UK: Banks bloodied and bowed. (2 of 3)

UK: Banks bloodied and bowed. (2 of 3) - The lapse of loyalty was quickly taken on board by the banks, but some firms' swaggering attempts to sidestep credit controls were harder to swallow. "A few of these corporate treasurers were adept at not revealin

Last Updated: 31 Aug 2010

The lapse of loyalty was quickly taken on board by the banks, but some firms' swaggering attempts to sidestep credit controls were harder to swallow. "A few of these corporate treasurers were adept at not revealing all," Lord Inchyra says. "You could ask, but if you weren't given the answer, or were given a misleading answer, you were unlikely to spot it ..."

Many observers, however, throw the blame right back at the banks. Says IBCA's Munro-Davies: "What is amazing is how little attention was paid to credit. Credit officers were even kept away from the clients because they might annoy them."

The banks deny vociferously that their credit procedures slackened. But certainly credit standards did change. Whereas in the past banks had lent money against the borrower's assets, they now began to emphasise future income flows, based on an assessment of the company and the economy. "So clearly there are things that are done with 3 to 3.5% (economic) growth that looked at now wouldn't be done," says National Westminster's chief executive of UK financial services, Derek Wanless. "The risk was right at the time."

But did the sheer steepness and length of the boom not start alarm bells ringing? Replies Wanless: "Not many people forecast that interest rates would go to 15% and stay there and that economic growth would go to negative."

The pressure-cooker effect built up quickly in the once sleepy banking sector. Barclays, under chairman Sir Timothy Bevan and then Sir John Quinton, led the charge on the corporate sector, thus retrieving its briefly lost crown as the biggest UK bank from NatWest. In October 1986 Big Bang, the deregulation of the financial sector, set off another banking fashion disaster. There was a scramble to buy up stockbrokers and market makers. "'We have to be there' was the cry," recalls Nomura banking analyst John Tyce. "And then many of them rued the day."

The broking firm's former owners retired to the country, while the banks veered with their extra baggage towards the biggest stock market crash since 1929. Bank of Scotland group chief executive Bruce Patello mulls over the impetus behind it: "I suppose it all gets back to egos and individuals wanting to stamp their personality on a bank. There simply wasn't the skill and experience to manage organisations that they weren't familiar with."

The stock market crash of October 1987 sealed that grave. But business confidence flagged only briefly. Worldwide, banks were still throwing money at customers, with the aim of preventing an economic collapse. Unfortunately it succeeded too well. The increasingly brittle boom had only begun.

By now banking was a whole new game. Leveraged buyouts (LBOs) and management buyouts (MBOs) involving huge sums had gained unprecedented respectability. But some incentives were misplaced. Many banks set targets for their managers in terms of the volume of lending or the number of deals struck. "Or even if you targeted people by profit," says Standard Chartered's Williamson, "you'd still have the concern that some lenders would say 'OK, make the deal, make the profit and maybe I'll get promoted before everything hits the fan'. And the bad debts come later."

Worse still, LBOs imported from the US turned into an invidious disease. The original LBOs were highly attractive to the buyer. The shares of the targeted company were bought up relatively cheaply (sometimes "a rip-off to the shareholder who was blackmailed into agreeing", says one insider), bits were sold off, and the debt quickly repaid.

But as the game caught on, "natural" deals became scarce, and fee-hungry advisers began to manufacture all sorts of buyout possibilities and "sell" them to corporate bidders and their banks. The subsequent debt burden proved crippling for companies like retailers Lowndes Queensway and Isosceles.

At the same time syndications of 50 or 100 banks became popular. It spread the risk, but also meant that no one banker knew the full story about a company. New financial instruments - securitisation (where a set of loans is sold on the market), interest rate swaps, options, futures and their derivatives - were eagerly embraced. "You got in one or two whizz kids who claimed to understand them," says one bank official. But at times "either the banks got the controls wrong or the kids weren't as whizz as they thought".

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