by Iain Martin
Where, indeed. In this book we will find out.
London, July 2013
1
Tuesday, 7 October 2008
‘You’re in a bit of trouble’
Lord Myners to Fred Goodwin
Outside London’s Ritz hotel, a chauffeur-driven S-Class Mercedes painted Royal Bank of Scotland blue sits waiting for Sir Fred Goodwin. Shortly after 8 a.m., the RBS chief executive makes his way through the revolving doors of the hotel, walks past the doorman on the steps, emerges onto Arlington Street and gets into the car. The London markets are opening for business and it promises to be another turbulent day. Yesterday, Monday 6 October, RBS shares had stood at just 148p when trading finished in the City, meaning that in six months of wild fluctuations the price has more than halved. The share price is simply a measurement of what investors – from massive institutions that control our pensions to individuals who play the markets – are prepared to pay to own a slice of a company. It is an indicator of a firm’s health, monitored on screens by profit-seeking traders who look at moments of crisis such as this for clues as to how ill the patient might be. RBS is about to go into cardiac arrest.
Pulling away from the Ritz, Goodwin’s car heads north, through Mayfair. The first appointment of the day is a longstanding engagement from which he is unable to extricate himself. The RBS chief executive has been booked as one of the first speakers at today’s Merrill Lynch annual banking and insurance conference, being held in a lesser five-star hotel, the Landmark, on Marylebone Road. Such events, held in front of several hundred executives and banking industry analysts, are standard fare for chief executives, who usually do a bullish presentation on their company’s prospects, take a few questions and then leave. Goodwin also knows the hosts well, the American investment bank Merrill Lynch. That relationship stretches back to Merrill’s richly rewarded advisory work on the £21bn purchase of NatWest in 2000 that had made Goodwin’s reputation. Matthew Greenburgh, one of Merrill Lynch’s highest-paid dealmakers, had become a trusted counsellor and friend. Anyway, failing to turn up to the conference is not an option. It would suggest panic.
There is a lot to panic about this morning. For months investors and traders have been trying to rid themselves of shares in banks exposed to the sub-prime crisis, which has its origins in years of catastrophically lax mortgage lending in the United States. Merrill Lynch has itself already been swept up in the tumult. Riddled with sub-prime-related problems of its own, it was sold to Bank of America in September. Today, the next bank in the line of fire is RBS, a Scottish institution that has grown rapidly to become a global player. Goodwin and his colleagues have waded into the toxic swamp of sub-prime and are now stuck, up to their necks. It is not just the share price that is a problem. That is merely a reflection of a more fundamental weakness. The bank is leaking money at a phenomenal rate. Just raising the billions it needs every day to keep going has been a struggle for months, and now the situation is deteriorating as large depositors move their money out. A major oil firm is the latest to show that it has lost faith in RBS’s ability to survive, suddenly withdrawing more than £1bn in deposits and quietly putting the money somewhere deemed safer.
Fearing that the entire banking system is about to collapse, government ministers and officials have been attempting to work up a rescue plan in collaboration with the Bank of England’s governor Mervyn King and the chairman of the FSA Adair Turner. Several senior bankers and lawyers have been drafted in to help. Yesterday evening, Monday, as part of the latest effort to find a solution, Goodwin had gone to the Treasury in Whitehall with fellow chief executives from Britain’s other big banks for what was meant to be a private meeting with the Chancellor of the Exchequer, Alistair Darling. Goodwin claimed, yet again, that the problem facing RBS was a temporary one of simple liquidity, or cash-flow, attributable to panic in the markets. The underlying business was sound, he said. Darling and the senior officials in the Treasury see it differently – as a question of capital, and the banks holding too little of it to cover looming losses. RBS is the worst exposed. The government will have to find a way of giving the weakest banks billions more in capital, which will mean the taxpayer owning large shareholdings in the bailed-out institutions. Darling is frustrated by the response and is convinced that the bankers, particularly Goodwin, are refusing to face up to the true nature of the problem. The meeting had broken up without agreement, and Goodwin retreated to his usual suite at the Ritz, his London base while the Savoy Hotel is refitted.
News of the Monday evening meeting at the Treasury does not stay private for long. At 7 a.m. on Tuesday morning the BBC’s business editor Robert Peston publishes an account on his blog.1 Peston had been briefed late the night before and then again first thing that morning. He knows he has a ‘bloody great story’, although he is not prepared for the scale of the sell-off on the markets that his report is about to help trigger. Peston reveals that the bankers who had met with Darling were unimpressed; their view is that the government simply does not have a serious plan in place to deal with the crisis and that ministers should get a move on. The message is clear. The bankers think that the government does not know what it is doing. This news takes a little time to ripple across trading floors, where already jumpy traders are looking for reassurance that someone is going to step in and avert disaster at RBS and the other banks. Now the parties supposed to be sorting it out are squabbling. Cue panic selling.
Goodwin takes to the stage in the Empire Room of the Landmark hotel at 8.45 a.m. and begins his presentation. As usual his team has commissioned a series of PowerPoint slides to accompany his talk. In view of what is about to happen, the presentation might as well have been prepared on a different planet. Under the heading of ‘Operational Effectiveness’, Goodwin explains that RBS has a ‘diversified and high-quality’ portfolio in the UK and the United States. Yes, the bank has been ‘de-leveraging’, meaning that it has been battling to reduce its lending and exposure, but there are still opportunities for growth in Asia. Closer to home he admits the outlook is ‘challenging’, although the bank has the strength to meet these challenges.
Quite how ‘challenging’ the outlook is becoming is apparent to members of the audience looking at their BlackBerrys and mobile phones for news from the City. The RBS share price is nose-diving. Several members of Goodwin’s team are in the audience and are being emailed and texted by frantic colleagues back in the office in the City and in the bank’s headquarters at Gogarburn in Edinburgh. One who is in the room watching Goodwin thinks about trying to warn him in mid-presentation, but concludes there is no way to do it without causing a scene: ‘I’m looking at these texts and thinking shit, how do I get a message to him, do I run on stage? I know I can’t do that. Fred is completely unaware of what is happening while he is speaking.’
After half an hour of this, Goodwin takes questions at the end as agreed with the organisers. A member of the audience gets straight to the point. Is he aware that while he has been on his feet making his presentation, the RBS share price has fallen by 25 per cent? Goodwin blanches, gives a holding answer, takes only a couple more questions and then indicates that he needs to leave. At high speed his staff hustle him out of the Landmark hotel shortly before 9.30 a.m. and back into the car for the journey to the City. Goodwin is straight on his mobile phone to the office. The first of his calls is to Sir Tom McKillop, the chairman of RBS, who at that moment is in his twelfth-floor corner office of the RBS building at 280 Bishopsgate. The trading screens are showing the slaughter as a sea of red, with graphs running on the TV news channels illustrating the vertiginous fall of RBS minute by minute.
The sell-off is so rapid that the London Stock Exchange has suspended trading twice. This suspension of trading in shares spells an evaporation of any remaining market confidence and means death for a bank. McKillop and Goodwin discuss their options, which doesn’t take long. They have been warning the government in private for months that Mervyn King, the Governor of the Bank of Eng
land, was useless and not doing enough to help. Now the government will have to do something. McKillop says he will try to get hold of the Chancellor right away by putting a call through to the Treasury. As his car speeds towards the City a stressed Goodwin rings off and calls Guy Whittaker, the RBS finance director, to check if he thinks there is a realistic prospect of making it through the day.
McKillop’s office struggles to raise Darling. The Chancellor is stuck in Luxembourg in a routine meeting of the Economic and Financial Affairs Council (ECOFIN). Instead, it is the Prime Minister Gordon Brown who calls McKillop back, asking: ‘How bad is it? What should we be doing?’ McKillop thanks Brown for his expressions of support but warns him that it is not about to get any easier. The RBS share price is collapsing, he says, and the Bank of England and its governor Mervyn King are simply not stepping up to do what is needed in terms of helping with liquidity and support for the embattled banks. Brown attempts to reassure him that the government will get RBS what it needs to keep going.
Darling has no desire whatsoever to be in Luxembourg, 300 miles away from the epicentre of the crisis. But opting not to attend would have suggested that he and the others at the top of the government are spooked by the seriousness of the situation, which they are. On Monday the 6th he had updated MPs in the House of Commons on the financial crisis, emphasising that the government stands ready to help the banks while declining to give too many details of what that might involve.2 This holding statement was designed to calm the markets, while the embryonic rescue scheme is worked on. He left Downing Street on Tuesday at 5.30 a.m. reluctantly, with ominous thoughts about the prospects for the banks filling his head. Accompanying him in the government people carrier on the way to RAF Northolt is a small team of civil servants: his private secretary Dan Rosenfield, special adviser Geoffrey Spence and Steve Pickford, who is there to deal with the standard business of an ECOFIN meeting. Unusually, the undemonstrative Darling has ordered that a small private jet be chartered for the trip to Luxembourg. It is the only way he can be sure of having transport on hand if he needs to get back to London quickly in the event of catastrophe.
Inside the ECOFIN meeting after 8 a.m., Darling has no means of checking what is happening in the markets other than popping out, to see his officials, before returning to talks not relevant to the concerns of the moment. As the meeting progresses, Spence and Rosenfield are outside on their mobile phones, getting reports from the Treasury of the RBS meltdown on the markets following Robert Peston’s report. Rosenfield scribbles down the figure of 35 per cent and marks an asterisk next to the news that trading in RBS shares has been suspended twice. They have to get their boss out of his meeting as quickly as possible. For a start, McKillop’s call has to be returned. Spence goes to get Darling, waving at him from the doorway, while others locate somewhere quiet where the Chancellor can call London undisturbed. The only place they can find is an anteroom being used by Kim Darroch, the UK’s top diplomat at the EU. Spence is now extremely fired up and shouts: ‘Clear the room! We need the room!’ Darroch complies calmly and leaves Darling to it.
First, while the Treasury switchboard locates McKillop, the Chancellor has to deal with another aspect of the financial meltdown by calling Iceland, to try to glean the latest on the recent collapse of that country’s banking system. Many Britons stand to lose their savings in Icelandic banks that have been offering unfeasibly generous interest rates. Darling gets little comfort from his efforts to establish whether the authorities in Iceland will stand behind their banks. After the call Darling is patched through to McKillop. The government, the RBS chairman implores, has to do something: ‘This Peston leak is a disaster and the markets are just terrible.’ Darling asks how long RBS can keep going and receives a chilling answer from the bank’s chairman: ‘A couple of hours, maybe.’ In soothing tones, Darling attempts to reassure McKillop that the Bank of England will provide emergency funding for the rest of the day while the government comes up with a proper rescue plan this evening. While Darling is doing his best to stay calm, to avoid panicking the RBS chairman further, inwardly he is fearful. The collapse of Northern Rock in September 2007 had been a dress rehearsal for the Treasury in terms of dealing with failed banks, but RBS is a far larger institution. With the McKillop call finished, Darling, not generally known for making theatrical flourishes or melodramatic statements, turns to Spence and Rosenfield and pronounces: ‘It’s going bust this afternoon.’ They need to get back to London as quickly as possible.
Fred Goodwin’s journey to 280 Bishopsgate takes little more than fifteen minutes. Emerging from the lift at the twelfth floor, home to a suite of executive offices, he turns right along a marble-lined hall which leads out to the cream-carpeted reception area. From there he turns left and heads through glass double doors leading to a wide corridor. Off that corridor is the meeting room – positioned between the chairman and chief executive’s large offices – dubbed the ‘war-room’ by staff. Today it will be the setting for a sprawling series of meetings running for hour after hour, with senior executives arriving with news and McKillop and Goodwin leaving at various points to make phone calls to try to establish what they should do next. Members of the board are dialled in and put on loudspeaker. Goodwin himself remains relatively calm at the centre of the storm. There are no histrionics or cursing of the fates today. He is quiet and eventually retreats to the sanctuary of his office. ‘Fred knows he’s dead, it is over,’ says one of those who visits him several times. After his telephone diplomacy earlier in the day, it is obvious to colleagues that a frantic McKillop is struggling to compute the enormity of what is happening to the bank he only reluctantly agreed to chair. There is also the question of historical reputation. A hitherto highly successful career is culminating with a starring role in the collapse of the UK’s biggest company and a substantial share of the blame for a national fiasco.
When the Group Executive Management Committee is convened, Goodwin is not around for most of the discussion, which focuses on whether enough money is in the branches of RBS and what should be said to desperately worried staff. Alan Dickinson, head of the bank in the UK, has recently doubled the cash limits at branches in an effort to ensure that the cash machines remain full and there are no queues.3 For weeks Goodwin has been phoning him every day to check. The RBS treasury department, charged with making sure that the bank has the billions it needs to fund its balance sheet, is where the immediate problem lies. Without emergency help from the Bank of England, RBS will not be able to transact the basic business of clearing large payments for corporate customers. Other banks are reluctant to deal with it. Making matters worse, large corporate customers and retail customers are continuing to withdraw billions of pounds in deposits. The scene on the twelfth floor is chaotic. The situation has moved well beyond the control of any of those present. Among the senior executives and staff there is sheer horror at what is unfolding. Not only is there the shared humiliation to contemplate, in seeing an institution they had been so proud of brought to the brink of bankruptcy. Many also have their own money tied up in RBS shares. As recently as January 2007 one share cost £6.50. Today the same share is worth less than a pound. Says one of those who was on the twelfth floor: ‘Everyone seemed numb with the shock of it, and we were asking each other how could this happen to us so quickly?’
The work of trying to sort out RBS’s immediate liquidity problem, of how to keep billions flowing through it, falls first to Nick Macpherson, Permanent Secretary to the Treasury, the senior civil servant in the department. Darling calls and orders him to get straight on to the Bank of England. They have to avoid Goodwin’s team running out of money that afternoon because if they fail there is a risk that the entire UK banking system will freeze. It sounds simple but Treasury officials realise there is a complication. The Bank of England’s rules forbid it from giving emergency funding to an institution it judges insolvent, and the Royal Bank of Scotland certainly looks insolvent. A message is passed to Bill Winters at the US bank
J. P. Morgan, asking him to carry on transacting with RBS. Ironically, Winters has rather sensibly dodged the chance to move to RBS to become the head of its investment bank and successor-in-waiting to Goodwin. The American wanted too much money, Sir Tom McKillop thought. Others suspected that this was a cover story because Winters had sensed just how much trouble was coming at RBS. Now Winters agrees to help the Treasury. If the UK government really is standing behind the Royal Bank, then J. P. Morgan will carry on dealing with it, meaning that RBS can be regarded as solvent. This, combined with the multi-billion government bailout that is supposed to be coming, gives the Bank of England the cover it needs to turn on the taps. In the following ten days, RBS will need more than £35bn in Emergency Liquidity Assistance.
Inside the Treasury, as midday approaches, and with Darling on the tarmac in Luxembourg, officials and ministers gather for a meeting convened by the chief secretary to the Treasury, Yvette Cooper. If the officials are generally calm, several feeling they have been battle-hardened by the Northern Rock experience, some of the politicians are extremely tense. It is understandable. The banking system teeters on the edge of total collapse and it is ministers, not civil servants, who will have to go to Parliament, and on television, to explain financial Armageddon to the voters. Joining Cooper are Lord Myners, who was only appointed City Minister yesterday, as a final addition to the Prime Minister’s ministerial reshuffle that had taken place at the end of last week. He comes with a wealth of City experience, which even includes the distinction of having been shredded by Fred Goodwin. Myners lost his seat on the NatWest board, and then his job, when RBS and Goodwin took over the bank in 2000. With Myners is former investment banker Baroness Vadera, a minister at the Department of Business and close confidante of the Prime Minister. The suspicion in the Chancellor’s team is that the fearsome Vadera has been parachuted in to keep tabs on the Treasury on behalf of Gordon Brown. ‘Shriti [Vadera] is saying to Yvette and the rest of us, get on with it, this is an emergency, but then she was always saying that, at every stage,’ says an official.