Making It Happen: Fred Goodwin, RBS and the men who blew up the British economy

by Iain Martin

  Making It Happen

  First published in Great Britain by Simon & Schuster UK Ltd, 2013

  A CBS COMPANY

  Copyright © Kennedy Herd Ltd, 2013

  This book is copyright under the Berne Convention.

  No reproduction without permission.

  All rights reserved.

  The right of Iain Martin to be identified as the author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act, 1988.

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  A CIP catalogue record for this book is available from the British Library

  ISBN: 978-1-47111-354-3

  eBook ISBN: 978-1-47111-356-7

  Typeset in the UK by M Rules

  Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY

  For Fiona

  Contents

  Prologue

  1 Tuesday, 7 October 2008

  2 Company of Scotland

  3 New World

  4 Paisley Pattern

  5 Battle of the Banks

  6 The End of Boom and Bust

  7 Fred the Shred

  8 Sir Fred

  9 Canny Scottish Bankers

  10 Safe as Houses

  11 Light Touch

  12 Double Dutch

  13 Bank Run

  14 Boom Goes Bust

  15 Five Years On

  Afterword

  Sources and Acknowledgements

  Notes

  Index

  List of Illustrations

  Prologue

  ‘You have a long time to regret it if you don’t get it right.’

  Fred Goodwin, 7 June 2004, Businessweek

  During the boom years, at the beginning of the century, the Royal Bank of Scotland chose an advertising slogan. The words were emblazoned in large letters on billboards at airports, used in television campaigns and appended to mountains of marketing material selling mortgages, insurance and investment products. RBS, the adverts promised, would ‘Make It Happen’. The phrase was chosen by the then chief executive Fred Goodwin for several reasons. It not only informed customers that RBS stood ready to help if they were minded to make it happen – whether ‘it’ was moving house, insuring said house, expanding a small business or trading billions on the financial markets in complicated products. It was also intended to encapsulate Goodwin’s ‘can-do’ determination to build a bank that could take on the very best in the world. All that activity eventually resulted in RBS becoming, briefly, the very biggest of all, just at the moment when being the biggest was the last thing a sensible bank should want to be. Fred Goodwin and his senior colleagues were true to their word, albeit not quite in the way they originally intended. They really helped to make it happen.

  The collapse of the bank they ran in October 2008 was not just a corporate catastrophe for those who worked at RBS, or owned shares in the company. It also presaged a severe and sustained downturn in the economy that has had adverse consequences for the prosperity of Britons. In January 2013, five years into the crisis, the UK economy was still 3.4 per cent below its pre-slump peak. The living standards of millions of families have declined.

  Of course, in the crisis of 2007 to 2008 RBS was not the only British institution to need rescuing. Plenty of others got into difficulties – HBOS, Northern Rock, Bradford & Bingley. All had to be bailed out or sold, and even the institutions that did not have to be nationalised – taken over by the taxpayer – relied on forms of special support and loan facilities from a government desperate to keep the banking system alive. RBS is a special case, however. Its blow-up was the largest and most spectacular of the lot. When it arrived at the point of failure, the government had to buy £45.2bn of RBS shares and offer many billions more in credit facilities to prevent the bank’s collapse. The rescue dwarfed the packages needed for the other UK banks.

  The damage done by the crisis goes well beyond simple lost economic capacity. The egocentrism and greed of the ‘good’ years and the trauma of the downturn that followed have so widely shaken confidence in the basic precepts of capitalism that it is common to talk of it being in crisis. In this way, our reckless past, troubled present and precarious future are bound up in the incredible story of how a previously modest, Presbyterian, cautious Scottish institution ended up with a balance sheet of almost £2 trillion just when the boom went bust.

  Goodwin himself is not an obviously stupid man. But if the former RBS boss had wanted to make himself the epitome of bad boy bankers, the physical embodiment of the British end of the crisis, he could not have done a better job if he tried. His bizarre handling of the aftermath has involved the adoption of an anti-PR strategy in which he offers nothing in the way of explanation. He has even used the courts to try to block mention of aspects of his private life. It has done nothing to aid understanding and has guaranteed that Goodwin be treated as the pantomime villain, a target at which anger over what happened can be channelled. Early on, there was the darkly comic awfulness of his public appearances in front of a parliamentary committee and at the RBS Extraordinary General Meeting held to approve the terms of the government bailout. He apologised for what had happened. He regretted how it had all turned out. He wished he could do something in order to make it different. That was all. There appeared to be no proper reflection or reckoning. ‘For Fred to admit he had got something, anything, wrong, that would be incredible,’ says a former member of his management team. ‘If you were to say to him when something had gone wrong, I saw you do it wrong, I know you did it, Fred would say no, that’s not how it was. He is like a little boy who never admits mistakes.’

  Former colleagues, friends and enemies all testify to his considerable abilities. Certainly, he did not rise each morning looking for ways in which to ruin the bank he ran and destroy his own reputation, while inflicting epoch-defining damage on the UK economy. So what on earth did he think he was doing? Finding out is not straightforward. Goodwin makes no comment in public, lives in Edinburgh, draws a pension from the taxpayer-owned RBS (of £342,500 per year), sees a few friends, shoots, repairs vintage cars, tries not to read the newspapers and avoids engaging with those who want to question him about his motives, recollections and regrets. ‘He has shut out the world,’ says a friend. His marriage foundered after it emerged that he had an affair with a member of staff at RBS in the run-up to the financial crisis. His wife, Joyce, only discovered this when he revealed that it was about to be reported in the newspapers. Everyone knows that Sir Fred Goodwin is now plain Mr Fred Goodwin, but it is rarely mentioned that Lady Goodwin lost a title too when her errant husband was stripped of his knighthood in 2012.

  Other than the removal of the Goodwin honour, very few bankers have faced any sanction, which is remarkable considering the scale of the disaster. Johnny Cameron, the former head of the division at RBS which oversaw investment banking, was singled out for criticism in an investigation by the Financial Services Authority (FSA). Cameron is not allowed to take up any full-time position in the City. Peter Cummings, a former banker at HBOS, another bank that got out of control, has been fined by the FSA. Bob Diamond was forced out of his post at Barclays, over the interest-rate-setting Libor scandal, which is only indirectly related to the crisis. Belatedly, Sir James Crosby of HBOS lost his knighthood.
A few others have been forced to stand aside from their jobs, and that is pretty much it. At the time of writing, no one has gone to jail.

  In the last five years there have been various studies and reports undertaken by MPs, peers and public bodies, dealing with particular aspects of the crisis. Incredibly there has not been a full report into RBS, although it is a common misconception that there has been, mainly because the FSA published a 450-page document called ‘The failure of the Royal Bank of Scotland’. The reality is that the FSA did not investigate the company. It investigated Johnny Cameron to establish whether or not he should face any action and then, when the government applied pressure for more, widened the scope a little, rebadged the findings and issued it as a sober-looking tome. There is very interesting material within its pages but several of the main characters at the top of RBS were not even interviewed, and several others received only the lightest of grillings. Another substantial chunk of the report involves the results of an investigation the FSA instigated into itself. The document is hardly a complete account of what happened.

  I became fascinated by these omissions and contradictions in the British response to what had been a national economic disaster on a grand scale, and by the inadequacy of many of the explanations. How and why had Fred Goodwin, his senior colleagues at RBS, other financiers and the political and regulatory class got Britain into this mess?

  Goodwin himself has intrigued me ever since I encountered him fleetingly when I was editor of the Scotsman newspaper in Edinburgh for three years, from 2001 to 2004. I shook his hand a couple of times at social events, then observed him work the room, and listened over lunch as awestruck people who knew RBS whispered horror stories about the chief executive’s behaviour. As an innately sceptical journalist I actually found all this rather baffling and struggled to square his image as a coming titan of finance with the strangely unimpressive, slightly geeky figure in a Royal Bank of Scotland corporate tie and sober suit.

  The public-spirited thing for Goodwin to do would be to donate himself to the psychology department of a decent university in order that academics could run years of detailed tests. He is a study. Had he really terrified some of his staff into submission as it is claimed? Yes, some. ‘Fill in the complaints book on your way out of the door,’ he told one executive who had been eviscerated in his office. ‘He had what he called Fred’s black book for executives who had displeased him,’ says a colleague. ‘He liked to say that if your name was written in the book in pencil you were on the borderline. If it was written in ink you were well and truly fucked.’

  Yet, although his nickname was ‘Fred the Shred’ he seems to have fired hardly anyone personally at a senior level. There was little swearing, and not much shouting, as he preferred destruction by logical deconstruction and biting sarcasm. Were fully grown men (they were almost all men) – such as those on the RBS board whose job it was to oversee his tenure – really reduced to shaking wrecks by this and unable to speak up? Of course not. Many of them were experienced and extremely wealthy individuals who did not need the money and had no reason to be afraid. It is simply not credible that they were too scared to urge restraint. Something else must explain their inaction, and I wanted to find out what.

  Some in the management team admit to having been frightened, although most developed strategies to cope with his unorthodox approach while taking the money. ‘You have to understand,’ says another of his closest collaborators, ‘that Fred had no interest in or understanding of ideas, even though he was gifted and had sharp insights into how to solve a problem in a deal or a proposal. So you proceeded mainly according to the goals and targets that were set for you and tried not to get tripped up, rather than thinking of the bigger picture.’

  Another concludes: ‘The job of chief executive wasn’t really done by him in the normal sense of someone trying to strategise properly and see the dangers and opportunities ahead. He was obsessed by all sorts of small details and measuring things and all sorts of minutiae and crap in certain parts of the business. He had identical Mercedes ordered so that he was always picked up in the same kind of car in Britain. And he had it painted in RBS blue, not the blue that Mercedes offered, but RBS blue. We would spend hours in meetings discussing the wrong things. Colours for advertising campaigns, computer systems and targets were what grabbed him. I think he thought that meant he was on top of things when he wasn’t.’

  Goodwin, an accountant by training and not a banker, was fixated on detail. Yet, there was a terribly important and ostensibly puzzling exception. The division of RBS that ended up doing most damage in the run-in to the collapse was its investment banking division, and the chief executive had only a very limited grasp of its activities. Apparently this did not concern him until it was too late. A supposed control freak didn’t want to know what he didn’t know, until, as we shall see, he smelt trouble and then made belated and insufficient efforts to investigate.

  He wasn’t alone in this. Although it was extremely unwise for any ambitious bank executive to admit it, many without a degree in mathematics or a particular kind of investment banking background seem to have been ignorant of a good deal about modern banking. When arguing with a drunken RBS executive from the investment banking arm who had questioned his judgement on the disastrous bid for the Dutch bank ABN Amro, Goodwin called investment banking ‘your money-making machine’, as though what half the bank he ran did was not his responsibility. In contrast, he spent more time on branding and making RBS a global giant. Says a close colleague: ‘What Fred wanted was to get bigger. He was determined that RBS would be bigger than Barclays.’

  That the modern Royal Bank of Scotland was only partly Fred Goodwin’s creation is often forgotten. It is impossible to understand what eventually transpired without reference to Scotland, and to the man who groomed Goodwin: Sir George Mathewson, his predecessor as chief executive and chairman for more than half of Goodwin’s time in post. The nationalistic Mathewson was not a banker. He was an engineer who became convinced that from the ruins of post-industrial Scotland in the late 1970s and 1980s could emerge a bank under his leadership that would lead a national reinvention. From the late 1980s he gathered together bright young managers, friends from the government economic development agency he had run and executives from Scotland’s computer industry, ‘Silicon Glen’. With them he set about remaking the Royal Bank of Scotland.

  Mathewson’s new notion echoed an old idea. The reputation of the Scots as uniquely canny bankers stretched back three centuries, to when a Scot, William Paterson, had helped found the Bank of England in 1694 to lend the money the English government needed to wage continental war. Scotland then established two properly commercial banks serving businesses and individuals – the old Bank of Scotland and the Royal Bank of Scotland – when England did not have even one. Mathewson mined his country’s past to forge its future, telling his team that there was nothing to prevent an innovative Scotland from creating the best bank in the world. He chose Goodwin to continue his mission.

  Mathewson had begun his extraordinary efforts just as the transformation of modern international finance got under way properly, as banks exploited new technology and grew by lending more and trading in innovative ways. Then a generation of politicians and regulators emerged in the UK and the United States to declare that these developments when allied to the rise of emerging economies, which increased vastly the potential for trade, meant that there was now a new paradigm, a settled period of rising prosperity or the ‘end of boom and bust’. The intellectual climate of the time created a dangerous feedback loop in which top financiers could act as though the good fortune was attributable to their genius – hence the need for them to be given ever-better remuneration – while politicians in power could take credit, spend the proceeds and stroke the ego of the financiers they needed to keep delivering growth. Hardly anyone involved paused for a moment to ask the old question: what happens when this stops or there is a reverse?

  It was in this excitin
g climate that a young accountant turned bank executive called Fred Goodwin emerged to run a small but terrifically ambitious bank in Edinburgh. ‘I want us to be bigger than J. P. Morgan,’ Goodwin told another banker, referring to the giant of US investment banking. For a few months he got his wish, and then in late 2008 it all – the Royal Bank of Scotland, other banks, some of the complex instruments investment bankers had created, the supply of cheap money and the assumptions under pinning the long boom – came crashing down.

  It suits many people at or near the scene of the disaster to make the British end of the financial crisis all about Fred Goodwin. Astonishingly, many who were most intimately involved have barely featured in the coverage of the crisis, or have been mentioned only fleetingly and gone on to continue their careers quietly. But Fred Goodwin at RBS did not operate alone, like some deluded young rogue City trader trying to make his first millions. Although his monumental management errors and dud decisions produced an end result that was catastrophic both for the bank he ran and for the rest of us, others shared his ambitions and collaborated each and every step of the way.

  While this book has the rise and fall of Fred Goodwin at its heart, Making It Happen is not exclusively about him. That would be much too convenient for others who share the blame. Rather, it is the story of how an over-mighty chief executive, corporate vanity rooted in patriotic pride and global ambition, misguided management, regulatory failure, and epic political hubris, all combined to produce a calamity.

  A member of his management team throughout his reign at RBS – someone with plenty of cause to dislike Goodwin – put it this way when I was beginning my research: ‘When you write this book you must tell everything you can about Fred because he has so much to answer for. He led us into the biggest fuck-up in British corporate history. But there is a lot more to it than that. We on the management team should have stopped him. We failed, I failed. Where was the board of directors? Where were the big shareholders? Where were the regulators? Where were the auditors? Where was the government?’