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

by Iain Martin

  This time it really is an emergency. Cooper is told that, as yet there is no final agreement on what should be announced or proposed to the banks. Some Treasury officials are in favour of trying to wait until the weekend if possible before unveiling a bailout, although such a delay no longer looks practical, considering that RBS might be about to go out of business this afternoon. By the time Darling returns to Whitehall a couple of hours later, following a bumpy landing, it is obvious that at the very least the outline of a bailout deal must be in place by the time the markets open on Wednesday morning. Darling calls another meeting in the Treasury at 3 p.m. and is given a ‘rich download’ of the options by Macpherson and his deputy John Kingman, the Second Permanent Secretary at the Treasury. Along with Tom Scholar, managing director of International and Financial Services at the Treasury, they will be mainstays of the bailout negotiations that are to come. All three are career civil servants who have worked for governments of both major parties, seeing their fair share of drama, disaster and dispute along the way. However, rescuing the banking system is of a different order.

  The outline of a possible bailout package is emerging. Vadera, well connected in the upper echelons of the City, has been working with Scholar for weeks, discreetly visiting City lawyers and investment banks to establish what is possible. Desperate to avoid news leaking of Treasury concerns that RBS might go bust, officials give RBS a code name: Phoenix. With the help of other Treasury officials, Andrew Bailey at the Bank of England and several senior bankers and lawyers, they have drafted proposals for the banks to be shored up with many taxpayer billions in fresh capital, which is what banks need as a buffer to cushion losses and reassure markets. This is in line with the view held by Darling and Brown for months that it is a question of capital. Tom Scholar has also been charged with ‘man-marking’ Vadera and ensuring that his colleagues in the Treasury are kept fully involved as this work progresses, when there might be a tendency for Vadera to go straight to Brown.

  Now – with ‘Phoenix’, RBS, going down in flames – that work will have to be turned rapidly into a simple set of proposals which can be put to the bankers this evening. There is a discussion about whether or not to make a public statement immediately. It is deemed more sensible to use the time they have until the markets open the following morning to get a plan together, rather than worrying about media appearances. Catherine MacLeod, the Chancellor’s media adviser, says that it is better to tell the world first thing the next morning when they – hopefully – have a deal that the banks agree to. It seems clear what they should do, Darling tells the officials. Get the banks in to the Treasury this evening and tell them that the outline offer has three components: £200bn of liquidity funding to provide an immediate lifeline for the banks; a government credit-guarantee scheme underwritten by the taxpayer, to give the banks confidence to lend to each other; and most controversial of all a recapitalisation of the weakest institutions. Darling is told that anywhere between £50bn and £75bn will be needed in fresh capital.

  At 5 p.m. Darling is joined in his office by Mervyn King and then a few minutes later by Lord Turner, chairman of the Financial Services Authority, the regulator supposedly overseeing the UK banks. ‘Mervyn and the Bank of England have absolutely no regard for the FSA,’ says a Treasury official. ‘His view has been I’m a world-class economist and Alistair Darling is just finding his way. Now Mervyn is revising his view on Alistair.’ King and Darling’s relationship had been very fraught. In Darling’s mind, King has been cosying up to the Tories because he thinks Labour will soon be out of office. Today, however, the situation has become so serious that they are on the same page. A few days earlier King told Brown and Darling that he thought the banks needed a recapitalisation of £40bn. Turner is in a different position from King. He only arrived as FSA chairman a few weeks ago, whereas King, who sets great store by his academic credentials, has been governor throughout the long boom that is in the process of going bust, spectacularly. Both concur with Darling’s plan and the Chancellor walks to Number 10 for a conversation with Gordon Brown where they agree to proceed. For once, with the crisis raging, Prime Minister and Chancellor are working together harmoniously.

  On the twelfth floor at 280 Bishopsgate, there is relief among the frazzled executives when trading on the London Stock Exchange ceases for the day. It has been a gruelling final few hours, with RBS shares finishing Tuesday at 90p, down almost 40 per cent on Monday. There has also been a further serious run on deposits, with £6bn removed by customers.4 An institution used to boasting of dramatic and sustained growth is sinking at a rate that can be measured in hours and minutes.

  Goodwin is due to take part in a conference call with the CEOs of the other banks at 6 p.m., and at issue, despite his protestations for weeks that it is simply about liquidity, is capital. How many billions will the government force on the banks? Inter-bank rivalry complicates matters. In one sense the CEOs have to stick together, because even those not in line for recapitalisation need the government bailout to happen because it will underpin the entire system. They may also be next in line in the markets after the Royal Bank if it fails. Treasury officials are particularly suspicious of Barclays, fearing that it is more exposed than it is admitting. For his part, Goodwin hates Barclays. Its boss John Varley – who spoke in the 8 a.m. slot preceding Goodwin at the Merrill Lynch conference that morning – insists that he does not need an injection of capital from the government. Rivalry between the pair had been a significant factor when both charged ahead in 2007 trying to buy the sub-prime-riddled Dutch bank ABN Amro, a race which Goodwin won with disastrous consequences. Now, on the call, Varley and the others turn on Goodwin and start pushing. It is RBS that is the issue; you are the biggest problem. Another old rival is in trouble and is in the middle of being taken over after experiencing its own bank run. Andy Hornby’s crippled HBOS, which contains the old Bank of Scotland, RBS’s Edinburgh rival for almost three centuries, is being bought by the hitherto cautious and conservative Lloyds, run by Eric Daniels. ‘Fred hated the HBOS guys,’ says a friend. ‘He really enjoyed when they had to be taken over by Lloyds and were humiliated. He said: “Good.”’

  This unlikely band of brothers, along with the CEOs of the other banks, files into Darling’s office on the second floor at the Treasury at 7.30 p.m. and take seats at the table with their backs to the wall. Goodwin sits in the middle, in a seat with arms that becomes known afterwards by civil servants as ‘the chair of death’. Darling records in his memoirs his shock on realising that the bankers are not going to accept gratefully and say thank you to the taxpayer for saving their skins. Instead, they start picking holes in the package. The scheme is too complicated, Varley says. The £50bn of recapitalisation is way over the top and he only needs a small amount of it, if any, Goodwin insists. The RBS chief executive looks remarkably relaxed, nonchalant even, for a man who has helped land himself, his bank and the country in the mire. ‘Fred was the least emotional of the bankers partly because he obviously realised that the game was up,’ says a Treasury official. In contrast, it is obvious that HBOS’s Andy Hornby – management whizz-kid, top of class in his year at Harvard but with no prior experience of banking when he moved to HBOS5 – is in anguish. ‘Hornby looked absolutely terrible, sitting there all hunched up. It was clear that he was a completely broken person.’

  The bankers are exiled to a room next door (‘Can they hear what we’re saying?’ Darling asks) while the officials in the Chancellor’s office discuss what to do. As Darling told the bankers when he sent them next door: this is the deal, there is no other deal, they had better get used to it or ‘God help us all’. Darling and the others are hungry, so Dan Rosenfield, Darling’s private secretary, orders £350 worth of supplies from the Chancellor’s favourite curry house, Gandhi’s in Kennington. Treasury messenger Kevin Whelan, veteran of many previous crises at the Treasury, such as the night Britain fell out of the European Exchange Rate Mechanism (the ERM) in 1992, drives to collect it. Sever
al weeks later Rosenfield’s unorthodox expenses claim is queried by an official in the Treasury accounts department. They are suspicious that the order for a curry was so large, with no names attached explaining who had eaten the long list of dishes.6 Could he not list who had had what?

  Next door, Goodwin is still protesting that the £50bn figure is excessive. ‘It will scare the markets and anyway I don’t need anything like that much.’ Varley is on this occasion in a stronger position and cannier. Smoother, more conciliatory and better at playing the establishment game, he appears to realise that this recapitalisation is not going to be averted. He is also desperate to keep Barclays out of that humiliating element of the rescue, so it suits him to be seen by the Treasury trying to get the others to agree, broadly, to what Darling wants for RBS and Lloyds/HBOS. They should push the government to make refinements to the way in which the credit guarantee scheme will work, but progress to a deal. By 11 p.m., Darling is exhausted and wants some answers. He has been up since before 5 a.m. and will have to be wide awake again in six hours in order to announce something, anything. The bankers are summoned once more. Again the exchange does not go well. Darling explains that while details can be finalised later they have to agree to the main elements of the plan, now. More objections are raised and Darling, not known for losing his cool, says he is heading off to bed shortly and they had better get on with it. The bankers, rather taken aback, are expelled from his office.

  Darling has had enough. ‘Alistair is completely fed-up by this point, and no wonder,’ says one of his staff. The Treasury team is kept behind while a gloomy Chancellor declares the situation to be ‘a complete mess’. The bankers are to be informed that he will be asleep by 1 a.m. and he wants an agreement ready four hours after that, so he can take it to the Prime Minister. Kingman and Scholar know that in conjunction with Myners they are going to have to make speedy progress. The two officials sit down with the CEOs to try to have them clarify their concerns and pin down acceptance of the recapitalisation. How can they move this along? Varley leads for the bankers, explaining that there are complications but they might be surmountable. The idea is emerging that perhaps the £50bn could be split in half, with £25bn promised as recapitalisation now and another £25bn earmarked in case it is needed.

  It is now past midnight and the bankers retreat to the office set up for them on the first floor, with Myners in his room on the second, along from Darling’s office. Above them, on the third floor, a small group of lawyers and officials is busy drafting and redrafting. Myners, Vadera, Scholar and Kingman call in Goodwin, Varley and the others again, at 2.30 a.m. The chief executives do seem prepared to sign up to the figure of £50bn, if it is announced as two batches of aid and the precise amounts assigned to each bank are worked out later. This is enough on which to hang a statement by Darling and Brown in the morning if it can be cleared with lawyers. At 3.15 a.m., as the other bankers head for their chauffeur-driven cars lined up downstairs, Myners asks Goodwin to stay behind for a discussion along the corridor in front of several officials and a lawyer. In light of the scale of the disaster, thoughts are obviously turning to how Goodwin’s departure will be handled, although it has not yet even been mentioned and the RBS chief executive himself offers no acknowledgement that he must be put through the corporate shredder. Is Goodwin thinking of the negotiation to come? Crumble immediately in a fit of emotion and he risks the many millions to which he is contractually entitled. Myners, who eight years before lost his place on the NatWest board when Goodwin swept in after the Royal Bank completed its £21bn takeover, opts for understatement: ‘You’re in a bit of trouble.’

  ‘Fred disagrees and is completely normal,’ says one of those present. ‘He just says that the markets are awful and that is it.’ Goodwin heads downstairs to his waiting Mercedes, to be sped back to the Ritz on nearby Piccadilly. Darling is woken at 5 a.m. and greeted by panda-eyed officials including Scholar and Rosenfield in the downstairs sitting room in Number 11. After a few minutes Brown joins the exhausted group. The Prime Minister and Chancellor have the makings of an outline deal to sign off and announce. It involves a bailout fund so astonishing in scale that they hope it will buy them some time. How much time is not clear. At this stage Scholar tells colleagues they now have a few weeks, rather than a few days, in which to work out the precise details. As it turns out, they will actually be back in the Treasury for more late-night and early-morning negotiations by the weekend, in less than seventy-two hours’ time. Before 8 a.m. on Wednesday 8 October 2008, Brown and Darling host a joint press conference in Number 10 to announce that they will recapitalise Britain’s weakest banks to the tune of £50bn – meaning £25bn now, with another £25bn available if more is needed, which it will be. The stricken RBS will require by far the biggest chunk of this enormous sum.

  How has it come to this shameful denouement, with mighty banks flattened and tens of billions of public money needed to pick them up, when the government has claimed so confidently for so long that the country is in the middle of a new golden age? We will come back to Gordon Brown later. First, consider the rise and fall of the Royal Bank of Scotland. For most of its 281-year history it proceeded prudently. A healthy entrepreneurial streak was balanced by an emphasis on careful financial husbandry. Then, somehow, it morphed from a conservative, small bank into a financial monster. Its near £2-trillion balance sheet made it the biggest bank in the world, yet it was so polluted with toxins and questionable assets that it was having to be rescued by the British taxpayer with vast sums of emergency state aid.

  Which forces and personalities had propelled RBS towards this calamity? There was Fred Goodwin, but he was not flying solo. For years, those at the top of the Royal Bank presumed that success in the increasingly globalised world of finance depended on their institution being prepared to change and, if necessary, grow much bigger. Eat or be eaten, as the phrase of the time had it. Like plenty of others, their calculations were rooted in widely held and mistaken assumptions that were the prevailing wisdom of the age. Those in the biggest banks – whose salaries and bonuses became so gargantuan – were hardly likely to question whether the system they were a part of was soundly based, not when it was making them rich.

  But while there are certainly people in this story and in the wider world of banking for whom avarice seems to have been the main motivation, greed on its own is an insufficient explanation for why the blow-up of the Royal Bank of Scotland was quite so spectacular. Says a senior figure in the City who came to know Goodwin: ‘Fred was building a monument and he was bloody proud of it.’ In making his monument he was building on foundations laid hundreds of years before by men who were financial innovators and patriots. Those who cared about the Royal Bank could point to an exceptional heritage and claim plausibly that it was no ordinary company, not some here today gone tomorrow firm willing to be treated as a chattel by asset-stripping foreigners. Its very history seemed to endow it with a special status. Indeed, to understand properly why RBS and the rest of us ended up where we did on that cold, grey dawn on 8 October 2008 we have to examine the story of Goodwin’s rise, and go back to the man who hired him, his immediate predecessor, whose extraordinary reinvention of the Royal Bank was motivated by patriotic pride and a desire to build the best bank in the modern world out of a Scottish institution which first opened for business in 1727. We begin just a little before that, towards the end of the seventeenth century, when inventive and profit-hungry Scots are agonising, not for the first or last time, about how their country might make its way in the world.

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  Company of Scotland

  ‘If we were all Scotchmen, I believe the unlimited issue of one pound notes would be an excellent measure’

  William Jevons, economist, in Money and the Mechanism of Exchange (1875)

  The Royal Bank of Scotland had its origins in the wreckage of a previous financial disaster that humiliated a nation. On the coast of the Isthmus of Panama, the thin strip of land joining North and So
uth America, is Punta Escocés, or Scottish Point. There, in the late seventeenth century, several thousand Scottish settlers set up camp hoping to found a trading empire that might rival those of bigger countries, such as England. It didn’t work. Instead, the audacious adventure, complete with a piratical postscript, ended up draining Scotland of a large part of its wealth, in the process clearing the way for political union with England. This ill-fated moneymaking venture, the Darien Scheme, had another important legacy. It also led to the creation of the Royal Bank.

  The foreign adventure had been meant to improve Scotland’s standing. In the late seventeenth century the place certainly needed a lift. Perched on the edge of northern Europe and lashed by rain, Scotland had a predominantly rural economy that had recently experienced waves of emigration, persistent crop failure and famine. Originally, the Scots had hoped that the Union of the Crowns with England in 1603 might somehow improve the position, by opening up more English markets to Scottish traders. Under the arrangement, the two countries were united under one monarch, James VI of Scotland and I of England, while both kept their own parliaments. Economically, it simply didn’t work. English merchants remained protective of their own markets and Scotland still struggled to compete and trade with its powerful neighbour. As the 1700s approached, frustrated Scots looked for opportunities for urgent national improvement.