Scarcely a week passes without disclosure of fresh scandal for Britain's banks. The image of the lenders has been battered and the reputation of those that ran them tarnished. The current management of Britain's largest bank, HSBC, was seriously damaged by disclosures of tax avoidance and evasion on a grand scale at its Geneva private bank. Lloyds Bank is still cast as a villain over its takeover of the deeply flawed Halifax Bank of Scotland (HBOS) in 2008. Two new studies, one a history of HSBC and the other on the Lloyds-HBOS deal, cast fresh light on how the harm was done.
At HSBC, the can of worms that was opened earlier this year is traced back to the late Edmond Safra, a scion of the renowned Sephardi banking dynasty. At Lloyds, we get a clear inside view of the role that Anglo-Jewish business leader Sir Victor Blank played in engineering the contentious HBOS transaction.
In February 1999, Sir John Bond, chairman of HSBC received a visit from a City intermediary who informed him that Safra, founder of the Republic Bank of New York, was in ill-health and wanted to sell. The Safra family hailed from Aleppo in Syria and had been bankers for generations. Among its clients were the leading Sephardi Jewish diaspora as well as wealthy Arab potentates.
Republic was the third largest retail bank in New York but, more significantly, was one of the world's best-known private banks offering wealth services to clients across the US and in Switzerland, Luxembourg, France, Germany, Gibraltar and Monaco. It had $56bn of assets under management. After a series of meetings and cursory due diligence a $10.3bn price was offered and Safra, the sole shareholder, accepted with alacrity. HSBC, with its rich client base in Hong Kong and Asia, saw Republic, with its private banking base, as an ideal fit. At the time, it was the biggest overseas acquisition in British banking history. So keen was HSBC to complete the deal that it all but brushed aside a revelation that Republic had breached securities laws in Tokyo and was under investigation for perpetrating an alleged fraud on Japanese investors.
The episode should have been a warning that behind the secrecy of the Safra private bank, regulation could be a problem. It should have been obvious from a branch network that included the notorious tax havens of Switzerland, Monaco and Gibraltar.
Moreover, some of the files at the private bank were so secret that accounts were still maintained in an ancient Hebrew-Arabic notation. The mystery around the Republic banking operations made headlines 24 hours after the deal was completed when, on December 2 1999, Safra was found dead after a fire in his Monaco apartment. It followed an incursion by masked intruders.
It should have been obvious to HSBC that the Safra private banking operation was far from conventional. Just how off the conventional map it was became clear in February this year when computer files containing the details of 30,000 accounts were removed from the Geneva branch and handed to the French tax authorities.
The files were a treasure trove containing the details of financial transactions by celebrities, African dictators and wealthy political donors. HSBC's chief executive Stuart Gulliver was caught up in the ensuing imbroglio when it emerged he had arranged for his own financial affairs to be managed through the Geneva branch and a network of companies in Panama. The goal of this elaborate arrangement was to shield his pay from his colleagues in line with the privacy that the Safra banks offered.
The Lloyds banking volume, Black Horse Ride, is largely an attempt to rebalance the debate over the emergency 2008 rescue of HBOS.
Victor Blank has long felt he was treated unfairly. Blank, the former chair of Wolfson-founded GUS, had become chairman of Lloyds TSB in 2006 proudly becoming one of the first Jews to head one of Britain's clearing banks. When other banks were still engaged in massive expansion, Lloyds TSB was criticised for sticking to its guns and slimming down globally. It managed to steer clear of the toxic debt at the core of the 2008 banking crisis.
As the financial crisis deepened in the summer of 2008, Blank found himself sitting next to the Prime Minister, Gordon Brown, returning from a trade mission to Israel. In the informal conversation, Blank let it be known that, should the opportunity arise, Lloyds would be interested in merging with HBOS. But for the deal to be done it would require Downing Street to clear the regulatory path. As the book recounts, Lloyds and HBOS had held on and off talks for the previous two years but failed to consummate the deal.
On September 15 2008, at a Citibank cocktail party and with HBOS shares skidding on the stock exchange, Brown and Blank talked again and the PM told the Lloyds chair "he would do all he could to help" a Lloyds-HBOS deal and the deed was done. What no one really knew was the dreadful state of HBOS.
The deal turned out to be an immediate disaster for Lloyds' shareholders and staff. The bank had an army of small investors attracted by a generous dividend. When the government took a 43 per cent stake a few weeks later, the dividend was axed and Lloyds' shares plummeted. Since the merger, more than 50,000 jobs have been eliminated at the merged bank. Amid a hubbub of criticism from investors, the media and the Treasury Select Committee Blank resigned in 2009 and was replaced by City veteran Sir Win Bischoff.
It was a dispiriting moment for Blank, who believes that the HBOS deal left Lloyds with a great legacy in terms of the strongest franchise in Britain's mortgage and current account market. Finally, seven years after the events of 2008, Sir Victor has been able to tell his own side of a story that he believes was badly distorted. Readers now have the chance to make up their own minds.
