Sir John Bond, former HSBC chairman, talks about the meltdown, Chinese history and how Hong Kong rises to crises

JOHN BOND arrived in Hong Kong, at age 19, as a deckhand aboard a cargo ship. Appropriately, during a 45-year career at HSBC that saw him rise from trainee to chairman of one of the world’s largest banks, Bond developed a reputation as the steadiest of helmsmen, guiding the company through many financial tempests. But the 67-year-old Bond, who retired from HSBC in 2006 to head Vodafone, tells power’s Anthony Spaeth and Peter Ritter that it’s the bank’s bedrock, conservative values – and a subtle understanding of China’s history – that has left HSBC as perhaps the world’s most seaworthy global bank.

We’d like to ask you about HSBC in the financial crisis.
HSBC is a difficult one for me. You know, I left two and a half years ago. I don’t mind talking about my life at HSBC in broad-brush terms. But the system at HSBC, which I happen to believe in, is you walk out and you’re finished. You don’t stay on the board. You don’t hang around and give advice. You know, I had my shot at running it. Now a new generation – and of course I had a part in the selection process – they’re now running it and it’s theirs to run as they see fit. And that’s how it works. More often than not, chairmen get offices and hang around. I don’t think that’s right, personally. So it would be very wrong for me to comment on anything to do with HSBC right now. I think they would view that as inappropriate – as indeed I do.

Just two months ago the New York Times was reporting that because of you HSBC is less vulnerable to toxic investments and is in a stronger position than any big bank to get through the meltdown.
I would disagree with that. It was nothing to do with me. Obviously, HSBC was my life for 45 years. But you need to go back into history to find the answer to that. You have to understand that deeply rooted within HSBC was the idea that you don’t make a loan until you’ve got a customer deposit. So it was a liability-driven bank not an asset-driven bank.

I think history plays a very important role inside HSBC. This was a bank that was formed in 1865, simultaneously opened in Hong Kong and Shanghai in that year. And I can’t do the history for you with precision, but within two years of it starting, I think something like 11 banks had gone bust in the area.

At that stage of history, you were at the end of the Taiping Rebellion, which – I think a lot of people don’t know – killed more people than the First World War. They then ran a business, a substantial business, in China through the period of tension with the Manchu Dynasty, through the Japanese invasion, the Boxer Rebellion, the fall of the Manchu Dynasty, the rise of Sun Yat-sen, the rise of the Communist Party, the rise of the Kuomintang, civil war, the Sino-Japanese war of 1936, virtually continuous until the Pacific War, then the final denouement between Kuomintang and the Communist Party after the war.

They ran a business in China throughout that period without a regulator. And they learnt some lessons. That is that you’re very conservative on the balance sheet. You take deposits and then you only lend out a certain percentage. That’s deeply rooted in the character. When I was nearing the top of HSBC, we were watching that percentage to make sure everything was funded by deposits.

They were running a bank in a time of sailing ships. So what they did was they sent somebody with a banker’s draft for capital to Batavia, now Jakarta. “There’s the capital. Don’t expect any help from us. You’ve got to build your business from the ground up.” So that’s how they built it. And that’s still there in the system. That’s just background stuff. The point being, it’s nothing to do with me that HSBC is where it is. It’s the way HSBC has got deep institutional values.

But the financial world did go off its solid moorings and get into crazy stuff the last few years.
Well, it’s so hard to generalize about the financial world because different countries have different financial systems. The difference between the German and British financial system is huge. And the difference between the British and American financial system is huge.

It’s very, very hard to generalize. The answer is in certain countries there’s been a massive credit bubble, probably of unprecedented proportions, and that’s going to take time to resolve.

How do you view the idea that regulation has been too lax the last couple of years? Is that just a contributing factor? A serious factor?
That’s a very difficult question to answer succinctly. There’s a point of view in Britain that regulators should have gone into banks and said, “You’re too dependent on market funding, wholesale funding. Cap your business model.” I find it very hard to imagine what would happen if a bank board was meeting and a regulator walked in and said, “We want you to stop the business of lending because we think you’re too depending on market funding.” I think that’s a very, very difficult position to a regulator to take in what is essentially a free market economy. So I think it’s quite easy to point the finger at regulators. My judgment is that when companies or institutions get into trouble, nine times out of 10 it’s the fault of top management.

In America the situation is slightly different. The commercial banks were fairly strictly regulated in a complex way. OCC, Federal Reserve, state superintendent of banks, FDIC. Four different bodies regulating is quite a complex situation – all of which have a historical source as to why they’re there. America is unusual in the sense that commercial banking may be 35 percent of the liabilities of the financial system, 20-25 percent of the assets. The vast bulk of the financial system is outside of the commercial banking system. It’s in the markets, in the investment banks, in hedge funds, and so forth. There I think you can point a little bit of a finger at regulators. I think people will rue the day they removed the leverage cap on investment banks.

I’m not so sure that putting investment banks and commercial banks together was necessarily a mistake. It depends on how effectively it’s done. Under good management, it should be capable of being done. But I think there was a much lighter regulatory framework, which was much more oriented toward fraud against investors and much less towards soundness of institutions in the non-bank sector. And that clearly had an effect on the situation.

Now we’ve experienced an international asset bubble popping. The closest experience we can think of is Japan after its bubble burst, which was followed by 10 years of every company in the economy paying off debt and not borrowing. Is that what we’re looking at worldwide?
It’s hard to argue from the particular to the general. Japan is the world’s second-largest economy, but it has a unique history and unique setup; very, very different economic setup than a western European country or the American system. It’s hard to take the Japanese experience and say this is what’s going to happen in America, this is what’s going to happen in Germany. They’ll all play out different. If you ask me to make some fairly simple broad-brush statements, I think the source of the main problem was very, very cheap money, which created a system where’d you be foolish not to borrow if interest rates were one or two percent. And it left savers with a search for yield. Into that fell the securities, subprime securities, and a variety of different ways of trying to bridge the gap between borrowers and savers. And a vast pool of liquidity grew up in that space that with hindsight held the seeds of serious problems.

I think that’s the source of the problem. To argue that it’s subprime is a loose argument because 40 percent of the population of America is subprime. Probably 70 percent of the world’s population is subprime. Subprime was the symptom not the cause. But if you’re looking for root causes: low interest rates, a huge pool of liquidity, investors searching desperately for yield, and borrowers recognizing the opportunity of a lifetime.

What about Hong Kong? Just as you described the crises that confronted HSBC from 1865 to the end of World War II, one of our standard pitches is about the crises that Hong Kong has been through from 1949 onwards, and they have been continuous.
Hong Kong has a wealth of experience. I arrived to work here in 1964. Of course in 1965, you had bank runs, and three banks went bust. And Hang Seng got itself into some difficulty. And surprise, surprise, the reasons were shortage of liquidity and too much lending to property! We’ve seen that movie before. If you talk about stock market crashes, I was here from 1972 to 1973 when the index went from just under 1,500 down to 140. That’s 10 percent of what it was. The stock market was only open for a half a day because there was no turnover. Then we had a crisis, interestingly enough, in the secondary sector with deposit taking companies in the early 80s. In the financial world, it’s often the secondary sector where the problems emerge.

Hong Kong has all this experience. That’s not to say that any of these situations were an exact parallel with today. I think the Hong Kong Monetary Authority has done a first-class job with regulation. There will always be issues from time to time, such as the mini-bond issue. But if you look at it in the round, I regard Hong Kong as one of the best regulated financial centers I’ve worked in my career. And the banking system is by and large liability led. There isn’t a huge wholesale market, which is where the problems emanated from in America and Britain.

I think Hong Kong is looking good in a world where — it’s hard to explain how much it’s turned on its head. If you think about it the way I occasionally think about it: five years ago, China was inviting western institutions to invest in their banks, to help them modernize their banking system. Today it’s the other way around. You know, China is sitting there looking very liquid, okay, relatively immune to the storm going on elsewhere. And the people who made the investments, many of them are having a difficult time.

That’s a very short five years, or maybe a very long five. Of course, none of us believe in decoupling anymore.
No, the world’s interconnected. The only way it would decouple is if domestic demand in China got so strong they didn’t need to export. If everyone develops their own domestic demand you’d have less coupling in the world.

Sounds like the Middle Ages.
I wasn’t around in the Middle Ages – though it may look like it. But nevertheless, I think people overestimate China’s dependence on exports. You know, sometimes the western perceptions of China are very far from the reality I’ve seen in my lifetime. One of the challenges we face is that the Chinese understand the West far better than the West understands China. That’s a source of potential friction. If you make a statement to a western audience that for 90 percent of recorded history China has been the world’s largest economy they say: “Say it again?” But that’s statistically pretty much the truth.

I think the other fact that doesn’t get enough airtime is that there isn’t a model for governing a country of 1.3 billion people. You can argue that some western countries have had quite a lot of challenges with governing countries of 60 million people. But it would be foolish, and you wouldn’t make the mistake in business, of saying what works at 65 is going to work at 1,300.