Kay, an economist at St John’s College, Oxford and a main board director of Halifax through the 1990s, made the comments last night during the key note speech at the Association of Mortgage Intermediaries’ annual dinner, held in London’s Plaisterer’s Hall.
Kay, who set up the Said Business School and writes a weekly comment for the Financial Times, said Halifax’s decision to demutualise in 1997 was a result of seeing Abbey’s profits grow following its own demutualisation in 1989.
When Halifax floated, more than 7.6m customers received an allocation of shares worth around £2,500 at the time.
In Kay’s opinion, the shift from building society to bank encouraged Halifax’s treasury department to focus too heavily on profits, and not enough on risk.
Whereas Abbey recognised the signs of a mortgage market bubble and reigned in its lending practices as the boom progressed, Kay said Halifax got greedy and chased profits to its detriment.
Ultimately, said Kay, it was this decision that destroyed Halifax and forced it into bed with Lloyds TSB.
Kay observed that Abbey, the headline sponsor at last night's dinner, was the more reserved model in the early part of the 2000s, which allowed it to remain a solid bank, whereas the newly formed Lloyds Banking Group had to be bailed out by the tax-payer to the tune of billions.
Lehman bashing
As well as criticising Halifax’s lending practices, Kay bashed the FSA, bashed Lehman Brothers and bashed the current state of the market, saying there needs to be a “functional separation between financial services.”
Kay said wryly that regulation had failed to avoid the bubble and bust of 2007, so “what we really need, is more of it.”
He also hit out at the effectiveness of the FSA and regulated firms’ attitudes to the regulator using the analogy of two people standing in a wood when a bear appears.
One takes time to put on a pair of trainers and the other says, “Are you mad, you can’t run faster than a bear?”
The one in the trainers says, “I don’t have to, I only need to run faster than you.”
Should have gone bust
Kay was firm that regulation’s role should not be to be extensive and intrusive, taking the industry captive, but rather should reduce contagion within and between the industry.
During the speech, he went on to say the industry should be delighted that Lehman Brothers was allowed to go bust, suggesting it was “populated by greedy people.”
His justification of this view was that the bank’s failure proved we still have free market economies and capitalism, but he said it highlighted the need for structural rather than behavioural regulation for the future.
The speech ended with a warning about moral hazard, suggesting that the precedent of public money bail-outs would encourage more boom bust recessions in the future.
Reaction
Adrian Coles, director general of the BSA, said: "None of the building societies that demutualised in the 1990s remain independent, but most existing building societies continue to be strong and robust as independent mutual institutions that put members’ interests first.
“The building society model remains sound. As the FSA noted in their consultation on specialist sourcebook for building societies, published on 5 June 2009, "Although building societies, like banks, have been weakened by adverse economic and financial market conditions, the extent of that weakening has to date been less than that experienced by the banks – mainly because of the lower exposure to wholesale funding and complex financial instruments.”
John Wriglesworth, managing director of The Wriglesworth Consultancy and a building societies economist agreed demutualisation that was the beginning of the end for Halifax.
Wriglesworth, who was a pupil of John Kay at Oxford, went further though and said all building societies that demutualised over-exposed themselves to risky lending.
He said: “All the converted building societies did stupid things, higher risk lending and increasing their reliance on funding via securitisation.
"They have all had to be rescued in some form or other."
"Even Abbey got itself in a mess," he added. "They just did it earlier than the others – their trouble in the treasury department pre-dated the credit crunch and paved the way for the takeover by Santander.
“Halifax’s problems didn’t crystallise until the credit crunch hit. And they weren’t alone. Bradford & Bingley made some huge mistakes and had to be rescued too.
“But a lot of the building societies that remained mutual were hit badly as well.
"Dunfermline particularly – it was the only mutual ever to go into administration.
"The important thing is that it wasn’t bad debt that crucified these converted building societies – it was the funding markets drying up and the chaos caused by the huge liquidity crisis in 2007.”
