PM's adviser blamed for collapse of HBOS

Former chairman of doomed bank 'sacked whistleblower who raised the alarm'

Andrew Grice,Nigel Morris
Wednesday 11 February 2009 01:00

The Government's crisis over the banks deepened last night when one of Gordon Brown's key advisers was accused of sacking a whistleblower who predicted that reckless lending by banks would end in disaster.

The record of Sir James Crosby, now the deputy chairman of the Financial Services Authority (FSA), in his previous job as the chief executive of HBOS, was called into question in explosive evidence to MPs by a senior official who raised the alarm that the bank was growing too fast and over-reaching itself.

Paul Moore, a barrister who was the head of regulatory risk at HBOS from 2002 to 2005, told the Treasury Select Committee that Sir James was the "original architect" of HBOS's doomed expansion. It was rescued by Lloyds in an emergency takeover last autumn. The new banking group received £17bn of taxpayers' money.

Mr Moore said: "It is now clear that this disastrous 'grow assets at all costs' strategy was what led to HBOS's downfall and humiliating demise by the forced acquisition by Lloyds." Sir James, who was knighted in 2006 on the Government's recommendation for his work in financial services, completed a major review of the mortgage market for the Treasury in November.

In a nine-page statement to the committee, Mr Moore added: "Some might now also question what his 'contribution to financial services' has in fact been when this will have led to millions of people in excessive debt, thousands who will lose their jobs and many more whose balance sheets have been impacted by the precipitous fall of the HBOS share price – apart from the reduction in competition in the retail financial services market threatened by the new Lloyds Group."

Urging the MPs to summon Sir James, he suggested that the FSA watchdog was reluctant to look into his complaints because Sir James was one of its non-executive directors at the time – an appointment made by Mr Brown as Chancellor. Sir James may now be quizzed after John McFall, the committee chairman, promised Mr Moore's claims would be "looked at".

Sir James did not comment. Lord Stevenson of Coddenham, former HBOS chairman, told the MPs that Mr Moore's allegations had been taken "very seriously" but that a nine-month inquiry had rejected them as untrue.

Mr Moore, who claimed his dismissal was Sir James's decision alone, said he signed a "gagging clause" and allegedly received substantial damages. He alleged that his team was met with "threatening behaviour" by some executives when it tried to raise their concerns.

"Being an internal risk and compliance manager at the time felt a bit like being a man in a rowing boat trying to slow down an oil tanker," he said. "Anyone whose eyes were not blinded by money, power and pride could have seen the explosion of 'excessively easy credit' was leading to disaster. But, sadly, no one wanted or felt able to speak up for fear of stepping out of line with the rest of the lemmings who were busy organising themselves to run over the edge of the cliff behind the pied piper CEOs and executive teams that were being paid so much to play that tune."

Yesterday four bankers blamed for the crisis said they were sorry for the problems, but insisted they had lost millions too as their shares collapsed. However, Andy Hornby, the former HBOS chief executive, said he did not feel "particularly personally culpable".

The Royal Bank of Scotland, in which the Government has a 68 per cent stake, announced 2,300 job cuts – about 2 per cent of its 106,000 UK workforce. The bank, which plans to pay bonuses of about £1bn, is under pressure to announce a £25,000 cap on individual cash bonuses when its bosses appear before the Treasury Committee today. Chief executive, Stephen Hester, is set for a grilling, alongside his equivalents from Lloyds (Eric Daniels), Barclays (John Varley), Abbey (Antonio Horta-Osorio) and HSBC (Paul Thurston).

Ministers are braced for more grim news. The unemployment figures, which stood at 1.92 million at the end of November, will near or exceed the 2 million mark when the statistics for the end of 2008 are published this morning.

George Osborne, the shadow Chancellor, said: "Given that Gordon Brown appointed Sir James deputy chairman of the FSA and relies upon him as a key economic adviser, the Government needs to investigate the allegations."

Vince Cable, the Liberal Democrats' Treasury spokesman, said that at HBOS Sir James privately accepted the banks were taking risks, the banker was "smart enough to realise he was on a very dangerous treadmill", he said. In meetings with him, Sir James argued he would be "fired" if he changed HBOS's behaviour while other banks pressed on, Mr Cable claimed.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

View comments