Wednesday, 16 September 2015

Ivan Fallon on the Lloyds/HBoS merger: bad deal, worse book

Picture: Spencer House
Ivan Fallon Black Horse Ride: The inside story of Lloyds and the banking crisis The Robson Press 2015 £25

In the great room of Spencer House, pictured above, Gordon Brown is said to have persuaded Lloyds TSB's unwilling chairman to buy their ailing rival HBoS. Black Horse Ride shows that Lloyds was already keen on the takeover; the idea was theirs, and Brown merely promised to remove obstacles to a deal that proved disastrous, and ended with Lloyds being bailed out by the government. I worked for Lloyds at the time, albeit in a lowly role far removed from the board's strategising. The idea that they were the unwilling stuffee never seemed credible to me; their desperation for a big deal was palpable. I heard some astonishing stories at the time, but I am more discreet than the directors who spoke to Ivan Fallon for his account of the background to the merger. I'm grateful to Fallon for busting the persistent myth that Gordon Brown forced the deal on Lloyds, though that is the limit of my gratitude. The book is a real stinker. It's badly written, ill-informed and cravenly tells the story on behalf of Lloyds' board.

He says that Lloyds wanted nothing to do with whizzy financial products, but CEO Eric Daniels spearheaded an expansion of Lloyds's markets business. I was hired as a risk manager in their Products & Markets business, which was keen to bring in outside expertise to support its growth. It was too little, too late to have had much impact on its profits—either positively in the boom years, or negatively afterwards. But that side of their strategy is wholly neglected. Lloyds was an odd mixture of conservatism and risk-taking. Its corporate book was less risky than its competitors, and it avoided sub-prime mortgage lending. But it pursued a number of high-risk acquisitions (most of which were not concluded), and risked its reputation by selling payment protection aggressively, resulting in huge compensation payments. Incredibly, Fallon thinks payment protection was a good product.

I suspect the problem is not merely that Fallon is ignorant of finance, but also that he doesn't know what he doesn't know. He repeats things that he's only half understood, seemingly without realising there's anything more to it. The book is littered with errors of fact and misunderstandings. He thinks banks lend to each other with terms up to five years (five days would be a relatively long term for inter-bank lending, p. 50). He doesn't know the difference between assets and liabilities, claiming that securitisation would have reduced gearing by "removing liabilities and replacing them with bonds" (p. 155; securitisation removes assets from the balance sheet). He thinks there would be 'no risk' if the government funded Lloyds to purchase Northern Rock, because it would be backed by securities. And he claims it was 'mathematically impossible' for money market funds to repay less that par. I don't know what he means by 'mathematically impossible'.

Some of the writing is merely careless, and the proliferation of minor errors make me suspicious of the whole book. He describes Spencer House as the ancestral home of Lady Diana. It's an irrelevant piece of background fluff, but it's not even altogether accurate as her family has rented it out for generations. He adds the superfluous detail of the guests going 'next door' for dinner, when in fact the dining room is downstairs from the great room. Finally, the writing style itself can be excruciating. I laughed aloud at the description of the charity 'Wellbeing of Women' as one that "researched obstetrical and gynaecological issues of great importance to women and their ability to give safe delivery to their babies" (p. 89).

Fallon had unique access the the protagonists, but he was ill-equipped to ask the right questions or understand the answers. I'm aware that my review seems one-sided and excessively harsh. But books like this are written for a general audience; the specialists who read them rarely write reviews. As a result they get an easy ride, and Fallon seems to have felt no pressure to carry out even elementary fact-checking. That does his readers a disservice and deserves to be called out, all the more so when this may stand as the definitive account of an important story. This book does not deserve the attention of posterity. 

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