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Kirk Houghton

Author of The Dividing Lines and Bad Things to Good People

Kirk's Book Reviews

Kirk's Book Reviews

Review of Black Horse Ride: The Inside Story of Lloyds and the Banking Crisis by Ivan Fallon

Posted on May 11, 2016 at 1:20 PM

Black Horse Ride: The Inside Story of Lloyds and the Banking CrisisBlack Horse Ride: The Inside Story of Lloyds and the Banking Crisis by Ivan Fallon

My rating: 5 of 5 stars

Lloyds TSB was the third biggest bank in the world with a market capitalisation of €34 billion in 1996. The mighty Citibank, Barclays and Bank of America were only two-thirds its size, and for a brief spell in 1998 it had the honour of being the biggest banking house in the world. Skip forward ten years to 2006 and Lloyds had slipped to number five in the UK, sixteen in Europe and out of the world top twenty. Barclays, RBS and HBOS looked set to leave it behind in their quest for global growth while Lloyds was reaping 94 percent of its profits from the UK domestic market. City analysts, restless shareholders and yield-hungry investors could be forgiven for seeing it as the most boring and conservative of Britain’s ‘Big Five.’ So how did it end up being 43 percent owned by the UK taxpayer and earning the opprobrium of Her Majesty’s citizens?

Ivan Fallon does a splendid job of chronicling the dark days of October 2008 when the UK Treasury helped to broker a deal that had been off the table for the previous five years. Lloyds had a merger with HBOS at the top of its wish-list prior to the banking meltdown of September 2008, but did not expect the Competition Commission to approve an integration. It had mauled the bank in public and prevented a hostile £19 billion acquisition of Abbey National in 2001. A merger between Lloyds and HBOS would not have happened unless the entire banking system threatened to implode.

Story has it Gordon Brown approached the Lloyds Chairman, Victor Blank, at a Citigroup cocktail party the day after Lehman went bust, giving him an implicit nod to buy up HBOS before it suffered the same fate. Though not as simple as this, not one person in the Labour Government, Bank of England, FSA or in the City thought it a bad deal at the time. In some quarters Blank and Lloyds CEO, Eric Daniels, received praise as saviours of the UK banking industry.

This helps Fallon put a much-needed perspective on Lloyds during this period of crisis, and he’s right to correct perceptions this famous banking house was an accident waiting to happen. Aside from the colossal write-downs and collapsing share-prices of all major banks in 2008-09, Lloyds did a good job of resisting the casino banking and reckless proprietary trading of the fat-cat years. The sweeping history of legendary CEO Brian Pitman is a case in point: under his leadership between 1983 and 1997 Lloyds closed its US and Latin American banking operations and pioneered the modern day ‘Banc assurance’ model that now dominates UK high street banking. Everything from outsourcing call centres to India, cross-selling insurance products to current account holders, targeted mortgage brokering, and commission-based KPIs for retail staff helped Lloyds extract huge profits from the UK market. Few businesses succeed by turning their back on the wider world because it offends the instincts of free-market capitalism. Yet Lloyds increased returns on equity by up to 40 percent in Pitman’s last year, a figure rarely seen in the industry these days.

The main thing the reader comes away with after finishing this book is the sheer scale of the crisis that engulfed the western world. On the day of Victor Blank’s private chat with Gordon Brown at the Citigroup reception America had four global Investment Banks on Wall Street; two days later only Goldman Sachs and Morgan Stanley remained. AIG needed a $90 billion bailout to survive and the HBOS share price had lost a monumental 18 percent in the space of hours. The word ‘Armageddon’ is mentioned too often to describe catastrophic world events, but is not exaggerated here.

Daniels and Blank thought they had the deal of the century, but did not count on the merger being forced through at a shotgun pace for political as well as economic reasons. Daniels in particular believes the Treasury stigmatized Lloyds as one of the irresponsible banks in need of recapitalisation, even though Barclays got permission to raise £7 billion from private sources (mainly the Qatar Government) and did not have to participate in Alistair Darling’s bailout deal in October 2008. In Fallon’s view, the ‘no support without capitalisation’ offer from the government allowed too many exceptions, unlike the US Treasury’s determination to force all major banks to take capital regardless of their health. Yet even this was not enough to mitigate the losses from the HBOS loan book: by February 2009 Lloyds had identified 40 percent of HSBOS’s £432 billion loan assets at risk. By the end of the year they wrote off £18 billion in losses.

Instead of saving the UK banking system, Lloyds got swallowed up in its worst moments of crisis and took a massive hit on acquiring a bank Gordon Brown refused to privatise. The subsequent ‘too big to fail’ subsidy put Lloyds in the firing line of public anger even though it did not cause the crisis and continued lending to SME and home-owners during the credit crunch. Politicians and an excitable media are quick to cite the £46 billion of HBOS losses between 2008 and 2011, but are often guilty of confusing write-offs with provisions. It’s clear the author has a lot of sympathies for the Black Horse.

But though Fallon is right to separate Lloyds from the recklessness of RBS and HBOS, one cannot help feeling he is perhaps too sycophantic towards Victor Blank. Lloyd’s unenviable position as the number one mis-seller of PPI in the period 2000-2009 is also glossed over, despite the fact the bank put aside £6.3 billion in 2013 to cover compensation claims (the largest of any UK lender). And for a bank with an aversion to Derivatives, Fallon forgets to mention Lloyds contributed to an FSA fund of £3 billion in 2012 to compensate business customers forced to take out Interest Rate Swaps as a condition for loan approvals. This is not the behaviour of a cautious or boring bank.

Nevertheless, Black Horse Ride is an instant classic and should still be on the book shelves in ten years. Fallon has a wide network of sources and years of experience as a financial journalist and commentator. Readers not steeped in the intricacies of Mergers & Acquisitions, share price fundamentals and impairment provisions should not be daunted by the subject matter and will find this as good as any introduction to the world of Commercial Finance & Banking.

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