Although Robert Peston has recently been criticising HBOS for the behaviour that led to it running up massive losses, a look through his book published as recently as last year shows him repeatedly praising HBOS for some of the very actions that are now being criticised.
For example, in late February, Robert Peston wrote on his BBC blog that,
For all the criticism of the alleged excessive risks taken by HBOS’s mortgage department – as per the charges levelled at the bank by its former head of regulatory risk, Paul Moore – the most reckless lending and investments were made by the bit of the bank that provides services to companies…
It made the classic mistake of doing what bankers used to call “pig-on-pork”, or taking equity stakes in creditor companies.
As I’ve said before, it is amazing that the Financial Services Authority, the City watchdog, didn’t feel it was appropriate to rein in HBOS’s corporate lending department.
In particular, it’s odd that the FSA didn’t apparently appreciate that the ability of a lender to properly assess credit risk can be dangerously damaged when that lender thinks it’s going to make massive returns on equity investments (the notorious “pig-on-pork”).
Note that phrase, “classic mistake”. So when last year Robert Peston published his book*, Who Runs Britain?, what did he have to say about such behaviour?
It certainly features a few times in the book, because Peston goes into some detail into the dealings between businessman Philip Green and Peter Cummings of Bank of Scotland (which merged with Halifax to become HBOS).
When Peter Cummings arranged for his bank to lend money to Philip Green, he frequently secured as part of the deal an equity share in the operation his bank was lending money for. In other words, this was the sort of “pig-on-pork” transaction that Peston now says is a “classic mistake”. But how did Peston write-up these actions in his book? Here’s how:
Bank of Scotland would make a spectacular return on this [pig-on-pork] investment. [p.71]
Cummings has never been proved wrong to back Green. And his employer, HBOS, has made a great return from the relationship, because it has tended to take equity stakes in his deals. [p.96]
Does this all matter, other than giving a chance to smile to those who have been out-scooped or embarrassed by Robert Peston’s more recent reports? I think it does, because avoiding similar mistakes in the future requires a proper understanding of the mistakes of the past, one of which seems to be the degree to which not only those in the financial sector but also those reporting on the financial sector forgot some “classic mistakes”.
* All references are to the hardback edition of the book.
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2 Comments
Your quotations are a little selective and misrepresent what Peston wrote and the point he was making.
On p.95 he wrote of Green “This private-equity superstar and his competitors eventually got what they wanted from the banks with more money than sense. Green’s astounding record may therefore have played a role in creating the conditions for the private-equity banking crisis of 2007.”
He goes on to explain how the big lending banks were stuck with huge loans to private equity financed companies, that they could not write off this debt and that they had to write down in value etc.
Cummings and BOS did not make a mistake in financing Green, but they make plenty of mistakes in assuming that their other investments were going to be similarly successful.
Mark: certainly there are things Robert Peston is saying now that are consistent with what he said previously. But what I highlighted in my post is a case where he’s now describing something as a basic error that he himself didn’t describe as such as recently as last year. I don’t think anything in your further quote undermines that point. “may therefore have played a role” is very different from a “classic mistake”.