Book Review: “Making it Happen–Fred Goodwin, RBS and the men who blew up the British economy” by Iain Martin

“It wasn't just Fred!”

Iain Martin's "Making it Happen - Fred Goodwin, RBS and the men who blew up the British economy" is a fine piece of investigative journalism and a beautifully written and very readable account of this sorry tale of corporate misgovernance. Whilst Goodwin is the main villain - rightly - there is nevertheless a sense of "Murder on the Orient Express" to the story. In Agatha Christie's detective story, you will recall, the denouement was that ALL of the suspects were guilty! The fall of RBS was the same. Fred the Shred brought down RBS, but he didn't achieve this without the connivance, neglect, self-interested actions, greed and incompetence of many others. Martin points the finger at Fred, of course, and provides the evidence. But others do not escape - there were many guilty men in this affair.

Fred Goodwin was born in 1958. This means that at the time of Margaret Thatcher's "Big Bang" in 1986 he was in his late twenties and ideally positioned to be one of Thatcher's children. He was making his way as a junior accountant at the time with Touch Roche. Less than ten years later he was Chief Executive of the Clydesdale Bank appointed by its Australian owners, Iain Martin says, because of his "ferociously logical approach to problem solving and the capacity to learn quickly". So Fred was not a banker and had no practical hands-on experience in a Bank at all. In a way, in the post Big Bang world, this was an advantage. Banks, especially maybe Scottish banks, were pretty conservative institutions and if they were to take advantage of the new financial freedoms they would need to change. On the other hand Fred Goodwin had none of the detailed understanding of bank processes and daily priorities that a career banker would have had. When growth in the good times is needed the Goodwins, gung-Ho and oozing self-confidence are what you need. But when things start to get difficult you want such people as far away from the levers of power as possible.

In the mid 1980s the Royal Bank of Scotland was dull, unambitious and pretty moribund - a "tired bit-part player" Iain Martin calls it. It was a takeover target for one on the far larger English banks. Lloyds had had a go as had Standard Chartered. It was at this time that the fervent Scottish Nationalist George Mathewson joined RBS - he was soon to become CEO. He formed an alliance with fellow Scot George Younger, the Chairman, and together they decided to do everything that was necessary to make RBS successful as an unashamedly nationalistic Scottish bank. A major step was the acquisition, in 1988, of Citizens Bank in the US. Mathewson and Younger succeeded in their ambition to transform the Royal Bank and by 1997, the year of Labour's return to power after thirteen years, Mathewson was hunting around for a successor. A year later Fred Goodwin, on the back of his success at Clydesdale, was hired. This was to be twist or stick time for the Royal Bank. True the Bank was out of the doldrums but to move onwards and upwards a step change was necessary. After a battle with their rival Scottish Bank "Bank of Scotland" RBS acquired the much bigger, but rather tired and complacent NatWest. Fred Goodwin led this successful coup and was rewarded with the CEO job when Mathewson moved upstairs as Chairman shortly after the NatWest takeover.

The early years of the new millennium were to be bonanza time for the financial services industry. Tony Blair left Gordon Brown to run not just the Treasury but much of domestic policy as well. The growth of the banks was extraordinary. Interest rates set by the Bank of England were low. Lending was growing exponentially. Fred Goodwin strove to make RBS a leader in all this. Its size, with NatWest being integrated, made it a player on an international scale. And Citizens gave them a solid foothold in the rapidly growing American financial services sector. Most importantly financial regulation in the UK was not just "light touch" but confused and often non-existent. Iain Martin is excellent on how regulation fell somewhere between the Bank of England, the understaffed Financial Services Authority (FSA) and the Treasury. The key, of course, for Brown was to interfere as little as possible. He had a cunning plan which was that credit-fired growth would make the Financial Services sector so profitable that the taxes on the profits they paid would fund an expansion in spending on public services. Socialism (sort of) would be paid for by uber-capitalism.

It is instructive to look back and see not just how disastrous this regulation lacuna was but how Britain's opposition got it 100% wrong. Typical was David Cameron's speech to the Conservative Party conference in 2005 (the speech which got him the leader's job a couple of months later). Cameron said

"Everyone knows that business need deregulation to compete with China and India. Who is standing in the way? The great regulator and controller, Gordon Brown."

In fact the opposite was the truth. Far from regulating and controlling Brown (a disastrous Chancellor Iain Martin calls him) stood back and let Fred Goodwin and his like get on with it! For a while it worked. In his "Mansion House" speech in June 2007 Brown said the Government would ensure Britain stayed a "world leader in stability... by ensuring [her] macroeconomic framework remains a world benchmark". That was "delusional drivel" says Martin!

The uber-capitalism was alive and well in Fred Goodwin's RBS. Soon the now "Sir Fred" began to act like a "Master of the Universe". There were private jets. Fleets of Mercedes specially painted in RBS Blue. Sponsorship of a Formula one team, of the Rugby 6 Nations and all the usual trappings of power and privilege. "Compensation packages" for the head honchos escalated exponentially as well. Bankers' bonuses were born and reborn. A grand new headquarters building near Edinburgh Airport was planned on an 80 acre site and in 2005 it was completed and opened by the Queen.
Banking can be divided between the traditional retail and commercial segment, with its branches and its domestic and business customers (the Royal Bank's home territory for two hundred years), and "Investment Banking" the (comparatively) new kid on the block. The latter grew massively across the world in the 1970s and after - especially in Britain post big bank. It is in Investment Banking that the big numbers apply. The scale of the trades, the complexity, the innovation and - of course - the rewards given to the successful practitioners. In RBS's US investment banking subsidiary Greenwich Capital many employees had salary and bonuses in the high millions of dollars per annum! This company moved in a big way into collaterised debt obligations (CDOs) which, in theory, provided reliable income streams from repackaged mortgage securitisations. Iain Martin describes all of this in an illuminating chapter "Safe as houses". Mortgagees pay their monthly amounts and these find their way via CDOs to RBS, or its subsidiary. What could go wrong? Especially as Greenwich was at the upper end of the category with its AAA or "Super senior" portfolios. "RBS does not do sub prime" said Sir Fred. Well actually they did, and he didn't know. Probably.

Let's reflect for a moment on this world of around 2004/5. Gordon Brown opened American Investment Banker Lehman Brothers' massive new offices in Canary Wharf on 5th April 2004 and made a laudatory speech commending their "greatness" and "innovation". There would, he frequently said at that time, be no return to "Boom and Bust". Credit is the driver of business and the source of income to banks. Credit is what makes buying a property possible for private individuals. The banks make money on the spread - the difference between what they pay for money and what they can sell it for. And they made a lot. Interest rates are the key tool. Alan Greenspan, chairman of the Federal Reserve in the US would use interest rates to keep the financial economy booming along reducing rates (for example) if the Stock Market wobbled. Eddie George at the (newly responsible for interest rates and inflation) Bank of England did the same, as did his successor Mervyn King. The increased liquidity from this would keep people spending, and borrowing, and lending. By the mid 2000s Bank balance sheets, leveraged to the hilt, were approaching five times the size of the UK economy (GDP). In 1970, before the Big Bang and the "Loadsamoney" era, they had been at 38%. The Royal Bank of Scotland was sailing along on this boom, its profits growing every year and its business portfolio widening, especially in the Investment Banking sectors. It had a touch of the Lehmans, a lot of the Northern Rocks (home loans) and many, many other fingers in financial services pies from Insurance to Leasing. It was diversified in business and geography. But Sir Fred wanted more, much more. His eyes fell on the Dutch Bank ABN Amro.

The synergies between ABN Amro and RBS were questionable to say the least. It was a big bank, with international interests, but a far from coherent structure. Iain Martin describes it as a "conglomeration of various inefficient units patched together". It was an unappetising mix of the good, the bad and the decidedly dodgy. There were bits Fred Goodwin definitely wanted and bits he certainly didn't. Part of the problem was that he wasn't sure of which bits fell in which category! When he heard in late 2006 that Barclays was interested it became a battle and Fred engaged in earnest as it was announced that Barclays was in formal talks the following Spring. He wanted to be bigger than Barclays it was, astonishing as it may seem, as simple as that! Goodwin put together a consortium which comprised RBS, Fortis the Belgian Bank and Santander from Spain. By June there was a deal which was, Iain Martin emphasises, approved by every one of the RBS Board. Iain Martin lists all 17 of them to make sure that we get the message that this wasn't just Fred Goodwin being cavalier! Meanwhile there was bad news from the US. In February HSBC said it was providing for $10 Billion of losses relating to the American mortgage market. It soon became apparent that the RBS American subsidiary was deep into this mess as well. "...the CDO machine at Greenwich was disintegrating". In The UK by September 2007 Northern Rock was in trouble. Around the world financial markets were in turmoil and financial institutions were under threat. The extent of that threat was unknown but no prudent Bank would surely go for a grandiose acquisition at this time. Surely?

RBS's takeover of ABN Amro was completed in October 2007. Iain Martin's "It was obvious... that RBS had completed the purchase of ABN Amro at an extremely difficult moment" is a masterpiece of understatement! The Royal Bank's balance sheet had doubled overnight! At £1.9 trillion it was "bigger by at least £400bn than the output of the entire British economy"! Well the rest of the RBS story really follows on inevitably form the position it found itself in after the Dutch acquisition and given the global financial circumstances gathering pace. Only a £12bn Rights issue in April 2008 stopped the bank from going under as money haemorrhaged away in the US and elsewhere. This was temporary relief. In September Lehman Brothers went bankrupt to be followed by a raft of other financial institutions on both sides of the Atlantic. The game was up. A month later RBS had to rescued by the British Government - eventually to the extent of £45bn. £750 from every man, woman and child in Britain (or £9,000 from every Scot!).

As I said at the beginning of this review although Fred Goodwin was the main villain of the piece in this sorry story it is fairer to call it a collective misjudgement. Unlike with Enron (and Arthur Anderson) eight years earlier nobody went to jail because, extraordinary though it may seem, no laws were actually broken. That there was fiduciary incompetence and irresponsibility on a massive scale by Fred and others is not in doubt. But they didn't break the law! The only conclusion from this is that the Law was an ass! Gordon Brown was proud of his light touch regulation but that it was so light touch that nobody was legally guilty in the RBS story is surely a scandal in itself. Brown failed. The Bank of England failed. The Financial Services Authority failed. Britain's political leaders on both sides of the House failed abysmally. The media failed. Accountants and Auditors failed. Risk managers failed. All the highly paid employees of RBS failed as did those charged with monitoring and guiding them. That they did not, as in "Murder on the Orient Express" wilfully slay their victim is by the by. The effect was the same. The Bank was dead and bereft of life due to the negligence, greed and incompetence of many. It wasn't just Fred.


“Making it Happen: Fred Goodwin, RBS and the Men Who Blew up the British Economy” by Iain Martin
350pp, Simon & Schuster,  £20.