'Never outstay your welcome' was Crosby's motto. A shame he didn't follow his own advice

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The Independent Online

The financial crisis finally seems to have caught up with Sir James Crosby. As HBOS, the bank he created, came close to collapse last year, Sir James was working on a report about the mortgage market for the Government and was also deputy chairman of the Financial Services Authority (FSA). Having quit HBOS a year before the credit crunch began, he had avoided the attacks faced by his young successor, Andy Hornby, and other banking bosses. His standing was so high that when the Government was looking for a new FSA chairman early last year, Sir James was regarded as the front-runner but did not want the job.

But he was forced to resign from the watchdog yesterday after HBOS's former regulatory risk officer alleged that he was fired by Sir James for repeatedly warning that the bank was growing too fast.

In evidence to the Treasury Select Committee, Paul Moore said Sir James, and not Mr Hornby, was responsible for the bank's push for "growth at any costs" that, he argued, led to the bank's demise.

Under Sir James, HBOS set out to shake up British banking with an aggressive drive to take business from the big four banks. The new "fifth force" competed on price and marketed retail-style products in campaigns that rubbished the value and service offered by Barclays, Lloyds TSB, HSBC and RBS.

But HBOS was forced to agree a sale to Lloyds TSB last year in a government-brokered deal. Lloyds is prepared to take the short-term pain of HBOS's rising bad debts to gain a dominant share of the UK banking market, undoing all Sir James's work. Mr Hornby and his former chairman, Lord Stevenson, took the flak from the committee on Tuesday but Mr Hornby was willing to point out that certain events, including Mr Moore's firing, took place before he was chief executive. Sir James is now almost certain to face a grilling of his own.

Lord Stevenson told the committee that he remembered Mr Moore's allegations but that HBOS had reviewed its sales practices and got FSA approval. He and Mr Hornby also insisted that HBOS's problems stemmed not from aggressive loan growth – Mr Moore's main charge – but from over-reliance on wholesale money markets to fund lending.

But the markets lost confidence in HBOS partly because of its massive exposure to residential mortgages – including a big buy-to-let book – and commercial property, both of which expanded rapidly when Sir James was chief executive. Its increasing reliance on cheap debt in the markets to finance its loans also left it in serious peril when those markets froze.

Sir James worked in the insurance industry before joining Halifax in 1994 to run life insurance and his appointment as chief executive took the City by surprise in 1999. He convinced the board he was the man for the top job with a sales-driven push to take on the big banks using marketing and product ideas from the world of retailing.

In his first year leading the bank, he signed up Mr Hornby, a high-flying Asda executive, to head retail banking and came up with the idea of using staff members in adverts, introducing Britain to Howard Brown the singing banker. His boldest step came in 2001 when he drove Halifax's merger with Bank of Scotland to create HBOS, keeping the top job in the bank. HBOS added Bank of Scotland's corporate banking business to Halifax's retail brands to take on the big four.

Sir James made himself unpopular with the City in late 2001 by asking shareholders for £1.5bn of new cash to fund growth. That allowed HBOS to go on a lending binge during the economic slowdown when margins were fat, reaping strong profit growth. But the bank's growth did not slow when he returned the cash, as promised, by buying back shares a few years later.

The timing of Sir James's departure from HBOS in July 2006 took people by surprise. The bank was apparently in rude health, he was only 49, and he had no proper job to go to. "One should never overstay one's welcome," he said. "I do like the idea of not being carried out on my last legs."

There was also the matter of Mr Hornby, who had been promoted to chief operating officer to prevent Boots from luring him as chief executive. HBOS was desperate to hold on to its whizz-kid and this was believed at the time to have played a part in the timing of Sir James's exit.

Simon Maughan, banking analyst at MF Global who worked closely with HBOS at one of its brokers, said the power of Mr Hornby and Peter Cummings, who ran the corporate bank, should not be underestimated because Sir James gave them freedom to run their businesses. "He was a sensible chap. Could he be difficult and obstinate? Yes he could. But I think he was intelligent and fair," said Mr Maughan.