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Cognitive dissonance at HBOS

Humans - such funny creatures,  says Zelda Zinger.

Some of us, when presented with unassailable evidence, change our views if they are contrary to the facts. Except sometimes, we don’t.

My darling partner, for example, knows very well that broccoli is good for him, but he still refuses to eat it. Even seven hundred years after Columbus didn’t sail off the edge of the planet, there are still adherents to the notion that the earth is flat and any other argument is a conspiracy.

The trouble is that facts sometimes seem malleable and subject to debate. Often we only see their truth in retrospect. But when presented with a strong argument that runs counter to our beliefs or ideologies, something strange happens in the human mind. A slight buzzing perhaps.

Psychologists have identified this clammy feeling as “cognitive dissonance”. However, this is not the spur to clarity of thought it should be.

In fact it seems to have the opposite effect.

Cognitive dissonance was the term used to describe the mind-sets of members of a death cult in the US in the 1950s. When aliens failed to pick up the cult’s adherents in a space ship before destroying the world with a catastrophic flood as predicted by the leader you would think the believers might then pack up their matching tunics and go home. 

Except they didn’t. Instead they merely deepened their faith in the cult leader.

I blame the positive thinking gurus. These are the chaps who argue that believing something makes it so. Sometimes blind optimism does work - any underdog story seems to have this kernel at its core.

Yet for every story of triumph over adversity - Sir Richard Branson overcoming his evident social deficits to become a squillionaire, for example - how often do you read the auto-biography of those that tried and failed? Not often, although when we do get to read an account of misjudgment, cock-up and failure it can be compelling.

One such account was published by the Parliamentary Commission on Banking Standards last week entitled: An accident waiting to happen: The failure of HBOS. We got an account of the “catastrophic failures of management, governance and regulatory oversight” when HBOS, one of the biggest banks in the UK, ran aground.

For ghoulish watchers of the global banking crisis, it served up a tasty carcase full of meaty detail. There was the £20 billion that tax payers forked out to save its tattered remains. There was evidence, too, of the swollen £68 billion corporate lending book backed by property assets which, by the time the bank was rescued by Lloyds, faced write downs of £25billion.

There was the £30billion pulled from its vaults by corporate customers when Lehman Brothers failed. There were details of warnings handed to the board as early as 2005, about how the bank, well before the crisis took hold, was “structurally illiquid”.

Instead of hanging out to dry just one executive, as did the Financial Service Authority in its earlier censure of Peter Cummings, the Bank’s former head of corporate, there were three. In no uncertain terms the commission laid blame on them, each named with solemnity as if their utterance was accompanied by the sound a doleful bell: Sir James Crosby, former chief executive; Andy Hornby, his successor; and last, but certainly not least, Lord Stevenson of Coddenham,  chairman from the bank’s formation in 2001 to its ignominious end.

Yet what emerged most strongly in the report was that the failure of HBOS was probably one of the single most expensive instances of cognitive dissonance on record.

Lord Stevenson comes in for special criticism for his unusually firm adherence to the line that actually, things weren’t so bad. The report opines that Lord Stevenson “in particular has shown himself incapable of facing the realities of what placed the bank in jeopardy from that time until now”.

Stevenson told the committee that he thought the board’s model of corporate governance was, still to this day, “rather good”. This was because there was plenty of opportunity for challenging the chief executive, he said. At least twice there were “occasions when great offence was caused”. So that is OK then.

In fact the HBOS boardroom sounded like quite a fun, if occasionally raucous, place to be - not unlike an evening in a drawing room salon or a club with overstuffed chairs and a good selection of ports.

Sir Ron Garrick, the senior independent director from 2004, went so far as to describe it, with its atmosphere of debate and intellectuality, as “the best board I ever sat on”. What might have stayed the board’s precarious insistence on aggressive growth at all costs was realising the facts. But it was Stevenson who kept insisting - to regulators, and presumably himself - that HBOS was a “highly conservative institution”

When questioned by the FSA in the spring of 2008, he said the bank had pledged to be “boringly boring” in the light of the collapse of Bear Sterns. The bank would not have a liquidity problem, he posited, because lenders were “looking to lend money to a highly conservative institution”.

A few months later, this clearly turned out not to be the case.

An artistic soul, known for his gracious manner and charm, Stevenson perhaps has the most to lose by coming to terms with his role in the bank’s failure.

Eventually, under the grilling of the committee, Sir James Crosby admitted that yes, the group’s lending strategy was incompetent - five years after the bank collapsed.

You would think that they might have learned by now that they were wrong. But perhaps the pain was too much for them to bear.  I’d recommend that they should eat their broccoli.

For the bank’s staff, its customers, its shareholders and the people of the UK, it is all too late.