Fred Goodwin is deeply culpable for what happened to RBS, given that he was chief executive from 2000 to 2008.
If he had run the bank differently, if he had been less blind to risk, if he hadn’t pushed for rapid growth in leveraged finance, commercial property and structured finance at the worst point in the cycle and if he hadn’t bought parts of ABN AMRO in order to assuage Santander chairman Emilio Botín and to avoid being sued by a bunch of hedge funds, Royal Bank might not have failed. If he hadn’t crushed any internal dissent by being so vile to his colleagues, then sceptics would have been more willing to speak out at board and management meetings, questioning his strategy and reining him in.
Clearly though, there is a whole corporate governance superstructure in large companies whose role is meant to stop imperious chief executives from leading companies to their destruction. In the case of RBS, the superstructure was peopled by a chairman, non-executive directors, a chief financial officer, the group audit committee, a chief risk officer, risk managers, internal auditors, external auditors, institutional investors and credit rating agencies, as well as panoply of other extremely well-paid professional advisors, including actuaries, lawyers, investment bankers and consultants.
If there is to be one lesson from the RBS catastrophe from an internal company perspective, it is that Britain’s much vaunted system of corporate governance is broken and is in need of an urgent overhaul.
True villains of the piece
However, where RBS was concerned, the preference of most of the people who fulfilled these roles was to go with the flow, suck up to Fred and flatter his ego in the hope of maximising their fees. None, with the possible exception of non-executive directors Sir Steve Robson, Gordon Pell and Peter Sutherland, seems to have challenged Goodwin over strategy. They were, to an extent, like the tailors in Hans Christian Andersen’s ‘The Emperor’s New Clothes’, persuading him he was elegantly clad.
Among this bunch, blame must be widely shared, but Sir Tom McKillop, chairman from April 2006 until February 2009, is more blameworthy than most. As chairman, his job was meant to be to challenge the executive over strategy, not to be even more gung-ho than his chief executive. If there is to be one lesson from the RBS catastrophe from an internal company perspective, it is that Britain’s much vaunted system of corporate governance is broken and is in need of an urgent overhaul.
However, the true villains of the piece are the politicians, central bankers, regulators and the Basel Committee on Banking Supervision. Despite his initial attempts to crack down on banker excess via the Cruickshank Report, Brown changed his tune towards banks and bankers in mid 2002. Seemingly pressurised by bankers, Tony Blair demanded that the already emasculated FSA give up any pretence of trying to regulate the banking sector. From that moment on, banks thought they could get away with virtually anything, whilst defying financial gravity and existing above the law. It meant morality and ethics were thrown out the window and we saw the mis-selling of rip-off products on an epic scale – including the scandals of payment protection insurance and interest-rate swap agreements sold to small and medium-sized enterprises.
The Treasury, the FSA and the Bank of England all turned a deaf ear to the complaints from the banks’ millions of victims and paid scant heed to the overall balance-sheet strength – capital, liquidity and asset quality – of British banks. And, at various stages between 1988 and 2008, British politicians also outsourced critical aspects of banking regulation and supervision to the private sector body, the Basel Committee on Banking Supervision, which enabled the bankers to write their own rules. That, in itself, was an error easily as bad as any committed by Goodwin. So he is right. We can’t just blame it all on him.
The government had an unprecedented opportunity to sort out RBS in the aftermath of its October 2008 collapse. It could have fully nationalised RBS and then split it into a ‘good bank’ and a ‘bad bank’, following the model adopted by the Swedish government for its bombed-out banking sector in 1992. That would have permitted a harsher treatment of certain categories of creditors and a much more profound restructuring than was possible under the Labour government’s half-baked bailout. There should have been a more realistic approach to the marking-down of asset valuations, greater honesty and transparency in the way the bank was run and a less vindictive approach to smaller business customers whose businesses and lives the bank has destroyed.
RBS lost its moral compass under Fred Goodwin. It needed to find it again after the bailout, but under Stephen Hester, who became chief executive after the rescue, it did not even look. In consequence, the bank continues to lose the confidence of customers and its own employees. After 25 years as a customer of the bank, I was delighted to move my accounts away in April 2013. And RBS continues to be seen as the most toxic bank brand on the British high street – with the possible exception of Barclays.
If the right moves are now made, RBS could become a great bank again. If they’re not, I doubt it will even exist in ten years’ time.
An uncertain future
In failing to consider policies along these lines, the governments of both Gordon Brown and David Cameron have let the people of Britain down. The result has been that, at the time of writing [Shredded was published in 2014] RBS is probably a worse bank than it was under Fred Goodwin, and it is certainly a much worse bank than it ever was under George Mathewson and Charles Winter.
The Royal Bank of Scotland is facing an uncertain future. If he genuinely believes in turning the place around rather than just extracting £3 million a year in pay and bonuses and spouting platitudes about being ‘customer focused’, McEwan is going to have to shape up his act. An ethical revolution is required. And that will be tough. At the very least, it will require the ousting of whole swathes of the bank’s middle management. The Global Restructuring Group (GRG) needs to be shut down, with a new ‘restructuring and recovery’ division started from scratch. [As the Financial Times reported, 30 of the 32 managers in the GRG were working for the new division]. Markets and International Banking (M&IB), if it survives at all, has to actually focus on serving the needs of large corporates – which is what Iain Robertson recommended it should do in his valedictory speech in March 2005.
If the right moves are now made, RBS could become a great bank again. If they’re not, I doubt it will even exist in ten years’ time. Whatever happens, it now seems impossible that British taxpayers will ever see a return on their £45.5-billion investment in the bank.
Describing the Parliamentary Commission on Banking Standards report published on 19 June 2013, the Financial Times’ chief economics commentator Martin Wolf said, ‘One cannot read the commission’s report without feeling real anger. The banking industry has taken the public for a ride. Despite substantial and welcome reforms, it still does so. The argument it makes is that it is too important to reform. In fact, it is too important not to be reformed.’
This is the final extract from Ian Fraser’s best-selling book Shredded: Inside RBS, the Bank that Broke Britain .
Featured image: Money – sad face: image byronv2 CC BY-NC.20
Sceptical Scot’s financial crisis series will conclude with a specially commissioned article and podcast when Ian Fraser and Ray Perman will review the legacy of the 2008 crash.