by Iain Martin
Cameron, whose marriage was disintegrating messily, and Crowe, whose health was poor, were working long hours with their teams, trying to keep the bank going as the liquidity situation worsened. Traders in GBM were reassigned and told that the priority was to find wherever they could deposits from corporate customers who wanted to lodge money in RBS accounts. A desperate scramble for survival got under way. They were now leaking money. From the start of August 2008 to the first week of October, RBS lost £10.4bn in corporate deposits and £8.7bn in retail.
When Lehman Brothers went bankrupt on 15 September it induced a fresh wave of global panic and collapse. AIG (the American insurer), the Icelandic banks, Washington Mutual in the United States and Bradford & Bingley in the UK went bust or had to be rescued. Fortis, which just a year before had been one of the ‘three amigos’ in the consortium that won ABN Amro, was humiliatingly nationalised by the Belgian government. It was also the end for HBOS. Inside it was the Royal Bank’s old rival Bank of Scotland, founded in 1695. Its reckless lending on commercial property and severe funding problems meant that the government was happy to encourage a takeover by Lloyds, which had until that moment taken a more cautious approach as others expanded at high speed. Within weeks it was to prove an expensive decision by the directors of Lloyds. Gordon Brown was accused of fixing the deal after he and Victor Blank were photographed deep in conversation at a drinks party.11
The meltdown of the banking system in Ireland – where growth possibilities had recently been declared limitless by the head of Ulster Bank – compounded matters for RBS. The announcement that the Irish government would guarantee deposits in all the country’s banks created a stampede away from Ulster Bank. It did most of its business in the Republic but was not covered by the guarantee as a UK-owned institution, so in just four days it lost £732m in deposits.
On 24 September the board met at Gogarburn, to have its first attempt at working out what had gone so wrong. The head of internal audit had prepared a discussion document, which contained criticism of Goodwin’s management style. Cameron and Goodwin also produced a paper and slideshow presentation, with the chief executive standing steadfastly by the GBM chairman. The pair posed a series of questions and went through CDOs, monoline insurance and leveraged finance. There was criticism of Larry Fish. It was suggested that Citizens had swapped some of its safe investments, which it used to make money from its excess of savings deposits, for a parcel of riskier sub-prime mortgage bonds. Several members of the board were angry and convinced that Fish had not given them the true position. Goodwin put on a good show, emphasising that all in all he had a great team who really could not have made any other set of decisions when faced with the situation facing them at the time. It was listened to fairly respectfully by the board. Stephen Hester, who had just joined as a non-executive as a potential successor to Goodwin, was there and asked a lot of questions.
In the days after the Gogarburn board meeting there was no time for further reflection, with the crisis approaching its peak. Brian Crowe had been withdrawn from his ABN role by Goodwin and put in charge of the rescue effort, working with John Cummins, the bank’s treasurer. Crowe tried wherever possible to look for ways to scale back the balance sheet and rein in activity, although it was past the point where it could make much of a difference. Increasingly they were relying on overnight funding, as it was impossible to get anything else. There was some money being accessed from the Bank of England, but as yet nothing like enough. The ‘wholesale’ funding gap, money RBS needed to find every few days, was now £100bn. This was unsustainable, with vulnerable banks being picked off as those in the markets assessed which institution would be the next to fall. Hedge funds sensed an opportunity. It emerged in mid-September that John Paulson, the American billionaire, had made $3.7bn in 2007 betting that the sub-prime mortgage market would collapse. Now his team had placed bets against RBS, ‘shorting’ it on the expectation that it was about to go bust. On 26 September, a Friday, the RBS share price closed above 200p for the last time.
In the management team tempers were completely shredded, as the shortage of sleep and excess of stress strained relationships. The desperate ideas being generated in meetings by his frazzled colleagues struck the quiet Brian Crowe as financially illiterate and completely detached from the reality of what was happening in the markets. One of Crowe’s friends said he was angry with himself as much as Goodwin, that the answers had been inside his head all along, on CDOs and not doing ABN Amro, and he had been all but mute when it mattered. ‘Brian had seen it coming, kept it to himself and never spoke up properly to Johnny or Fred, and this is where it had got us.’ At one such meeting near the end, when Goodwin offered his view, Crowe snapped: ‘Learn something about banking, Fred.’ It was a bit late for that.
By the afternoon of Sunday 5 October, when Goodwin flew into London it was evident that this was going to be a decisive week. Monday the 6th was spent on the twelfth floor of 280 Bishopsgate. He was ‘firefighting’, chairing meetings about the desperate funding situation, and he reviewed the paper that had been prepared for him to present at the next morning’s Merrill Lynch Banking and Insurance conference being held at the Landmark hotel. The Chancellor announced to MPs that the government was ready to stand behind the UK banking system, although he could offer few details. Goodwin left his office late and headed to spend the night in his suite at the Ritz hotel.
14
Boom Goes Bust
‘We must, in an uncertain and unstable world, be the rock of stability on which the British people can depend.’
Gordon Brown, 13 October 2008
The twelfth floor of 280 Bishopsgate had a quite bizarre atmosphere on the morning of Wednesday 8 October. Lack of sleep and months of battling to keep the bank afloat seemed to have detached several of the inmates from reality. After a night spent at the Treasury on Whitehall, Fred Goodwin and Guy Whittaker prepared for the detailed bailout negotiations to come in the days ahead. But Goodwin was particularly exercised about his own position. He hit the roof when he picked up a copy of the Daily Telegraph that morning. Jeff Randall revealed in a story published on the front page that Goodwin and McKillop were out.1 Echoing his abortive attempt to sue the Sunday Times several years previously, Goodwin demanded a retraction and apology from Randall. The onslaught was so fierce and the denial from Goodwin so vehement that the journalist prepared to hand in his resignation. But his source was spot on. Of course Fred Goodwin was for the chop, even though he didn’t yet know he was no longer meaningfully in charge. Both Brown and Darling had already told ministers and officials that his removal was a condition of the bailout. This had also been communicated discreetly to Steve Robson who sat on the board. Shredding Fred was a non-negotiable demand.
RBS board members were also now in an awkward position. They had signed off on Goodwin’s expansion, they had acquiesced when it came to the ABN Amro takeover and they were active participants in the UK’s biggest corporate smash of all time, but the law stated that they were still on the board of an independent company. Their duty was to act as directors and not take orders from ministers. Did that mean anything any longer in an era of governments taking over failed banks?
The broad outline of the rescue, when it was announced at breakfast time on 8 October, produced for a few hours a surreal kind of calm after the madness of the preceding day, with its talks between bankers and Treasury officials long into the night. At a press conference at Number 10 Gordon Brown and Alistair Darling emerged blinking into the light of TV cameras to announce that RBS was going to have billions of pounds of capital injected by the government, on the behalf of taxpayers. The exact details would be worked out at the weekend. HBOS, folded into Lloyds, would also need a large chunk of the £50bn shock and awe recapitalisation. Another £250bn of loan guarantees was made available for the banks, and another £100bn of short-term funding to replace the wholesale funding, or liquidity, that had dried up. The enormity of it was mind-blowing. ‘The City of London h
as never seen anything like it in its long and illustrious history,’ said the BBC’s business editor Robert Peston.2 ‘The state will own a very substantial proportion of our biggest and proudest banks. What a sorry end to Britain’s longest ever period of unbroken economic growth.’
In Scotland, home of RBS, there was astonishment, shame and some anger. The First Minister, Alex Salmond – author of that warm note of encouragement to Fred Goodwin ahead of the calamitous ABN Amro deal – had attempted to criticise the London-based ‘spivs and speculators’ who had supposedly engineered a bank run on two such fine Scottish institutions. This line of attack now looked silly. Hedge funds might have exacerbated the situation at the death, but they were not the root cause of what had gone wrong in Scotland’s banks. It became apparent that the real ‘spivs and speculators’ were actually some of those working ‘inside’ the offices of RBS and HBOS.
The Scotsman newspaper declared it was ‘the end of the road’.3 A bank with a proud history – with roots in the Edinburgh of the Scottish Enlightenment – was reduced to this. Alan Cochrane, writing from Edinburgh in the Daily Telegraph, noted: ‘There was a time in the not too distant past when the words “bank” and “Scotland” conjured up an image of dour respectability, certainly, but also of financial caution and of the utmost probity.’4 The Scots had taken such pride in that image. Now, he added: ‘It is as if the old maid on the corner has been exposed as a harlot.’
It was the British taxpayer that was about to get royally screwed. Not that that was the intention of anyone preparing to finalise the bailout. Alistair Darling and his officials were not relishing putting so much money into the banks. They were aiming to prevent the financial system freezing, to keep the country’s cash machines dispensing ten-pound notes and, they believed, to avoid civil unrest. Yet by any measure a bailout running to tens of billions was a colossal indication of failure, an indictment of the reckless policies pursued during the boom years. The system of regulation had failed utterly to check the banks. The Bank of England had allowed a credit bubble to be inflated. And the government had assured the country that it was all built on solid ground, so it was permissible for consumers to carry on spending ever more borrowed cheap money. Gordon Brown stressed publicly that he was appalled by what had gone on at RBS. Privately he said he felt betrayed (a big theme with Brown when things went wrong) and he could not believe that Goodwin had failed to warn him of impending disaster. As though the chief executive of a bank was going to lean across the dining table at Chequers and say ‘Gordon, I think we might go bust.’ Goodwin understood enough about his position as CEO of a bank to keep talking it up until the very end.
On Thursday the 9th the FSA invited itself to Bishopsgate and summoned the RBS board and executives. The RBS team was thinking in terms of needing £10bn from the taxpayer, when the Treasury ministers and officials and now the FSA were convinced it would be at least double that and probably much more besides. Thomas Huertas of the FSA told them it would be more like £20bn. There were incredulous exclamations. Goodwin indicated that he now agreed with the FSA and said he thought it was probably just about all over. Afterwards McKillop called Bill Winters at J. P. Morgan one last time. Would he perhaps consider again coming on board? They talked about how it might work. Winter’s fears six months before about risk-management had been vindicated. And the question of RBS buying out his J. P. Morgan shares was even more problematic now, considering that the government was about to be a big shareholder in the Royal Bank. For all his talents, it was not hard to envisage hiring Winters being a public relations disaster. When the board met on Friday the 10th it was agreed that Goodwin would go and Stephen Hester would be his successor. The Treasury had decided the same.
Darling was due to be out of the country that Friday, in Washington for a meeting of G7 finance ministers and the annual meeting of the International Monetary Fund. There was international interest in what the British had done – or rather had not done yet but had announced they would. Tom Scholar, the Treasury official working closely with Shriti Vadera on the recapitalisation plan for RBS and HBOS, went out ahead of Darling on Wednesday. The Chancellor followed with his private secretary, Dan Rosenfield, and media adviser Catherine MacLeod. The flight, and autumn sunshine of Washington, offered respite for a team that had been living on their nerves for weeks. Between meetings, with other finance ministers such as US Treasury Secretary Hank Paulson, there was time for a late lunch on the terrace of the British Embassy in Washington. It was only interrupted by Yvette Cooper calling from the Treasury in London to say that she was so exasperated she had locked Shriti Vadera out of a meeting.
Scholar had already headed back to London to join his colleague John Kingman for the talks that weekend to finalise the bailout. Scholar landed back in Whitehall at lunchtime on Saturday, entering the Treasury building now swarming with investment bankers and lawyers. Matthew Greenburgh, friend of Goodwin and key player on the NatWest and ABN Amro deals, was there. He was not advising RBS this time, however. It was Lloyds who had hired him to help steer it through the bailout it needed as the new owner of HBOS. Bill Winters’s team was involved too, as J. P. Morgan had been hired by the government to work on its behalf. Bankers crowded the corridors and filled the various meeting rooms. It was like an awayday, a festival for London-based senior investment bankers. They had helped fuel the boom. And here they were picking up lucrative work in the bust.
The pivotal meetings were with RBS. McKillop, Goodwin, Whittaker and Bob Scott, the senior non-executive director, all turned up sporting their RBS ties, embossed with the bank’s logo, and were soon lined up waiting to hear the terms. The taxpayer would put in £20bn, and the bank would effectively be a ward of state with roughly 60 per cent of the shares in the hands of the government. They had no choice about anything, it was made clear. This was not so much a negotiation, more of a ‘drive-by’ shooting, Goodwin said. It was later interpreted as an angry comment, although the Treasury team thought it was intended as a wry attempt at black humour. Goodwin seemed more reconciled to what was happening than McKillop. Fred was cool as a cucumber, as far as the Treasury officials were concerned. ‘Goodwin was the least emotional of all the bankers,’ says someone who was there that day. ‘I think he had realised the game was up. Whereas McKillop looked as though he had not realised what it meant for McKillop. The speed with which these guys were going from being the pinnacle of the Scottish establishment to pariahs was remarkable.’
It fell to Paul Myners, Lord Myners, the newly appointed Treasury minister who had lost his place on the NatWest board when Goodwin masterminded the takeover in 2000, to deal with Goodwin’s departure. ‘Myners was rather revelling in it understandably,’ says a colleague. He asked to see McKillop and Bob Scott once Goodwin and Whittaker had left to head back to Bishopsgate. Goodwin would have to go, he explained. Yes, said McKillop, the board had decided that was the way to proceed. Excellent, and would McKillop go? The RBS chairman indicated that he would not. Myners suggested a compromise after Bob Scott said that the board would resign en masse if the chairman was removed by the government. Would McKillop stay on for a few months, until the next AGM, to hand over to a new chairman? Yes, said McKillop. The government did not want Fred getting a bonus either, said Myners. There was no danger of that, McKillop said. ‘The issue won’t be his bonus, his contractual arrangements will give him a big pension,’ said Scott. Goodwin’s successor, Stephen Hester, was also in the building by this point, with efforts made to keep him apart from Goodwin to avoid any embarrassment. Entreaties were made to his employer, British Land, to let him start early. His employer agreed that as it was a national emergency he could begin some initial RBS work first thing on Monday. Hester saw Gordon Brown in Number 10 and was hired as chief executive.
On the Saturday evening, McKillop convened the RBS board. Johnny Cameron was in south London, after a day spent pacing the floor of the office in Bishopsgate along with other colleagues who wanted to be around but were suddenly n
o longer in the loop. There was no theatrical resignation speech. Goodwin simply explained that it was done, that the government would probably own more than half of the Royal Bank. It was the sheer speed of the collapse, and the way liquidity dried up, that so astonished McKillop. He still could not quite believe it. Several members of the board were discontented with the way the government was handling it, and resigning en masse was discussed, although it was difficult to see in what conceivable way this group could feel aggrieved after everything that had happened. It was decided to wait and see. Soon all but three – Archie Hunter, Colin Buchan and Joe MacHale – would be removed.
On Sunday morning Darling’s team were confident they had the bailout set up and could start to think about how to handle the announcement. Investment bankers turning up at the Treasury late that morning observed an exhausted Lord Myners sitting in the courtyard garden in the middle of the building smoking a cigar, his feet up, reading the Sunday papers. The bankers whispered that Myners was reading a profile of himself. The approach adopted for the bailout was that designed by Shriti Vadera and Scholar, on the advice of various City lawyers and investment bankers. They had started discussing it back in the summer, hoping that it would not have to happen. Mervyn King’s preference had been for full nationalisation, with RBS split into a good bank and a bad bank containing its toxic assets. This had been done in countries such as Sweden, which had suffered earlier banking collapses. Earlier in the year King had done some work on the idea, although his relationships with Darling and Brown were so poor by that point that he could not build support for an alternative to the proposals that Vadera and Scholar were devising.5 The politicians doubted King’s judgement too much. That weekend there was some discussion among Nick MacPherson, Kingman, Scholar and other officials about the merits of simply opting for the possibly cleaner option of full nationalisation. Why leave the shareholders with anything? The politicians decided that they did not want full control, and would rather it was run at arm’s length. In October 2008 Mervyn King filed in neatly behind the Darling plan when the crisis hit. The government would inject the capital directly, owning shares in several of the banks but not take all-out state control.