Abbey, which, like Alliance & Leicester, was bought by Santander. Cheltenham & Gloucester was bought by Lloyds.
That leaves the Halifax, the largest building society and ultimately the biggest disaster of all. We can add to that the Leeds Permanent Building Society, which merged with the Halifax shortly before the enlarged society demutualised in 1995. The following year it expanded by acquiring another demutualised financial services mutual, Clerical Medical, an insurer.
At the time of its demutualisation, James Crosby was a senior executive of the Halifax, as the chief executive of its life insurance division. In 1999, Crosby became chief executive of the parent Halifax company. He was then the main architect of the merger of the Halifax with the Bank of Scotland, to form HBOS, where he was again chief executive.
For the next stages of the HBOS disaster we can rely on the Parliamentary Commission on Banking Standards’ report published at the beginning of the month. The Commission explains that as an emerging player in this exciting new world of banking competition, the Halifax was disadvantaged by its background. It had been a conservative institution, prudently managed and with a business based on mortgage lending and retail deposits.
This was not seen by Crosby as a suitable approach for the future. He oversaw the merger with the Bank of Scotland, which had a more adventurous business model, with a strong commercial banking operation and greater use of the wholesale markets. The merged business then focused on expansion, exploiting the property boom through heavy borrowing on the wholesale markets. But the bank collapsed when the wholesale markets dried up, with HBOS dependent on short term borrowings for long term lending.
But what the Parliamentary report reveals is that although this dependence on the wholesale market was the immediate cause of the HBOS collapse, the bank would have become insolvent anyway – it was not the only problem with the business model.
HBOS expanded faster and further than any of its banking competitors. It made loans where its competitors might not have done and loaned more generously against underlying asset values. More than its competitors, it loaned against inflated property values, leaving it far more exposed when those inflated values deflated. As a result, the levels of its debt write-downs were more severe than those of the other banks, even the Royal Bank of Scotland.
The irony here is that on the basis of the Halifax’s conservative heritage, the directors continued to regard it as a conservative institution – one that took regard of its traditions and only, it thought, making sound decisions on lending. This was nothing less than self-delusion. The reality, says the Parliamentary Commission, was that there had been widespread “incompetent lending”.
“The strategy set by the Board from the creation of the new Group sowed the seeds of its destruction,” concluded the Commission. “HBOS set a strategy for aggressive, asset-led growth across divisions over a sustained period. This involved accepting more risk across all divisions of the Group.
“Although many of the strengths of the two brands within HBOS largely persisted at branch level, the strategy created a new culture in the higher echelons of the bank. This culture was brash, underpinned by a belief that the growing market share was due to a special set of skills which HBOS possessed and which its competitors lacked.
“The effects of the culture were all the more corrosive when coupled with a lack of corporate self-knowledge at the top of the organisation, enabling the bank’s leaders to persist in the belief, in some cases to this day, that HBOS was a conservative institution when in fact it was the very opposite.”
This verdict reminds me of another institution, which might be regarded as offering a parallel experience. It has sometimes been observed that Margaret Thatcher was more in the mould of an 18th Century free trade shopkeeping Whig than a true descendent of the aristocratic Conservatives. But she revolutionised the Conservative Party, just as she did society and the mutual sector. We should just be relieved that even if we are damaged, we still exist.