Treasury Select Committee: Bonfire of the bankers

The former top bankers of HBOS and RBS apologised, but spread the blame for the financial crisisin evidence to MPs yesterday

They may have made the requisite apologies, but the fallen bankers from Royal Bank of Scotland and HBOS spent most of their appearance at the Treasury Committee sharing the blame around and protesting that they were the victims of events out of their control.

After saying sorry, the bankers were asked by the chairman, John McFall, if they believed that Alan Greenspan's "great moderation" of high growth and low interest rates would last for ever. Lord Stevenson, the former chairman of HBOS, said the bank did not believe slavishly in the new paradigm, but added: "Yes, the prevailing view best exemplified by Mr Greenspan... was bound to have an influence on us and other people in the world."

Lord Stevenson and Andy Hornby, his former chief executive, admitted a number of times that their over-reliance on wholesale funding markets had caught them out. HBOS had spotted that markets were getting more difficult, and had cut its mortgage market share, reduced dependence on very short-term funding and tried to raise more retail deposits.

Sir Fred Goodwin, the former chief executive of RBS, said his bank knew that the economic good times would come to an end at some point, "but nobody predicted the speed ... The way it has happened so profoundly and globally has caught everyone out".

His ex-chairman, Sir Tom McKillop, admitted that RBS did not spot that spreading risk around the world with an "originate and distribute" policy could blow up in a bank's face if no one knew where the risk was. "We did not see that coming," he said. "We had no way of spotting the interconnectedness and how quickly it all turned out."

The Government bailed out the UK banking system in October because RBS and HBOS were in danger of imploding after confidence disappeared in the wholesale and equity markets.

RBS, which had already raised £12bn in capital from shareholders earlier last year, was forced to take £20bn from the Government. HBOS, which had already been forced to agree an emergency takeover by Lloyds TSB, needed £10.5bn.

RBS bought NatWest in 2000, and made a string of acquisitions, culminating in 2007's disastrous takeover of ABN Amro's investment banking and Asian businesses. It also rode the wave of the credit boom by turning its corporate bank into a debt powerhouse.

HBOS was formed from the merger of Halifax and Bank of Scotland in 2001, and set about competing with the big four banks on price in retail banking and expanding Bank of Scotland's commercial property-based corporate bank.

The ex-RBS bankers made their fullest admission yet that the bank's £10bn acquisition of ABN Amro was wrong-headed.

Sir Tom said: "In retrospect, we bought ABN Amro at the top of the market ... In fact, I'm sorry we bought ABN Amro." The bulk of what RBS paid for ABN will be written off as part of up to £20bn of goodwill writedowns in the bank's results later this month, he said, adding that the deal was "a big mistake".

"You failed," Michael Fallon, deputy chairman of the committee, told Sir Tom.

"At the time it didn't look like that," Sir Tom replied, adding that the bank's shareholders and the Financial Services Authority approved the deal.

Sir Tom defended the RBS board against charges that they allowed Sir Fred to intimidate them to drive through the ABN deal, and said that at every meeting that discussed the acquisition there were questions raised. Different members had strong views about which were the businesses in the Dutch bank that RBS should go for, but directors were unanimous that the bank should take the opportunity to battle Barclays to try to buy ABN, he said. RBS had gone ahead even after the credit crunch started because ABN had put out a "reassuring" statement saying that it had not been affected by the financial freeze.

Mr McFall scoffed at this response, saying RBS had fallen for ABN's message.

Sir Fred defended his record of more than 25 acquisitions at RBS, saying that most of them were small and, yes, were approved by shareholders.

"It is a reality in business that you have to make judgements and predict the future, and you don't always get it right. There were no glaring missteps in the way that ABN [was]," he said.

The bankers said they were under pressure from shareholders to produce ever greater returns, and that investors changed their tune as the credit crunch got worse.

"I would say the thrust from most institutional shareholders was: increase the dividend, do share buybacks, don't sit on capital and run a tight balance sheet," Sir Tom said.

"At the end of 2007, people became much more preoccupied with capital ratios." But even in early 2008, when he sought the views of investors, there was a very wide spread of opinions on how to raise capital if necessary, he added.

Lord Stevenson recalled that after another mortgage bank announced it would need less capital under the new Basel 2 capital rules, HBOS "came under huge pressure to make such an announcement – and you feel it."

Mr Hornby was careful not to blame his predecessor, Sir James Crosby, explicitly for any of the bank's woes, but was also willing to point out that certain events happened before he became chief executive.

When he took over, Mr Hornby stopped the bank's share buy-back programme and pulled back on mortgage market share to conserve capital, he said.

Criticism of bankers' pay was too crude, they said. Mr Hornby told the MPs he had lost more money than he had earned in over two years as HBOS chief executive, and had invested all his cash bonuses over 10 years in the bank's shares. Sir Fred said he had lost £5m, and had never sold an RBS share.

Sir Tom, who left the chairmanship of RBS two weeks ago, said there was a need for a fundamental review of how banks pay their investment bankers "across the board in a fairly coherent and consistent way", because if only certain banks tame the bonus culture, their top people will walk out. "That is a big challenge," he added.

Sir Fred took a different view, saying that RBS's investment bankers operated within their risk limits, and that pay did not play a big part in the positions they took.

But RBS expanded aggressively in debt markets and paid good money to attract bankers to its burgeoning business. Sir Fred claimed this did not make him happy.

"Many practices were imported from the US. This has been a source of angst within banks," he told the Labour MP Nick Ainger. "It is very, very difficult for any chief executive to make a change. It is absolutely the culture."

The problem, according to Sir Fred, was "how risk was calibrated", so that AAA-rated securities turned out to be worth 5 cents in the dollar. For that, the credit rating agencies and the investors who used the "language" of the agencies were partly to blame, he suggested.

Ultimately, no one could have predicted what would happen when Lehman Brothers was allowed to go bust in September. That turned a bad situation into a disaster, sealing their fate.

Under-fire bankers will seek to end fury over bonuses at Treasury Committee

Britain's top bankers will try to draw a line today under the political row over pay and bonuses when they face a grilling at the Treasury Select Committee.

Stephen Hester, the chief executive of Royal Bank of Scotland, is under intense pressure from the Government to limit bonuses paid to investment bankers at RBS, which is propped up by £20bn of taxpapers' money.

Mr Hester, who took over the helm at RBS in November, will stress that bonuses are necessary for RBS to keep its best bankers.

But he is likely to tell MPs on the committee that cash bonuses will be limited to £25,000, with the rest linked to RBS's battered share price. Bonuses will only go to those who have brought in revenue, and any surviving bankers responsible for the credit losses that have caused RBS's losses will not be rewarded, he will add.

The total bonus pool in Global Banking and Markets, RBS's investment banking division, is also likely to be at least 60 per cent down on last year's £1.83bn payout.

Despite attacks from the Prime Minister, the Government is said to understand the need to ensure that RBS bankers in markets such as foreign exchange, which probably had a record year, do not walk out of the door.

RBS has not finalised details of its new pay plan, which could also include linking investment banking rewards to the value of illiquid assets that could recover when capital markets unfreeze. A similar plan has been adopted in Switzerland.

Mr Hester is also likely to stress that most of RBS's bankers earn far less than the millions enjoyed by top investment bankers and that branch staff on £15,000 or less rely on their annual bonus as a key part of their income.

Barclays said on Monday that total bonuses for 2008 were down 48 per cent, with those for bankers at Barclays Capital, the investment bank, dropping further. The bank has pledged to revamp its pay policies to be in tune with the times.

Unlike RBS, Barclays has not accepted state money to support its capital ratios but has faced attacks for paying bonuses to investment bankers while taking advantage of liquidity support and credit guarantees from the Government.

John Varley, Barclays' chief executive, will tell the committee that the bank recognises a new mood and that the banking sector has to take some responsibility for the economic crisis.

He will tell MPs that Barclays understands the need for moderation in pay but is likely to defend stoutly Barclays' right to pay bonuses for high-performing bankers.

RBS and Barclays were Britain's two main players in the once-booming debt markets. Last month, Mr Hester predicted a loss of up to £28bn at RBS for last year on acquisition write-downs and losses from credit assets. Barclays announced more than £8bn of writedowns on toxic assets on Monday but was still able to post an annual profit.

Also appearing in front of the Treasury Select Committee will be Eric Daniels, the chief executive of Lloyds Banking Group; Paul Thurston, the head of HSBC's UK bank; and Antonio Horta-Osorio, the chief executive of Abbey.