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 bronze nameplate, still exuding echoes
of past power and influence over the doors of its former headquarters close to
the Bank of England.
Julien had been appointed at the behest of Midland’s chairman, the Scottish
chartered accountant Sir Donald Barron. Julien was well known to three of the
Midland 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 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
chairman 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 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 switchboard room to find out what was going wrong.
‘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 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 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
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 co-operation 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’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 itself had extended some ill-judged loans in South America, but Crocker
threatened to be the last straw.
Beginning of the end
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 effectively turned into six
as he worked two shifts. ‘From 8am until 4pm, it was UK business. Then, when
California woke up, I worked from 4pm 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 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 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 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.’
While Midland 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
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 later went on to provid
e 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
institutions followed Midland’s lead, the 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 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 became less pronounced.
Interestingly, O’Brien and other Midland 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 Julien brought to Midland
sound humdrum for example, the introduction of new accounting software 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 yet more backfiring bureaucracy.
Julien’s general observation on his time at Midland 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 shows that banks are hard to
manage. Anyone who suggests otherwise might be regarded with a degree of
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. This
article first appeared in the latest edition of Financial Director
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