Free Hubris: How HBOS Wrecked the Best Bank in Britain by Ray Perman, Alistair Darling

Scotland tens of thousands of new accounts, but it failed to make the most of it. ‘We still had a Presbyterian culture,’ Pattullo remembered
later. ‘We didn’t believe that we were that much ahead of any other bank. It was a great success, but we could have expanded the account base twice as fast if we had thrown everything
at it.’
    Other electronic developments followed: an internal network which allowed any manager to access the account details of any customer – another ground-breaking system – and an
international payments system which was used by the Government to pay pensions and other benefits to British citizens living abroad.
    There was financial innovation too. In the early days of North Sea exploration, when the Bank began participating in oil field financings, it had learned new skills by being able to forecast
cash flows and structure lending deals. Archie Gibson, one of Pattullo’s closest allies, and Gavin Masterton, Gibson’s young protégé, began to apply these techniques to a
new corporate phenomenon – the management buyout.
    In boom times big corporations had often acquired companies without obvious logic and diversified conglomerates became fashionable. As the economy tightened in the early 1980s, these same big
groups began to sell off unwanted subsidiaries, often to their managements, who understood the business and recognised its potential to grow if freed from the burdens and restrictions imposed by
the parent group. Unlike later leveraged deals, these were usually companies in basic industries, with long track records and predictable cash flows. The Bank realised that the companies could
afford to borrow a large proportion of the purchase price, with the loans being repaid a fewyears later when the firm was either bought by another trade buyer or floated on
the stock market. It set up a unit to specialise in management buyouts (MBOs) and quickly became the leader in the field, topping the league table of lenders ahead of banks many times its size.
Crucially, it began to gain a UK rather than just a Scottish reputation as a shrewd corporate lender and its younger managers got to work on bigger and more complex deals than they would have done
had they worked for one of the big London banks.
    The core retail market in Scotland was not neglected. In 1984 Pattullo launched the ‘Friend for Life’ campaign, an attempt to shake off the Bank’s ‘stuffy and dour’
image and replace it with an attempt to provide ‘the most friendly, efficient and constructive service of all the banks’. The advertising was backed up with staff ‘training and
retraining’, to ensure that the actual service experienced by customers lived up to the hype. 2 The Bank also supported the Institute of
Bankers, and put any of its managers it believed had potential through the Institute courses and exams. Exceptionally talented people were sent to Harvard to take the Advanced Management
Programme.
    In 1985 Pattullo presented figures to his senior managers at an internal conference. Over the past year the Bank had increased its pre-tax profit by 35 per cent, marginally behind its old rival
the Royal Bank, but well ahead of any of the English clearers. Over five years the record was more impressive: the Bank was well ahead of the pack with an almost doubling of profit. Over ten years
it had achieved an increase of 474 per cent, beaten only by Lloyds. Its return on equity – a measure increasingly looked at by professional investors – was running at 23–25 per
cent in the late 1980s, a very high rate of return for a bank which was still regarded as well capitalised and not unduly risky. In 1989
The Economist
magazine’s survey of the
financial sector resulted in the Bank being voted by its peers as ‘the most admired bank’ for its technical innovation, and the Institution of Electrical Engineers asked the Bank to
deliver the annual Faraday Lectures, under the title ‘Electric