The form might have changed, but the substance of the mistakes behind the current banking crisis holds nothing new: poor lending decisions, slack management, excessive optimism and too many unfettered egos. We have been here many times before.
Michael Julien knows this better than most. Now retired and splitting his time between Surrey and western France, Julien made several waves in the City throughout his senior management career. A big one was his appointment to the board of Midland Bank in 1983: the first finance director at a UK clearing bank.
Midland Bank doesn’t exist today, having been acquired in an orderly fashion by HSBC in 1992, but in 1985, when we interviewed him as part of an article on why banks needed finance directors, it was secretly confronting a more violent end. “We came very close to failing,” says Julien.
Midland had been the nation’s biggest clearing bank, used by hundreds of foreign banks in London. You can see its massive bronze nameplate, still exuding echoes of past power and influence over the doors of its former headquarters close to the Bank of England.
Getting on board
Julien had been appointed at the behest of Midland Bank’s chairman, the Scots chartered accountant Sir Donald Barron. Julien was well known to three of the Midland Bank directors who also sat on the board of his former employer, cable-maker BICC: a “bit of a stitch-up” Julien recalls with a wry smile.
At the time of his joining, Midland Bank had no reason to think it was in serious trouble. That was the whole point. The board had little idea of what was happening on the ground.
“I remember the first set of board papers I saw in June 1983,” says Julien. “There was no financial information at all, just a collection of loan applications.” There were no monthly accounts and the group balance sheet was only prepared twice a year at results time. In retrospect, he thinks the chairm an had a premonition of impending doom and wanted a savvy FD to put his finger on the reason why.
Soon after, Julien popped in to see the CEO, the late Geoffrey Taylor, about the annual budget review. Taylor looked blank. They had never done one of those before, although, to his credit, he embraced the new-fangled concept with enthusiasm. Julien got to work, installing budget systems, internal audit functions, a group legal division and various other departments that most of the outside world might have reasonably thought to have existed already.
He found himself involved in other housekeeping issues, such as technology and communications. On one occasion, frustrated by reports from overseas colleagues that it took an awfully long time to get through on the phone, Julien went to the telephone switchboard room to find out what was going wrong.
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“The chief operator nearly fell off her chair,” he recalls. “She’d never seen a main board director before.” Having recovered her composure, she explained the reason for the slow connections was that the operators didn’t have an alphabetical phone directory. The 4,000 telephone extensions within the building were listed by order of seniority in the bank.
Aside from such everyday evidence of past sclerotic management, there was an elephant in the room. In 1981, Midland Bank had taken a 57% stake in Crocker, the 10th largest bank in the US. The terms of the acquisition had given Crocker’s own board and management “maximum operational autonomy” together with the retention of its US share listing.
Although it accounted for a third of the enlarged Midland group balance sheet, no one at Midland HQ knew what it contained. In Julien’s view, the international business, of which Crocker was the largest part, had grown like a huge boil on one of the bank’s arms, completely unintegrated with the UK business.
Towards the end of 1983, he flew across for a visit. The first thing he noticed was the superiority of Crocker’s information systems, thanks mainly to better technology and a very demanding regulator. With the full cooperation of the US bank’s financial controller, he drilled through the numbers much more easily than he could at home, but he soon realised they bore little resemblance to those that were presented to London.
“The figure sent to us was a plug,” he said. “London would tell Crocker its performance expectations and Crocker sent them a number that met them.” Something was seriously amiss.
In fact, Crocker’s management had been spending Midland Bank’s billion pounds of acquisition money shoring up and expanding a toxic loan book that included more than a fair share of dud Californian businesses and bankrupt Latin sovereigns. Midland Bank itself had extended some ill-judged loans in South America, but Crocker threatened to be the last straw.
In a chilling parallel to the US authorities’ attitude towards the collapse of Lehman Brothers in 2008, the Bank of England was in no mood to rescue a troubled clearer. Parliament had objected to the rescue of another bank, Johnson Matthey, in 1984. “We were on our own,” Julien says.
The pressure meant his three-year stay at Midland Bank effectively turned into six as he worked two shifts. “From 8.00am until 4.00pm, it was UK business. Then, when California woke up, I worked from 4.00pm until midnight on the US. I hardly saw my family over Christmas for three years because December was always the time the US regulators would throw up some new crisis.”
The successful resolution of the Crocker problem fell into three phases: first the acquisition of the outstanding shares in the bank, second the restructuring of the balance sheet including removal of the toxic debt and finally the sale of Crocker to Wells Fargo in 1986.
“We had to deal with both boards of directors. The Midland Bank board had to agree the acquisition of the outstanding shares and to a capital injection of $250m. Then we had to deal with the Crocker board which was acting as if there was no problem and that the bank was a wonderful asset which Midland Bank was trying to acquire on the cheap,” Julien notes.
Ironically, by the time they reached the third phase, he voted against the sale to Wells Fargo. He believes the Midland Bank board could have done better for its shareholders if it had held on, but, as Julien puts it, Crocker was “one of the worst symptoms of a greater malaise.” The dissent among senior executives over how it could retrieve value from the rescued US bank was too much to handle. “It is a sad commentary on corporate governance that the internal bickering of the executive directors could drive the board as a whole to a course of action calculated to destroy value for the shareholders,” he says.
While Midland Bank survived, it was severely weakened and not long after the Crocker sale the board started the process of putting Midland itself up for sale. Julien left for the board of Guinness the following year.
He doesn’t have fond memories of his brief banking career. “After Midland, I promised I would never go back into a financial services company. They’re difficult to manage and there are a lot of low-quality people lurking everywhere,” he says.
He thinks the fact that so many of the people working within banks are major financial decision-makers in their own right means that most bank boards will underestimate the financial management requirement. “Compared to an industrial company, you need to multiply the overall headcount by ten to get a sense of the beast you’re trying to control,” he says. “For companies like Royal Bank of Scotland, with 174,000 employees at the end of last year, you start to realise they may be simply too big to manage.”
His work wasn’t wasted. Julien and his team showed sufficiently sharp navigation skills to avoid a run on the bank and the likely ensuing corporate (and macro-economic) disaster. Perhaps more relevant to today, away from the Crocker crisis, the disciplines he instilled at Midland Bank later went on to provide a sound platform for the management at HSBC in the UK, which has notably not been a serious casualty in the current banking crisis.
Had more of the UK’s banking institutions followed Midland Bank’s lead, the UK banking sector in 2009 might have been in better shape.
He hesitates to judge whether good financial control systems alone would have been effective in withstanding the financial tsunami of 2008. Maintaining liquidity and conservative banking ratios are important, but so is culture. One of HSBC’s traditional characteristics, which he admires, has been the way it discourages prima donnas.
Even when he was in the midst of restructuring Crocker, there were some senior managers within Midland Bank who came close to scuppering the deal through pursuit of an alternative strategy. Had they succeeded, Julien has no doubt that the bank would have gone down.
Hugh O’Brien, who was in Julien’s team and was group planning director at the time of the takeover by HSBC, stayed on after the acquisition. He thinks the bigger bank’s conservative, deliberate culture was its strongest line of defence against the recent banking catastrophe. O’Brien notes that financial management tends to move centre stage when an organisation is in crisis and that HSBC was very strong and very successful. The urgency attaching to the finance function at Midland Bank became less pronounced.
Interestingly, O’Brien and other Midland Bank alumni later moved to NatWest. “It was like moving into a time warp, with endless committees of people talking to themselves,” O’Brien says. Some of the innovations that Julien brought to Midland Bank sound humdrum for example, the introduction of new accounting software packages and integrated bookkeeping technology. At NatWest, only a decade ago, even these fixes hadn’t been done. Financial management medicine came too late for NatWest which was swallowed up by RBS in 2000.
Julien is less hesitant in his judgement of governments’ regulatory response to current problems in the banking world. “I fear that the march of the bureaucrats is becoming unstoppable,” he says. In particular, he thinks that the 2009 finance bill’s proposed imposition of penalties for finance directors who fail to tick the right box on a tax return, is wholly wrong. “By making one person at the top totally accountable, you’re letting everyone else off the hook. There is no way a finance director of a large group can be expected to verify every single item in the books,” he says.
One risk management lesson has never left him. Julien now refuses to sit on boards as a non-executive director, although his professional knowledge and experience would be invaluable for any company. “The money would be nice, but the risks are just too high, especially if you’re a chartered accountant,” he says another example of backfiring bureaucracy.
Are the lessons of Midland Bank relevant today? Banking was very different in 1985, but there are still some valid points to note. First, Sir Donald Barron’s instincts in appointing a strong finance director was a classic illustration of the skills and attributes required of a chairman, in particular, having a nose for potential trouble. Second, it shows that cultures within banks are more likely to change when the institution is under pressure. Now, while banks are on their knees, is an excellent time to fix the financial management gaps that have become apparent during today’s banking crisis. It is not a time to restore the status quo.
Julien’s general observation on his time at Midland Bank is that most of his achievements were down to getting out of his chair and calling on people. “I developed a reputation for barging in on meetings and racing down corridors with shirt-tails flying,” he says.
“Ninety-five percent of what I achieved was a result of getting out and seeing people.” And by that he means colleagues, not clients. It is easy for very senior managers to be distracted by the hubris of global summits, the flattery of finance ministers and the social trappings of high rank. “There aren’t enough hours in the day to enjoy all that and get the job done,” he says.
Overall Julien’s story of his time at Midland Bank shows that banks are hard to manage. Anyone who suggests otherwise might be regarded with a degree of suspicion.
Michael Julien began his professional career with Price Waterhouse. He was group treasurer at British Leyland, finance director of the Lloyd’s insurance brokers CE Heath and Willis Faber and finance director of BICC prior to joining Midland Bank. After Midland he worked on the boards of Guinness and Eurotunnel, where he was deputy group chief executive. Latterly, he served as group chief executive of Storehouse and chairman of First Choice Holidays. He retired in 1998.
* Peter Krijgsman was launch editor of Financial Decisions (which was later re-named Financial Director) in 1984. His original interview with Michael Julien and other bank finance chiefs appeared in the September 1985 edition. Click here to view it.