Royal Bank of Scotland was not alone in being shabby, reckless, greedy, dysfunctional and corrupt during the build-up to the crisis. Nor in its aftermath.
Many other banks only survived as a result of broader rescue programmes and money-printing by central banks. The Royal Bank was very much a creature of its age. With growth its main focus, the board of directors and its management became wilfully blind to the riskiness of the assets they were buying. More than 200,000 people worked for the Royal Bank of Scotland at the time of its October 2008 collapse. But there was only one person in the driver’s seat, and he had been in that position for eight and a half years
Fred Goodwin RBS CEO 2000–08
Fred Goodwin had delusions of grandeur. He was determined to show the world that a plucky little bank from Scotland could play with the big guys. First, he wanted to take on England, then the USA and then the world. He wanted the fame and glory that would come from this, together with the money, power and lifestyle.
Self-confident, aggressive and contemptuous of anyone who questioned his vision – with hindsight, he seems to have been a one-trick pony who became overly obsessed with the baubles of wealth.
He believed that, after pulling off the £21-billion acquisition of NatWest, RBS had developed a secret formula for perpetual growth. The strategy was to make acquisitions without necessarily worrying too much about the price or how they would be paid for
Goodwin pulled the trick off so often – he made 27 acquisitions as RBS chief executive – that he grew to believe he could keep on using it forever. His problem, however, was that he had no plan B for financing deals on the occasions when the cost cuts and revenue synergies failed to materialise – as happened with both Charter One and ABN AMRO. The assumptions were wrong and the model naive since it was dependent on the good ship RBS always having a fair economic wind to fill its sails.
Cult of Fred
As the storm gathered, a ‘cult of Fred’ inside RBS meant staff were unaware of how the bank was perceived and oblivious to the precariousness of its business model. Goodwin’s capricious and tyrannical management style discouraged dissent or challenge. Mass delusion played a big part in the bank’s demise.
Goodwin’s approach of verbally dismantling (‘shredding’) subordinates in front of their colleagues, his reluctance to heed advice and his lack of any internal confidants ensured he was increasingly out of touch and behaving like a medieval monarch, surrounded by cronies, courtiers and ‘yes’ men. Without even a fool to remind him of his own human frailties.
[Stripped of his knighthood in January 2012…] By February 2015, Goodwin did not see himself as being at risk of arrest. Indeed, he was welcomed back into the heart of Edinburgh establishment. Early that month, he turned up at the Oyster Club, an Edinburgh drinking society founded in the 1770s where he was a member, after an absence of about five years. The first two people he met on crossing the threshold were two of Scotland’s most senior policemen. They greeted him like a long-lost friend.
Despite repeated requests, Goodwin has refused to be interviewed for this book.
Tom McKillop RBS chairman 2006–09
Sir Tom McKillop, a Royal Bank of Scotland non-executive director from September 2005, took over chairmanship from George Mathewson on 28 April 2006. When he arranged for one-to-one meetings with each of the divisional heads, they felt change was in the air.
Their overriding concern was Goodwin’s management style. They told the chairman designate that Fred disliked bad news and could be a tyrant and a bully.
To his eternal discredit McKillop didn’t seem to do anything. Indeed, If anything, he seems to have been as much in denial about the problem as Mathewson was.
As chairman he could have saved the bank. It is surprising that McKillop’s name is only mentioned twice in the FSA’s report into the bank’s failure.
McKillop appears to have done little or nothing to stop deceptive and unethical sales and marketing practices at RBS – particularly for payment protection insurance and interest-rate swap agreements in the UK and for mortgage-backed securities in the US.
He could have restructured the board so that it was peopled with directors who were robust enough to challenge and stand up to Goodwin.
In his favour, McKillop did offer one of the most grovelling apologies made by any banker or bank director in the wake of the crisis.
Both personally and in the office I hold, I am profoundly sorry about the position that we have reached. The buck stops with me as chairman and with the leadership of the group. Accountability has been allocated and fully accepted. McKillop to shareholders in Edinburgh 20 November 2008
In reality, accountability has been neither allocated nor accepted. Like most bankers who led institutions to their doom, McKillop remains firmly in denial, blaming the global financial crisis on government and claiming that it was only with hindsight that the ABN AMRO deal looked ill-advised.
George Mathewson RBS chairman 2000–06
As chief executive of Royal Bank of Scotland (1992-2000), George Mathewson turned it around following the crisis of 1990–91, pursuing an innovative strategy that rebuilt the bank.
Very ambitious for RBS, he saw growth in UK and internationally as the surest bulwark against take-over. He ran the bank with an ‘efficient’ balance sheet –using relatively low capital ratios and relatively high leverage to bolster returns – but he never took outrageous risks as chief executive. RBS was one of the UK’s best performing banks during these years.
Mathewson made three terrible errors.
First: to appoint Fred Goodwin as his successor. A phone call to Deloitte would have told him that Goodwin had misrepresented his role on the global liquidation of BCCI and a call to Clydesdale Bank would have told Mathewson that Goodwin was a poor manager despised by most of his staff.
Second: to regard Tom McKillop as a suitable successor and to engineer his appointment.
Third: on succeeding George Younger as Royal Bank’s chairman in April 2001, he erred towards being too hands-off. Partly because he did not fancy having constant rows with Fred Goodwin. His detachment and lack of engagement with the bank intensified after Goodwin overpaid for Ohio-based Charter One in April 2004. Relations between Goodwin and Mathewson soured from this point onwards.
Mathewson acknowledges some mistakes, including appointing Johnny Cameron to run Global Banking and Markets. He blames other mistakes on ‘pressure from the City’ – to boost short-term shareholder returns.
For Mathewson, the next pressure was to securitise the bank’s loans – bundling them up into tradable bonds which could be sold to third-party investors, thereby removing them from the balance sheet. Mathewson said he and Iain Robertson would have preferred that the bank held leveraged loans until they matured, instead of securitising them.
To Mathewson’s credit, he has thought through some of the flawed practices that fuelled the global financial crisis, but to his debit he did not do enough to control them. He needs to publicly acknowledge that he made errors of judgement in appointing Goodwin and McKillop.
Johnny Cameron CEO/chairman RBS Global Banking and Markets 2000–08
Johnny Cameron – a successful corporate banker at County NatWest, Dresdner Kleinwort Benson and Royal Bank of Scotland – was out of his depth as chief executive of a massive investment bank with operations in London, Connecticut, New York, Frankfurt, Madrid, Milan, Paris, Stockholm, Singapore, Japan, etc.
Urbane and affable, Cameron says it was ‘great fun’ being a banker until the end of 2006. With economic conditions benign, regulators relaxed and liquidity plentiful, it was an unusually propitious environment to be building GBM.
Cameron was a great salesman and motivator of people. Paradoxically, he was also seen as a safe pair of hands.
To his credit, Cameron did launch what he calls a ‘drains-up’ probe of the bank’s mortgage-backed securities business, focused on RBS Greenwich Capital, in March 2007 and reined in the bank’s use of conduits (off-balance sheet vehicles dependent on short-term funding).
Lack of in-depth knowledge
Where he fell down was his lack of in-depth knowledge of some areas of the markets business and in being too trusting of some of the individuals within it. For at least ten months after the financial crisis intensified in July 2007, Cameron – like his boss Fred Goodwin – believed it would be a short-term phenomenon.
Cameron was singled out for investigation by the Financial Services Authority in May 2009 and is the only RBS executive who has suffered any form of retribution from the regulator.
In May 2010, the FSA reached a settlement with Cameron under which he agreed not to perform ‘any significant influence function in relation to any regulated activity carried on by any authorised person, exempt person or exempt professional firm; or undertake any further full-time employment in the financial services industry.’
In exchange, the now disbanded regula- tor said it had not found any evidence of regulatory breach against Cameron and would not pursue any disciplinary action against him.
It is worth pointing out: plenty of others who worked for GBM are no less culpable than Cameron and many have also emerged from the wreckage of RBS as multi-millionaires:
To be continued…
This is an edited and abridged extract from The Guilty Men, the final chapter of Ian Fraser’s best-selling book
Featured image: Wanted poster at Holburn Station, London, March 2009 by takomabibelot
Further reading in the Sceptical Scot financial crisis series
Extracts from Ray Perman’s Hubris: How HBOS wrecked the Best Bank in Britain