Outlook: Old vendettas come back to haunt beleaguered Ian Harley

Andersen's conviction; Merrill wealth report

Part of Ian Harley's problem when he was appointed as chief executive of Abbey National was that half the rest of the board thought they should have been chosen instead. Mr Harley never did entirely succeed in stamping his authority on the subsequent highly fractious board, as is only too apparent from the letter published at the weekend from Abbey's former head of wholesale banking, Gareth Jones. Talk about revenge from beyond the grave.

Leaving aside the little matter of whether Mr Jones has breached the confidentiality clauses of his severance terms in publishing such a letter, this is a pretty disastrous turn of events for the already beleaguered Mr Harley. Mr Jones sounds like, and no doubt is, an embittered man, but even so, his letter makes Mr Harley and the rest of the Abbey board look like complete plonkers. The thrust of Mr Jones's allegations is that everything was fine in wholesale banking until he left, which he did voluntarily only because be had become so concerned over what Mr Harley and the others wanted to do with the operation.

Mr Jones claims that he resisted the move into high yield debt and private equity, that when he left Abbey he expressed concern over the company's $500m exposure to Tyco but the warnings went unheeded, and that he warned against the "substantial risks" associated with the planned attempt rapidly to expand Abbey's profits by going for growth in wholesale banking. It is perhaps this latter allegation which casts the board in its most embarrassing light.

According to Mr Jones, a management conference was held in June last year entitled "Life after Lloyds". At the conference, McKinsey published a report claiming that Abbey could become one of the top five banks in the world by 2005. That ambition necessarily involved wholesale banking tripling its profits. Mr Jones made his opposition known but the report was adopted anyway. Where on earth Mr Harley thought he was going to get either the capital or the wherewithal to achieve these aims is anyone's guess, but that the outcome of such a strategy couldn't have been anything other than disastrous is not in doubt. The whole thing is reminiscent of Barclays' famous dash for growth in the late 1980s. Under the slogan of Number One by Ninety One, Barclays lent to every tom, dick or harry who walked through the door. Inevitably it ended in tears, with the bank forced to report the first-ever loss in its history.

The same would have happened at Abbey, without a shadow of a doubt, had not the business downturn caught up with the bank before anything too dramatic could be done. As it is the bank is being forced to reserve around £450m against bad debts this year, substantially reducing its total profits. Mr Jones claims wholesale banking was perfectly healthy when he left and, by implication, that it must have been what happened subsequently that led to the losses. He's determined not to take the blame for Abbey's travails. Abbey would say that bad debt experience builds up over a number of years. Whatever the truth, Mr Harley now faces a whole new set of questions as old rivalries and battles come back to haunt him. Provided he wants it enough, Mr Harley may still survive, but after this he's going to need to fight like an alley cat to keep his job.

Andersen's conviction

Even without last weekend's guilty as charged verdict from a Texas jury, Andersen's demise as one of the big five global audit practices looked pretty much inevitable. The damage to reputation from the Enron collapse alone might have been enough to sink the partnership, without the additional charge of attempting to get rid of the evidence by putting it through the shredder. Even so, the conviction remains a deeply shocking event for which it is hard to think of any modern parallel. That one of the world's most respected and successful professional partnerships could so quickly be reduced to a pile of rubble, and that it could in the process be found to have obstructed the course of justice, would have been thought completely unbelievable just nine months ago.

Andersen and its lawyers were insisting yesterday that there has been a terrible miscarriage of justice, but there's no way of undoing the damage now. For better or worse, the American judicial system has acted and in so doing has dispatched Andersen to the knackers yard along with Enron. Well done is what everyone should be saying, for whether or not the jurors were right in deciding that the shredding was ordered from on high, it is certainly right that Andersen should be made to pay the highest possible penalty for its scandalous culpability in the Enron collapse. There was much tut tutting in the professions yesterday about Paul O'Neill's "string 'em up from the highest branch" remarks the affair, but the fact of the matter is that the US Treasury Secretary's characteristically uncompromising take on it all has hit the nail on the head.

Too often the professions and advisers are able to wriggle out of the blame when things go disastrously wrong and public trust is breached. At worst they escape with heavy fines and a few, choice sackings. There but for the grace of God go I, say all rivals, everyone rallies round, the post mortems follow, worthy committees make recommendations for reform, and everything carries on much as before.

There is a lot of that going on this time too, but no amount of regulation and toughening up of standards serves to substitute for the terrible lesson in retribution which has been the total collapse and conviction of Andersen. No firm of accountants is going to repeat that one in a hurry. This is how capitalism is supposed to work. It is brutal, but also effective, and although much is being written and said about the sickness at the heart of free market America, the reality is that the speed and decisiveness with which the system has reacted to events rather indicates the reverse. Enron is proving a cathartic experience for all concerned. The cancer has been cut from the body and in time, the American economy will emerge strengthened and rejuvenated.

For too long, the big accounting practices have been allowed to act as both game keeper and poacher by piggybacking vast consultancy fees off their basic work as auditors. Now they will have to decide which of these two functions they want to pursue, audit or services, but they won't be allowed to do both for the same company. Inevitably, the audit will be a more exacting process and even before taking account of the reduced competition for such work that will result from Andersen's demise, audit fees will rise. All the same, investors will find it a small price to pay for more reliable accounts.

Merrill wealth report

The rich get richer and the poor get poorer. It was ever thus, and if you thought the collapse in the stock market might temporarily have halted the phenomenon, think again. According to the latest Merrill Lynch wealth report, both the number and combined wealth of the world's high net worth individuals rose by 3 per cent last year. The price of goods is either stagnant or declining. But the price of assets, such as property and cash, keeps going up. This is a bad time to be a producer, a good time to be a hoarder.

jeremy.warner@independent.co.uk