Black Horse Ride: The Inside Story of Lloyds and the Banking Crisis by Ivan Fallon

CHAPTER 1
THE PITMAN MANTLE
EARLY IN 2002 Sir Victor Blank had one of his regular lunches with
Sir Brian Pitman at the Savoy Grill. Pitman, widely regarded as the
shrewdest and most pioneering banker of his generation, had recently
retired after a 49-year career at Lloyds TSB, the last eighteen as chief
executive and then chairman. His years at the top were generally judged
to have been spectacularly successful ones, transforming Lloyds from an
old-fashioned, medium-sized institution into, for a few months at least,
the biggest bank in the world.
In his last few years, however, his almost-mythical status in the City
had slipped as the bank’s performance faltered and analysts began
questioning Pitman’s single-minded focus on the domestic market, his
obsessive drive for shareholder returns and his rejection of the more
glamorous areas of investment banking and international operations.
Lloyds had dropped from first to fifth place among the high street banks,
passed first by HSBC after it took over Midland, and then by a more
dynamic Barclays. Two newly created groups, HBOS, a merger of the
seventeenth-century Bank of Scotland with the Halifax Building Society,
and the Royal Bank of Scotland (RBS), which had taken over the
National Westminster Bank in 2000, had turned the Big Four clearing
banks into the Big Five and Lloyds was steadily being outpaced by all
four of its more aggressive rivals.
Nonetheless, Pitman, then aged seventy, still commanded huge respect
in the banking community, a giant of the industry whom everyone
listened to with reverence – as Blank, ten years his junior, did that day. A
bluff, bear of a man with a heavily lined face and imposing polished
dome, Pitman had revolutionised the way British banks were run,
changing forever the patrician world of a management culture which
believed that what mattered was size rather than profitability. His single-

minded drive for return on equity, an alien concept in the banking
industry until he introduced it the mid-1980s, had created a new
generation of highly paid bank executives who put shareholders before
customers and turned traditional bank managers into salesmen marketing
a broad range of financial products which went well beyond cashing
cheques and offering overdrafts. The result was one of the biggest
financial success stories in banking history.
Against what he later admitted was ‘massive resistance’ from his own
senior executives, Pitman had imposed a value-creation philosophy on
the bank, which basically meant that increasing the share price and
dividend should be the bank’s first and only target – everything else
would fall in behind. The key to what he achieved at Lloyds, he later
reflected, was centred around what he called ‘a single, well-defined
performance measure’, against which all decisions, however small, were
taken. Initially, he set his team a target of achieving a return on equity of
10 per cent above the prevailing inflation rate of 5 per cent. The problem
was no one at the bank had ever worked out what the return on equity
(RoE) really was. When they did, they were astonished to find it was 17–
18 per cent, already well above their target. Pitman immediately raised
the bar, reinforcing the pressure by using it as a measure for determining
executive pay. ‘After that, the cry “Improve RoE” could be heard all
around the organisation,’ he joked later.
‘The adoption of a value-creation philosophy imposes a tough
discipline,’ he said in a lecture he gave at Harvard in 2002. ‘People, with
an eye to their bonuses, will wriggle like mad to avoid goals based on
shareholder value, often arguing for alternatives that only appear to be
related to it. And beliefs are hard to change.’
In Lloyds’s case, that meant abandoning the conviction that it should
be a global bank offering all things to all people. ‘We had to accept that it
was all right to get smaller, to stay close to home, to focus on
unglamorous products like mortgages and insurance while getting out of
the more prestigious services such as investment banking and currency
trading.’
Every action he took flowed from that philosophy. There would, he
decreed, be no investment in anything that did not measurably increase

Black Horse Ride: The Inside Story of Lloyds and the Banking Crisis by Ivan Fallon