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

by Iain Martin

  The danger was obvious immediately. The Royal Bank might go bust, and even if it did not, it needed to make itself big enough to resist more attempted takeovers by any much larger bank that might be on the prowl looking for weakened prey. To avert such a disaster, Mathewson sanctioned Project Columbus, named for the 500th anniversary of the explorer’s voyage to the New World in 1492. The implication in the name was obviously that the Royal Bank was setting sail on an exciting voyage of discovery to a new world. At that point any echoes of the Darien Scheme seemed very distant.

  Initially thirty or so of the bank’s best and brightest were put to work on Project Columbus in an office above the old bus station, next to the headquarters in St Andrew Square. The numbers involved gradually swelled to almost 200. They were shepherded by Cameron McPhail, a Glasgow University economics graduate and part of Mathewson’s small team who had worked on the original reorganisation leading to the night of the long knives. He would report to Tony Schofield and to Mathewson. Prior to joining the Royal Bank, McPhail had been living in San Francisco, promoting Scotland as an investment location and imbibing the spirit of the coming computer age.

  Mathewson wanted modern thinking to imbue their deliberations. The Royal Bank should be reorganised from top to bottom, he told them, in ways that controlled costs of course. The management consultants McKinsey were hired to assist the effort. In terms of the bank’s staff, a premium was put on having non-bankers involved, outsiders who had worked in other industries and who would not be swayed by old loyalties and ingrained traditions. Among them was Steve Rick – who grew up in a children’s home, worked as a draughtsman, became a personnel director and was then headhunted by the Royal Bank. The Project Columbus team was in ‘the crappiest office’ but it was refreshingly open-plan and they had great IT. The atmosphere was collaborative, egalitarian and exciting, although many of their colleagues viewed those in the project with great suspicion.

  Rick was tasked with working out how to handle the considerable disruption there would be as older managers and staff in branches were encouraged to leave to reduce costs. The aim was to allow new talent through that would be open to innovative ideas in middle management. That meant more promotion for women, who had hitherto found it difficult to get on in a bank where the local management was almost exclusively male. ‘In the past, selection for promotion quite often had a lot to do with your golf handicap,’ says another member of the team. ‘RBS was like a golf-club.’

  One of the core failings was that the existing structure put far too much power in the hands of branch managers who were expected to know every aspect of banking. One minute they were offering advice on savings accounts to pensioners, the next they were discussing large potential loans with local companies whose needs, and capabilities, might easily outstrip their experience. In one sense customers liked the idea that they could call on their neighbourhood bank manager. But McPhail’s team found that it was inefficient, particularly when it came to allocating capital, or putting to work the money deposited by customers. Too much of it just lay in the individual branch vaults or strongrooms, when it could have been lent to businesses and earned a return. Those managers not hoarding cash too often made unwise lending decisions that resulted in the bad debts which had shown up in 1991. Now vans were dispatched by head office to gather up some of the excess and the money was passed to the Corporate Bank, where it could be put to more profitable use, lending to business consumers.

  There would be a much tighter grip on lending decisions. A major missing ingredient in the old set-up was the extraordinary absence of proper credit controls, which scored those customers applying to borrow. Alan Dickinson, who had started in banking the old-fashioned way on the counter at Williams & Glyn’s, before going off to university, was drafted in from south of the border to fix it. Other basic banking processes were judged to be broken too. Payments were given to Jim Rafferty to sort out and sales and service to Bob McInnes. A centralised machine – for administration, IT, product creation, sales and the setting of performance targets – was being constructed, that would drive efficiency and profit.

  It was, Mathewson told them, more than about simply saving the Royal Bank. His sense of patriotic ambition was infectious. In the weekly sessions held to review progress with McPhail and the others he pushed and praised, declaring on more than one occasion: ‘I want us to be the dominant force in British banking.’ The relatively young team revelled in the competitive environment and became increasingly loyal to Mathewson. Says one: ‘It was high pressure. Of course initially he could be frightening as he had a style that people weren’t used to, but when we got depressed and thought this is going to be a disaster, he would come in and give us a strong push. George went out of his way to praise and thank you. He was an incredibly strong leader. It was afterwards that he made mistakes.’

  Columbus took four years to complete and when it was finished in 1996 the Royal Bank was a very different company. Profits started to boom. Those on Columbus had talked in terms of ‘deskilling the branches’, meaning that as much as possible would be done centrally to restrict costs, using telephone banking and direct mail to sell financial products and computers to manage customers accounts. Mathewson was innovating out of necessity, although other banks went in a similar direction. All this did come at a cost. Some of the caution and conservatism that had served the old Royal Bank well down the centuries was being traded for dynamism. And while it was thrilling for those in that Columbus office, who saw their ideas for synergies and efficiencies rolled out, for many who were moved on it was much less of a thrill. McPhail loved the way they had taken the old established Royal Bank marque, the brand, and reinvented it. But a ‘sales culture’ had been created, with many employees in the bank now measured according to rigorous targets dictating how much they must sell in the way of products to customers. ‘We created a monster,’ McPhail told friends.

  The reforms might have been essential and sometimes they might even have been good for customers. But the basic business of banking and the public’s understanding of it were being altered. Customers used to thinking in terms of asking nicely for credit started to find that banks were competing to give them more credit than perhaps they needed and trying to sell them products. It certainly wasn’t just the Royal Bank. This happened, at varying speeds, across much of the banking industry and in the thrift-driven building societies that turned themselves into banks. This so-called financialisation of the economy – meaning that finance, banks and the City were becoming a larger part of the nation’s life, and that more leverage or debt were merely natural by-products of what it was to be a modern consumer – was accepted widely as the new norm. As many of the banks were getting bigger it seemed, for a while, as though their very size was a virtue, a comfort even. Would it always remain so?

  In the 1990s, it did the trick for Mathewson and the Royal Bank. In 1993, profits before tax had been just £265m, an amount that twenty years later looks like little more than a rounding error in the context of the multi-trillion-dollar financial crisis. In 1994, Royal Bank profits leapt to £532m; to £602m the following year; and to £695m in 1996. In 1997, the year Labour’s Tony Blair and Gordon Brown swept to power, the Royal Bank made £801m. At that rate it would soon break the billion pounds in profit barrier. A confident Younger, by then Lord Younger of Leckie, beaming in the portrait of the board taken inside St Andrew Square for the annual report in 1997, could tell investors: ‘This group will continue on its course of consistent and profitable expansion.’

  It almost turned out very differently. Although it was never disclosed, Younger and Mathewson had actually held top-secret discussions a year before with another bank. In 1996 the Hong Kong and Shanghai Banking Corporation, which had been prevented from buying the Royal Bank in the early 1980s, came calling again. By now it was headquartered in London ahead of the handover of Hong Kong to the Chinese and had been rebranded as HSBC. Willie Purves, the boy from Kelso in the Scottish Borders who had rise
n to be global CEO and chairman, had never quite given up on the idea of HSBC owning a Scottish bank. There were discreet discussions over lunch in Younger’s flat in London. Younger was open to the idea of a deal. He and Purves got on well. Both had fought in Korea in Scottish regiments. HSBC might be good custodians, if they undertook to preserve the Royal Bank brand within a larger group. Mathewson was less keen, having made such play of growing the Royal Bank to keep it wholly independent and thinking that it had a way to go yet in terms of growth. The HSBC team indicated that they would even be prepared to station the combined group’s headquarters in Edinburgh. The secret discussions foundered when HSBC gleaned the impression later that Mathewson would want to be chief executive of the whole show. This struck HSBC as ludicrous. They were the much bigger bank. Why would they hand the top post to an executive of the bank that was effectively being taken over? In this way a chance for HSBC to be headquartered in Edinburgh was lost.

  Anyway, Mathewson was soon hailed as the architect of the Royal Bank’s incredible recovery and there was a knighthood for him in the 1999 New Year Honours list. In the parts of wider Edinburgh and Scotland that paid attention the turnaround seemed slightly unfathomable. The profit numbers were suddenly, by the standards of the time and in a small country, so big. There was considerable pride in Scotland as newspaper profiles lauded the rebirth of an institution that had managed to combine exciting modernisation with authentic patriotism. The staid old Royal Bank, which only a decade before had appeared lost, was becoming what Mathewson had said it could become. Why couldn’t a Scottish bank rise to be one of the best in the world? Where was it written that there must be a cap on ambition? The City of London, which Mathewson instinctively disliked, also loved what he was doing. The share price rose. Up, up and up it went. At the end of 1992 one share cost an investor 208p. Just four and a half years later in May 1997 it had trebled to more than 600p.

  Steve Rick, who left the Royal Bank in 1996 as the Columbus Project came to an end, counts Mathewson as the best CEO he ever worked for. Rick went on to a successful career in the technology industry and still he regards what the Columbus team did as groundbreaking. At the time he did have a concern, however. As an Englishman living in Edinburgh in the mid-1990s he was slightly discomfited by the huge surge of patriotism in Scotland that greeted the release of Hollywood films such as Braveheart and Rob Roy in 1995. He discussed it with colleagues. The new Royal Bank seemed to relish being the financial embodiment of a nation’s assertiveness. Might the spirit of nationalistic pride that Mathewson loved to invoke eventually get out of hand? Says Rick now: ‘I blame Braveheart, I really do. I think it had a lot to answer for when it came out. Braveheart gave those guys in the Scottish banks too much confidence.’

  For all the plaudits, Mathewson, who was fifty-seven in 1997, wanted to find a potential successor to widen the bank’s choices when he opted, eventually, to move upstairs to become chairman. The moment would soon come for Younger’s retirement from public life. Chief executives in large publicly owned companies tend not to play the major role in choosing their successors, for good reasons. Ego may cause them to confuse their interests with those of the company and its owners, the shareholders. They might see it too much in dynastic terms and be keen to recruit someone who will continue with their agenda, giving their work imperishable meaning when otherwise their reputation might be mouldering in the corporate graveyard. Usually, in successful companies, a chairman and the board will take the lead on such a succession, deploying external recruitment specialists to help find a new chief executive.

  Mathewson’s position was highly unusual, and for the resurgent and increasingly international Royal Bank it was all new territory. This strong leader with unconventional methods, who was not a banker by profession, had saved the organisation and seemed to have an understanding of what was needed next. Mathewson himself cast around for options and wondered who would best grow the Royal Bank and protect its status as an independent institution. He needed someone Scottish, someone who would understand, or could learn, what he, Mathewson, had been trying to achieve with the Royal Bank. How about an ambitious young accountant turned chief executive at a rival Scottish bank? Mathewson’s mind turned to hiring Fred Goodwin.

  4

  Paisley Pattern

  ‘Disce puer aut abi’ (Learn, boy, or get out)

  Paisley Grammar School motto

  Frederick Anderson Goodwin, always known as Freddie in his youth, was born in Paisley on 17 August 1958. The myth is that he was raised on a tough council estate and even though it has been repeated many times, first when he was riding high and then after the financial crisis when he was the singled out as the alleged ‘world’s worst banker’, it is simply untrue. Goodwin always seemed content to let the false impression linger, however. Even at the height of his powers he professed to loathe the scrutiny involved in being interviewed for personality profiles. Although he was happy to talk about the rise of RBS, requests made to the Royal Bank press office for more intimate access were generally declined and he made it clear to subordinates that he was not interested in talking showily about school, family and his rapid rise. Revealing his ‘back story’ was of no interest: ‘I hate that stuff.’ The image he projected instead was the one that he had created for himself through his work, of someone who was self-made, competitive, professional and unsentimental. Anyway, letting his background in Paisley seem much earthier than it was certainly helped him sound tough.

  The truth is that thanks to his ambitious parents Freddie had a comfortable middle-class upbringing. Fred Goodwin Snr was a product of Britain’s post-war boom in social mobility, the son of a policeman, a draughtsman by trade who worked hard and became one of the bosses in a fast-growing local electrical engineering firm, James Kilpatrick.1 It became Balfour Kilpatrick and part of Balfour Beatty. In the 1950s the firm offered the opportunity for travel and promotion as deals were signed for work in the Middle East and on the Indian sub continent. Fred Snr travelled to Iraq and also supervised a project in what is now Bangladesh. Having helped manage such breakthroughs, he became the well-paid head of special projects. He met Mary (known as May) Mackintosh through work, a Paisley girl who worked in the office at Balfour Kilpatrick. Their colleagues were astonished when it was revealed that the bright, kindly and approachable May was romantically entangled with Fred. He was quiet, acerbic and buttoned up in his sports jacket and tie (‘not a braw man’, meaning handsome, as one of their colleagues puts it). In contrast, May was good company and widely liked. Certainly, Fred Snr does not seem to have been the easiest of men to work with. According to another member of staff: ‘There is no way to explain it I’m afraid other than to say that Fred Goodwin was a bit of a bastard. He was a very cold man.’

  Fred Snr and Mary were married in 1957 and did live initially in Paisley’s Tannahill Terrace, which is in Craigilee on the edge of Ferguslie Park, then already one of Britain’s most notorious housing estates synonymous with poverty, social breakdown and violence. But the residents of the little enclave in which the young married couple resided were at pains to point out that they were not actually in Ferguslie Park proper. Anyway, they did not stay long. By the time Freddie was a toddler they had purchased a plot of land in Lounsdale, a mile and half away near the local cricket club, where they had a bungalow built. Two more children followed: a sister Dale and a brother Andrew, both of whom still live in the Paisley area.

  The Paisley in which the Goodwins then lived was still thriving. There were certainly large pockets of serious deprivation, but in the 1950s and 1960s it was also a prosperous, self-contained town with textile and engineering industries.2 Its proud residents made great play of rejecting the common misconception that it was merely a suburb of its bigger neighbour, ten miles up the River Clyde. Glasgow was looked down on as ‘gallus’, or brash. Paisley residents felt they lived somewhere that was a distinct place in its own right, with a history that marked it out and an abbey dating back to the twelfth century. T
hanks to the wealth creation of the Victorian era, in which textile mills were the powerhouses of the local economy, there was some decent architecture and a legacy of thriving civic institutions. Like similar towns in the industrial heartland of England it has since suffered from a hollowing out after the disappearance of most of its industry, with the middle-class section of its population living comfortably on the periphery, often commuting to jobs in Glasgow or Edinburgh as the centre of Paisley declines. In the 1950s it was flourishing.

  School for Freddie was Paisley Grammar, a choice that indicated immediately that Fred and May had aspirations for their son. It involved a modest fee and was where the children of the professional classes tended to go, along with those whose parents wanted their offspring to climb the ladder. The school was partly selective and with its Latin motto ‘Disce puer aut abi’ (Learn, boy, or get out) and school debating society, the culture was hard-working, academic and aspirational. The headmaster of the senior school when Freddie arrived was R.Y. Corbett, a strict disciplinarian who encouraged high expectations and was an admired figure in the town. As a pupil Goodwin was always in the ‘top stream’ or top class of the school, an academic achiever, although not in a stand-out way, who was socially unremarkable. ‘He was bright, able and very diligent,’ remembers a school classmate. ‘Freddie was inherently a very conventional person who would never, ever express a controversial opinion on anything.’ As a teenager Goodwin played golf, at the course at Ralston in Paisley, had a girlfriend, played rugby for the school (not in the first XV) and was obsessed by cars.