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

by Iain Martin

  All of the historical enmity between the two Edinburgh banks stretching back centuries, and put on hold during their abortive talks about cooperation in the summer, now resurfaced with renewed intensity. Both Mathewson and Burt knew that the winner would most likely emerge in a heroic light, whereas the loser’s bank would become a target for takeover itself. No matter that the pair got on well, the bankers thought they were fighting for the existence of their institutions as independent entities. The testosterone surged.

  Burt zeroed in on fears about Goodwin’s management style,10 even invoking his nickname: ‘The question for NatWest shareholders is who do you want, Fred the Shred or a team of 80 people led by Gavin Masterton.’ A much more emollient character than Goodwin, Masterton was the chief operating officer of Bank of Scotland. Mathewson was contemptuous in response. ‘The reality,’ he told his team back at St Andrew Square, was that the two banks were ‘simply not in the same class. Bank of Scotland just isn’t big enough, it doesn’t have the management, it has no experience of England.’

  After Christmas, and the dawn of a new millennium, Younger, Sir George and Fred Goodwin began their campaign to win over investors, to get them to choose the Royal Bank rather than the Bank of Scotland. Long days were spent trudging around London – and in America – making presentations. It was not an entirely happy experience, with the chief executive so obviously no good at faking flattery. ‘Wee George’ could be prickly to the point of downright rudeness, even to people whose help he needed. Why, Mathewson asked, did they have to be so nice to fund managers and those who managed the shareholdings for large institutional investors? To Mathewson’s mind they behaved like sheep following the market. Goodwin was better at it. He had his integration plan distilled into a calmly delivered spiel in which he could run through any of the initiatives in great detail. With some in the City sceptical that the Royal Bank’s promises were deliverable, his half of the double act became critical. After a day of pitching the pair would return to wind down at the Savoy Hotel, the five-star hotel off London’s Strand.11 It became their unofficial campaign headquarters. George Younger was also instrumental. His contacts book, compiled during a long career involving the army, business, the City and Conservative politics, was so good that he could lift the phone and talk in relaxed terms to his contemporaries who sat on the boards of large investors.

  On 31 January 2000, both the predator banks moved to improve their offers. The deadline by which shareholders must choose was less than a fortnight away and the excitement was dizzying for those involved. Two relatively small banks, with annual profits not much more than £1bn each, were prepared to pay around £24bn for NatWest. The Royal Bank’s offer actually gave NatWest shareholders a little less per share, but Goodwin had proposed a new piece of paper, a so-called ‘additional value share’, offering an extra dividend for NatWest shareholders. Greenburgh and the other investment bankers were impressed; it suggested Goodwin could think creatively as well as cut costs.

  The mood in the rival camps swung wildly and in the decisive final week there were moments of dark depression in the Royal Bank team. On Monday 7 February, rumours swirled that another bank, Lloyds TSB, was ready to mount a takeover of the Royal Bank if it lost the race for NatWest. Even though Lloyds TSB issued a statement denying the claims, it seemed to Mathewson that his fears were about to be realised. Defeat would most likely result in the eventual end of autonomy. That Monday evening it looked as though Bank of Scotland might have the edge with large shareholders. Phillips & Drew, which owned more than 2 per cent of NatWest, declared that it backed the Bank of Scotland. Led by Mathewson, the Royal Bank team retreated to the pub opposite their London head office in Waterhouse Square, Holborn, before heading for a late dinner in an Italian restaurant near Covent Garden. More troubling news came as the red wine flowed. Howard Moody, the head of communications and colleague of Mathewson’s since their days at the Scottish Development Agency, took a call from the Financial Times. The influential Lex column, widely read by investors and fund managers, would the next morning endorse the Bank of Scotland bid, he told his colleagues.12 That day Mathewson and Goodwin had gone to the FT’s office, and spent time giving an interview, conducted in the canteen, in an effort to win support. It hadn’t worked. Gloom enveloped the group.

  Yet within twenty-four hours the picture had been transformed. Fund managers working for Schroders, the second-largest single shareholder in NatWest, spent the Tuesday morning discussing which Scottish bank would get their backing.13 After a final tour of other investors, Mathewson and Goodwin retreated to Waterhouse Square to make calls and wait for news. Schroders broke for the Royal Bank. Next up was Mercury Asset Management (MAM), the third-largest shareholder in NatWest. Mathewson was on the phone to Patience Wheatcroft, then the business editor of The Times, when Goodwin popped his head round Mathewson’s door with more good news: ‘We’ve got MAM.’ Mathewson punched the air and relayed the news to Wheatcroft: ‘How about this for a headline? Wham, bam, thank you MAM . . .’

  The next morning a trickle turned into a flood. Investors wanted to be on the winning side, and a third had soon sided with the Royal Bank. By that afternoon they had effectively done it. At Waterhouse Square senior executives who had not been much involved in the bid, but who knew they were about to be part of a much bigger outfit, gathered excitedly. The air fizzed with possibilities of promotion, bigger profits and bonuses. Drinks were served and Lord Younger, Mathewson and Goodwin basked in the praise of their colleagues. Tired and excited, the chief executive and his deputy retreated again to their favourite haunt, the Savoy Hotel. Like two boys from the sticks let loose in the big city they decided to treat themselves to a sugar-rush. They ordered an ice-cream knickerbocker glory each.

  The battle was over. Burt wrote to his staff on the Thursday conceding defeat and trying, somewhat unconvincingly, to sound upbeat. After fluctuations in the share price of the target and the winning bidder, the Royal Bank offer was worth £21bn. At NatWest headquarters, an appalled Sir David Rowland was initially reluctant to cooperate with the new owners. It wasn’t until Friday 11 February that he would finally concede that he had lost. Mathewson found his foot-dragging and truculent behaviour baffling and unbecoming, even though the Royal Bank chief executive made upbeat statements to nervous investors which suggested that relations were cordial.

  In reality, when Mathewson and Goodwin travelled to NatWest headquarters to inspect their prize for the first time, there was no greeting party. A security guard simply handed over the keys, saying half-jokingly: ‘Here, it’s all yours.’ The Scottish pair had a look around 41 Lothbury, a colonnaded building right behind the Bank of England in the heart of the City. Goodwin in particular couldn’t believe how lavish it was. A cavernous main banking hall had been adapted by NatWest to showcase some of the bank’s collection of contemporary art and the wine cellar was stocked with the best vintages from Bordeaux and Burgundy. Like a Scottish medieval monarch, leading a successful raiding party over the border, Mathewson ordered the wine to be shipped to the Royal Bank’s headquarters in Edinburgh. A few days later, he returned to NatWest headquarters with his team for a more cordial meeting with senior executives, to explain how the integration would proceed. One of the first decisions taken was that the Royal Bank would have no need of 41 Lothbury. Shortly afterwards it would be closed for redevelopment and then sold in 2006 for £115m at the height of the property boom.

  Mathewson and Goodwin were hailed as conquering heroes in Edinburgh, home to the new Scottish Parliament. The Scotsman14 declared of the NatWest deal: ‘Scotland has emerged a winner. A native talent for reliability in the moving and making of money, coupled with a certain audacity, has been rewarded. Edinburgh, meanwhile, has reasserted itself as a financial centre.’ In the City some presumed that the Royal Bank would naturally now want to be headquartered in London. Mathewson was contemptuous. He hadn’t spent all these years trying to create a Scottish banking behemoth only to move south. Although a far
larger proportion of the bank’s activities would by necessity have to be carried out in London, the headquarters would stay in Edinburgh. A Fleet Street reporter asked Mathewson and Goodwin whether they were really serious about remaining north of the border: ‘Of course we are. Just look at my record and then tell me I am not committed to an Edinburgh HQ. One of the biggest banks in Europe – centred in Edinburgh – can only be a good thing.’

  Goldman Sachs and Merrill Lynch, which had both earned nice fat fees on the deal, were keen to organise a celebratory private dinner. It would be in Edinburgh, naturally. A house was hired for the occasion, complete with chef and aristocratic owner who rather awkwardly appeared at various points during proceedings. The whole thing wasn’t to the meritocratic Mathewson’s taste and the dinner came close to being a disaster. One of the Goldman Sachs team made speeches and handed out presents, although the jokes rather misfired. Goodwin was given an Airfix kit model of a car, to reflect his automotive obsession. It looked as though the chief executive in waiting was being mocked for his relatively youthful geekiness. Merrill Lynch gave the Royal Bank team engraved silver plates. There was the consolation of exceptionally good wine at dinner, however. The sommelier uncorked bottles that had been liberated from the NatWest cellar and with their glasses full of Château Latour 1970 (price in 2000: £370 a bottle) the Royal Bank and its advisers proceeded to toast their success.

  Goodwin had enjoyed an astonishing rise. Just five years previously he hadn’t even been a banker. Now, with Mathewson due to become chairman, he was about to become chief executive and one of the most powerful financiers in Europe sitting astride a banking colossus. NatWest wasn’t just a retail bank with its named branches. It also owned Ulster Bank, which was well placed to capitalise on the coming property boom in Ireland. Across the Atlantic there was the potential for growth too. In Connecticut in the United States NatWest had a trading house, Greenwich Capital, an expert in mortgage securitisation and US government bonds. Even the Queen was now one of Mathewson and Goodwin’s customers. The monarch banked at the private bank Coutts, that establishment paragon of financial discretion. It was owned by NatWest and hence was now a Royal Bank company. Hadn’t Mathewson long said that a Scottish bank could be among the world’s very best? Now it would fall to his hand-picked and anointed successor to continue their shared quest to make the old Edinburgh institution one of the greatest names in global finance. Fred Goodwin readied himself for the top job.

  6

  The End of Boom and Bust

  ‘This is the time to set the British economy on a new long-term course that will deliver high levels of growth and employment through lasting stability.’

  Gordon Brown, 6 May 1997

  The phrase ‘son of the manse’ might have been invented for James Gordon Brown. Plenty of other successful Scots have been raised in the tied houses, manses, in which Church of Scotland ministers live with their families, but the former Chancellor and Prime Minister embodies what it is to be the ambitious offspring of a Presbyterian preacher. Decades later Brown still described his parents as his inspiration and cited his father’s sermons, with their invocations on the value of hard work, duty, responsibility, fairness and social justice.1 The message preached from the pulpit in St Brycedale, in Kirkcaldy, by the Reverend John Ebenezer Brown, was that we are not atomised individuals selfishly seeking to further our own interests. We are cooperative beings. The highest possible calling, the young Gordon was taught by his parents, involved helping those less fortunate than ourselves, whether it be through service in the church or in politics.2

  The Fife town of Kirkcaldy, which lies across the River Forth to the north of Edinburgh, was rather similar to Fred Goodwin’s Paisley on the other side of the country in the late 1950s and 1960s. Both places were home to close-knit communities. They had an industrial heritage that was beginning to be eroded and pockets of severe poverty. In Brown’s case he saw the evidence of it on his own doorstep. The very poorest often turned up at the family home seeking the help and comfort dispensed by his father and mother. To be the son or daughter of a Church of Scotland minister in such a town in that period was to be marked out from the beginning as special. There was a weight of expectation in the wider community that achievement would follow, and from an early age Gordon Brown was known for hard work and his precocious academic ability. His two brothers, John the elder and Andrew the younger, regarded him as the prodigiously gifted one, someone who was bright but who needed regular assistance with life’s practicalities. Both have fussed over their high-achieving brother ever since. Fast-tracked through school, with a select band of similarly bright contemporaries, Brown went early to study history at Edinburgh University, becoming the youngest student in the modern era to achieve a first-class degree there. In the interim he had dealt with adversity, losing the sight in one eye as the result of a rugby accident at the age of sixteen, after which he was confined to hospital for weeks.

  Fired by this searing experience, with his ambition to make a difference increased, Brown wanted to do only one thing. He entered politics, becoming the long-haired student rector at Edinburgh in 1972 on a reforming left-wing ticket, backed by ‘Brown’s Sugars’, a group of miniskirt-clad female campaigners. After university he fixed on getting into Parliament as quickly as possible, managing it in the 1983 election when Labour was crushed in the landslide re-election of Margaret Thatcher. Initially Brown was a standard-issue socialist of the era, who believed that the Thatcherite Tories were on a mission to destroy British industry and make society less equal by encouraging the individual pursuit of greedy self-interest. He had written a biography of James Maxton, the glowering socialist firebrand MP from the ‘Red Clydeside’ period in the early decades of the twentieth century, when radicalism and industrial strife dominated Glasgow working-class politics. Gradually, however, Brown also became more interested in the literature on markets. He still despised Tory policies but nationalisation and the command of the economy traditionally advocated by the left didn’t seem like a suitable response to the needs of an era that was going to be increasingly global. It also didn’t seem like a good way of getting a Labour government elected for the first time since 1979, given that it needed to win in the south and Midlands of England. Brown’s views started to evolve.

  Adam Smith, the eighteenth-century philosopher and father of modern economics, the inspiration for pro-market economists and free-market Thatcherites, was a fellow son of Kirkcaldy.3 There was a side to Smith that appealed to Brown all along. As well as teaching that markets were essential for economic efficiency, hadn’t Smith also appeared to argue in The Wealth of Nations that the rich should pay higher taxes to support the poor? As Brown’s views shifted away from old-style socialism there were areas he was determined to protect from markets; the National Health Service was the obvioius example. He regarded it as the collectivist glue holding society together, which embodied the nobility of common endeavour and the enduring nature of ‘British values’. More broadly the old left’s hostility to markets seemed to be a dead end, Brown concluded. Successful markets – in goods and services – were essential to create the growth that government needed, in order to collect taxes that leaders devoted to public service, leaders such as Gordon Brown, could then spend to help the needy.

  The United States, where he liked to spend summers in Cape Cod, playing tennis, reading voraciously and mixing when he got the chance with the Democratic Party elite, influenced his thinking. America’s economic dynamism and optimism were highly appealing, especially when compared with the sterile arguments he was forced to have with trade union leaders in Britain who did not want Labour to deviate from the true socialist path. On trips to Washington, with his fellow Labour moderniser Tony Blair after another defeat for Labour in the 1992 general election, Brown’s developing worldview was reinforced.4 In the November of that year the Democrats had succeeded in doing what Labour seemed incapable of managing. They had won an election. Bill Clinton prised the presidency
away from the Republicans, which gave the visiting Labour leaders hope that they too could win if their party changed.5 As well as studying the marketing techniques – including spindoctoring – that would soon be copied by New Labour in Britain to such startling effect, Brown and Blair also learnt ideological lessons from the senior members of the Clinton team. The trick, it seemed, was to accept that middle-ground voters were generally keen to get on in life, and were relaxed about markets, as long as you promised to manage the public finances sensibly in a way that guaranteed stability for them and their families. What mattered after that was to use the proceeds of growth to alleviate poverty and make society more equal. It was possible, it seemed, to square the circle. If Brown became Labour leader he could fuse two elements of his Kirkcaldy past: the social concern of his father’s sermons and the market dynamism described by Adam Smith. The latter would fund the former.

  Brown seemed to have become the dominant intellectual force in Labour, and his bravura performances in the Commons reinforced the idea that he was the party’s future. Then Brown got the shock of his life when he lost out on the Labour leadership, shortly after John Smith died suddenly in May 1994. Being deprived of the leadership by Blair – a friend regarded by Brown as very much his intellectual inferior – was simply not in the script. In life, he was used to coming first. To compensate, a grief-stricken Brown threw himself into devising an economic platform that the shadow Chancellor thought would put Britain on a new path. If he could not be Prime Minister, yet, he would be a great, reforming Chancellor first. He didn’t want the New Labour government to end in disgrace, ruined by out-of-control spending and mismanagement. To avoid that outcome he planned a revolution in policymaking. If Labour had to gain and maintain economic credibility, allowing it to win election and re-election, everything must be anchored by two watchwords: stability and prudence. As a downpayment, he pledged that for the first two years after the election Labour would stick to the relatively tough spending limits of the outgoing Tories.