I missed this piece from John Kay, a former director of the Halifax, in the FT last week. He traces the disintegration of the demutulaised building societies, the last of which disappeared yesterday, to the deregulation of the1980s.
The business I joined gathered deposits from small savers, mostly through its branches. It lent the proceeds to house buyers. Founded as a self-help organisation by provident Yorkshire folk 150 years ago, the Halifax became the world’s largest mortgage lender. Its quality of service and competitive interest rates trounced conventional banks in the UK retail savings market.
By doing what it was good at, it beat a lot of the bigger players. It also had solid foundations so it survived the last economic downturn too.
The simple business model was very robust. In the early 1990s, a combination of high interest rates, recession and falling house prices posed much more serious problems for UK homeowners than anything seen, or likely, in the current credit crunch. But the Halifax remained profitable and mortgages readily available.
And the key to all this? The skills and attitudes of its people.
Accepting deposits and underwriting and administering mortgages requires that millions of records should be maintained and updated every day with almost no errors. This activity does not require flair or imagination but does require conscientious individuals with integrity and loyalty. The Halifax was a precision machine that made the most of the talents of ordinary people. I came to understand the fundamental incompatibility of the cultures of retail and investment banking and why the marriage of the two so often leads to tears.
But then came deregulation and the pressure to convert to a PLC.
Legal restrictions on UK mortgage lenders were relaxed in 1986. Halifax’s main rival, Abbey, converted to a public company and leveraged its deposit base to build a large balance sheet. Most bankers were incredulous that the Halifax had been so slow to take advantage of this opportunity.
The Thatcher years didn’t just see changes in the law, they saw a shift in attitudes too. Private companies were good, the public sector was rubbish and anyone who was anyone was making lots of money. Set against the shiny City investment banks, mutual building societies conjured up images of terraced houses, working men’s clubs and brass bands. Demutualisation wouldn’t just enable a building society to get richer, it would make it hip too.
As John Kay says, the wiser heads questioned where the Halifax’s competitive advantage would be in this new market. They worried that the Halifax was moving from a market in which the capabilities of its staff made it a leader to one in which it was a novice. Their objections were, it seems, swept aside in the excitement about the new world.
At first, it looked as if the doomsayers were wrong. All the new banks made large profits and, up until recently, it would have been hard to argue that demutalisation was a mistake. But, as John Kay explains, when the losses came, they wiped out the profits of the previous years.
There, in a nutshell, is the story of the credit crunch. And there is the story of how a business that had grown for 150 years forfeited its independence. When the dust settles, many banks and hedge funds will have lost more money on their trading activities in the past year or so than they had made in their entire history.
And what of the staff whose key skills had once made Halifax a leader in its field?
Those conscientious people who process deposits and issue mortgages are still there, though many have had the worst weekend of their lives. The business they do continues to make money. Customers mostly remain loyal. The pursuit of shareholder value damaged both shareholder value and the business. We let them all down.
Commenting on this piece, Chris Dillow adds his twopenn’orth:
The quoted firms overlooked the virtue of tacit knowledge, and the unarticulated wisdom embodied by traditional ways of doing things.
They overlooked monopoly power. The mutuals could use local loyalty as a source of deposits. The demutualized firms thought they could make money doing what any AAA-rate firm could do – borrow cheaply. They didn’t ask: do we have an advantage in this business?
There is a lesson here for companies who are planning to move out of their traditional areas of operation. The skills and behaviours that make a firm top-dog in one market will not necessarily do the same in another.
Of course, there are many reasons why Halifax and the other demutulaised building societies failed but one factor was their failure to understand just how much the capabilities of their staff and the relationships they built had contributed to that success and how much of the same they were lacking in the markets they were moving into. The building societies had a source of competitive advantage in their people. They turned their backs on that advantage and moved into a world where they hadn’t a clue what they were doing.
One wonders whether anyone raised these issues at the time. Did anyone talk about the capabilities of the staff or the organisation’s culture, or its accumulated knowledge and relationships? Did anyone ask whether they would be a source of strength in this brave new world? These are the sort of questions good strategic HR directors ask. I don’t know if any of the demutualised societies had such people at the time but, if they did, it appears that their questions, too, were ignored in the rush towards the City’s bright lights.