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

by Iain Martin

  And crucially, by 2003 Brown’s attention was elsewhere. Says a Labour cabinet minister from that period: ‘What you have to remember is that Gordon was now on an entirely different mission. He was focused on getting Tony out. Look at the contrast, when after 2003 Tony was seen to have failed in Iraq whereas what he, Gordon, was doing on the economy was going so well.’ There was still ‘more to do’, as Brown put it, but he could imply that he had accomplished his end of New Labour’s original mission and was ready for the next challenge.

  The success of financial services and the growth of banking in Britain were important because they helped vindicate his claims. The global nature of the rise of banking also appealed to Brown, who was increasingly interested in globalisation and the interconnectedness of the world’s economy, which obviously created fresh opportunities for global leaders to enact their ideas on the international stage. Brown had also been vindicated on his determination to keep the UK out of the European single currency. Even though Britain was not in the euro, the City of London did not suffer. Quite the opposite, in fact. It asserted its dominance as the financial capital of Europe, where business in euros and other currencies was transacted.

  The overhaul of financial services regulation in the 1980s had also attracted outsiders, ambitious bankers and traders from abroad who wanted to work in resurgent London. The result, it was said, was the ‘Wimbledonisation’ of the City, in which the British provided the charming venue while the game was played mostly by globetrotting foreigners. This was an exaggeration; there were plenty of British success stories too. Still, the influx of bonus-hungry bankers suggested that the British economy was at the forefront of exciting international developments. Under Gordon Brown, foreign investment banks were more keen than ever to have a strong presence in the UK, with its growing reputation as a global banking centre. Since Thatcher’s Big Bang of 1986 the UK capital had been judged perfectly placed in terms of time zones for investment banks who wanted to do business around the clock. The plan announced by Lehman Brothers for a new building in London was just more evidence of British success. The US bank had had a presence in London since 1972, although it had scaled up dramatically after Big Bang in the 1980s. Lehman had headquarters in New York, London and Tokyo. Now it had such a large operation in Britain that it needed a vast new building. The steel and glass tower, thirty-seven storeys tall with one million square feet of office space, proved the firm’s commitment to the UK, said Dick Fuld, chairman and CEO of Lehman Brothers.

  Fuld knew London well. After all, in 1986 he had been part of the original American invasion which had so shocked the sleepy City old guard. Lehman’s then management had sent him across the Atlantic to spearhead the firm’s push into Europe from London. His new colleagues explained that the firm should also be thinking about expanding elsewhere on the continent. An office in Frankfurt, West Germany, should be considered: ‘No way,’ declared the aggressive Fuld. ‘We’re never going behind the iron curtain.’14

  Richard S. Fuld Jr had since risen to be a Wall Street kingmaker able to call on presidents, prime ministers and finance ministers. Who better to open Lehman’s new London building than Gordon Brown? On 5 April 2004 he was ferried to 25 Bank Street, Canary Wharf, to pull the cord and unveil a memorial plaque in front of the media. Brown lavished praise on his hosts. He wanted, he said, to pay tribute to the contribution the firm made to the prosperity of Britain. It had never been afraid to experiment, he noted. ‘During its one hundred and fifty year history, Lehman Brothers has always been an innovator, financing new ideas and inventions before many others even began to realise their potential. And it is part of the greatness not just of Lehman Brothers but of the City of London, that as the world economy has opened up, you have succeeded not by sheltering your share of a small protected national market but always by striving for a greater and greater share of the growing global market.’ Lehman Brothers was certainly an innovator, although to what extent would not become fully apparent for another four and a half years. After Lehman went bust in the financial crisis, the plaque from Canary Wharf bearing Brown’s name would become a collector’s item, selling at auction in 2010 for £28,500 to a buyer with a presumably dark sense of humour.

  For now, in 2004, it was possible to believe Brown’s vision was being realised. Under Thatcher the City and the UK economy had been opened up. Under Brown, stable conditions had been created in which growth was strong, interest rates were low, inflation was marginal and financial services flourished. Canary Wharf had sprung from the decaying docklands and wharves of crumbling East London in the 1980s. Now firms such as Lehman and Barclays, and others, were opening enormous offices there. Under a Labour Chancellor the City of the Square Mile was modernising and breaking out of its old geographical constraints, pushing voraciously eastwards.

  The global banks keen to be based in a lightly regulated and modernised City employed new staff, who would pay taxes and generate bigger and bigger profits that in turn boosted the government’s coffers. A son of the manse, a Presbyterian Scot still unafraid to use the S-word (socialism) when he was in like-minded company, Brown could then have the piquant pleasure of using the proceeds from this banking boom to help increase public spending dramatically and do what he saw as good works, repairing the damage he felt had been done to the civic fabric in the 1980s. The arrangement struck his Labour advisers, including Ed Balls, as beautiful. Brown had fused a quasi-Thatcherite belief in the power of liberalised markets with New Labour modernisation, enabling an expansion of the state and public services. They were sure that the situation would continue being benign, which is why Brown’s speeches were peppered with the phrase ‘no return to boom and bust’.

  In confidently declaring a new paradigm Brown was hardly operating in isolation. In America, his friend Alan Greenspan, the chairman of the Federal Reserve, was seen as the sagacious progenitor of never-ending global stability. Greenspan made occasional mild warnings about irrational exuberance in the markets, but generally the rise of the emerging economies such as China was thought to have combined with the rise of information technology and new trade patterns to create a second industrial revolution that could power growth for decades. The authorities had also proved they were capable of mitigating the worst effects of potential reverses. Whenever there was a problem, policymakers led by Greenspan managed to handle it and restore order. Only recently there had been another example of a mad bubble bursting in the United States. The emergence of the Internet and associated technology had fuelled a stock-buying mania in the late 1990s as investors clamoured to buy anything associated with the ‘e-economy’. For a time it seemed that any young, chino-clad technology geek with half an idea could secure millions or tens of millions in funding from venture capitalists keen to surf the wave of the future. On 10 March 2000 the boom peaked when the NASDAQ, the technology index on Wall Street, burst through the 5000 mark. Shortly afterwards firms with names such as WorldCom and Pets.com, which had rocketed in value, came crashing down. At the height of the madness, Yahoo had thought it sensible to pay $5.7bn for Broadcast.com, a website that was soon defunct. There had even been a widely tipped business called Startups.com, dealing in Internet start-ups, which failed.

  But the US authorities dealt calmly with the after-effects. Greenspan brought down interest rates and flooded the markets with liquidity to prevent panic. His view was that it was almost pointless trying to spot and prick bubbles in advance. It was much better to be on hand to mop up the mess afterwards, and to help get growth back on track as soon as possible with emergency action. The dot-com comedown was just the latest instance in which he had employed this technique. After October 1987’s stock market crash he had also used liquidity, standing by to provide cash from the US central bank’s reserves to help distressed financial institutions. This was judged widely to have turned a potential repeat of the Great Depression into a manageable event.

  In the early 2000s the cult of Greenspan was attracting ever more followers. He was t
reated by politicians, central bankers and other experts as though he was the economic equivalent of Master Yoda in Star Wars. From his bathtub (he did his best thinking in the bath, he told interviewers), he would emerge to issue Delphic pronouncements about the condition of the global economy. He received an honorary knighthood from the Queen for his ‘outstanding contribution to global economic stability’.

  ‘If risk is properly dispersed, shocks to the overall economic system will be better absorbed and less likely to create cascading failures that could threaten financial stability,’ he said in 2002.15 The financial innovation of recent years was, he declared, on the whole an immensely positive development because it diluted risks so that they were much more widely dispersed. This was exactly what some banks, growing in size, wanted to hear. Goodness, the complex new products they were experimenting with to expand their activities might actually make the world a safer place. It was a beneficent analysis that also suited politicians who had to fight elections. On 18 May 2004, President George Bush gave Greenspan a fifth term as governor of the Federal Reserve, which meant that he had been appointed to that role by Presidents Reagan, George Bush, Bill Clinton and now George W. Bush. Greenspan, it was claimed, was presiding over a ‘great moderation’ or ‘the great stability’, a period of unprecedented equilibrium and prosperity. His nickname was maestro.

  Senator John McCain, never noted for the quality of his economic insights, commented when asked if Greenspan should be asked to stay on at the Fed indefinitely: ‘I would not only reappoint Mr Greenspan. If Mr Greenspan should happen to die – God forbid – I would prop him up and put a pair of dark glasses on him and keep him as long as we could.’ In Britain, Gordon Brown was an equally big Greenspan fan. The pair shared an interest in ideas and academia and on the fringes of various international summits the friendship grew ever stronger.

  Greenspan was the perfect figure around which the Brown operation could build a ‘coronation’ event, for his planned ascension to the premiership. By early 2005 the Brown team expected Blair to be gone, and their man installed in Number 10 ahead of a general election. A programme of activities was arranged around Greenspan being awarded an honorary degree at Brown’s old university, Edinburgh. With the arrangements already made, the coronation had to go ahead with Blair still on the throne.

  On Sunday 6 February 2005, Greenspan gave the annual Adam Smith lecture in St Bryce’s, formerly St Brycedale, in Kirkcaldy, with Brown in the front pew. This was where his father had preached his sermons from 1954, when Gordon was aged three, until 1967. The strongest themes of the Chancellor’s life and career – his father’s preaching, notions of Scottish financial expertise and being reconciled to markets thanks to Adam Smith – all came together that evening in an atmosphere of mutual admiration, self-congratulation and hubris. From the pulpit, Greenspan acknowledged the extraordinary symmetry of the occasion in his opening remarks. ‘Kirkcaldy, the birthplace, in 1723, of Adam Smith and, by extension, of modern economics, is also, of course, where your Chancellor of the Exchequer was reared. I am led to ponder to what extent the Chancellor’s renowned economic and financial skills are the result of exposure to the subliminal intellect-enhancing emanations of this area.’ Concluding a scholarly speech, Greenspan referred to the phrase ‘the invisible hand’ which Smith used to describe the workings of markets: ‘One could hardly imagine that today’s awesome array of international transactions would produce the relative economic stability that we experience daily if they were not led by some international version of Smith’s invisible hand.’ That night Brown hailed his friend Greenspan as ‘the greatest economist of his generation’.

  The next day, Monday 7 February, Greenspan got his honorary degree at Edinburgh with Brown in attendance. Brown even wore a white tie for the occasion, something he had hitherto been reluctant to do, choosing to turn up for dinners in the City of London in a lounge suit instead. Mervyn King, who had succeeded Eddie George as Governor of the Bank of England, got an honorary degree that day too. After the ceremony the trio of King, Brown and Greenspan posed for pictures.

  History, it seemed, was running the way of all three men. There was a virtuous circle of seemingly unstoppable growth and intoxicating innovation, and the banks, including the Royal Bank of Scotland, were at the heart of it. What could possibly go wrong?

  7

  Fred the Shred

  ‘They had a shared aspiration to make RBS not just a leading bank, but also one of the most widely admired companies in the world.’

  Harvard Business Review, 2003

  George Mathewson was drained. The Royal Bank chief executive had found the fight for NatWest highly exhilarating but by the spring of 2000 he was fatigued and badly in need of a rest. Having been the driving force at the Royal Bank for more than a decade, first leading the struggle to save it and then launching a quest to make it the world’s best bank, he was now looking forward to standing back a little.

  Lord Younger and Mathewson told the board it made sense to accelerate the planned elevation of Goodwin, so that he could implement his integration plan for NatWest which had impressed them so much. Mathewson told friends that winning the takeover battle wouldn’t have been possible without Fred. On 6 March 2000, the Royal Bank announced that Goodwin would take over as chief executive with immediate effect, with Mathewson becoming executive deputy chairman. Younger would stay on as chairman only until January 2001. He died shortly afterwards, in January 2003, following a battle with cancer.1 In the spring of 2000, an exhausted Sir George Mathewson promptly took himself off travelling for several months, to look at various parts of the business and recuperate. Only five years since first going into banking, and aged forty-two, Goodwin was now a bank CEO with control of the Royal Bank train set. It had been a remarkable ascent.

  Just as he had at the Clydesdale when he was asked for a plan, and during the preparation of the bid document in the NatWest battle, Goodwin snapped into action deploying precisely the same techniques, to forge one large bank out of the constituent parts of the Royal Bank and the much bigger NatWest. For some of those who worked most closely with him, this was his peak. ‘Fred was born to do that integration because he was probably the world’s greatest project manager,’ says one of his team. A ‘traffic-light’ system was established so that Goodwin could see at any moment whether any given initiative was stalled, almost ready or completed. Working with Mark Fisher, he commanded the teams in charge of human resources, IT, retail banking, corporate banking and the rest, setting them their tasks and hourly keeping on top of the responses. Of course he started with an advantage, which was that he was building on the foundations of the Columbus Project from the mid-1990s. The Royal Bank – which had been transformed from a relatively sleepy institution into a more thrusting operation in just a decade – was used to rapid change.

  Many NatWest staff responded enthusiastically after years spent working for a struggling organisation. To counter the ‘Fred the Shred’ name-tag, Goodwin decreed that tea and coffee dispensed from machines in NatWest offices should be free, where previously staff had been used to paying for it. ‘It was a little thing, but it made a difference to how people saw us internally,’ says an adviser. The new chief executive also moved to assure NatWest staff that they shouldn’t see the integration in terms of cuts. They should view it as an opportunity to be part of a bigger and expanding enterprise. That was gilding the lily somewhat. There was still a lot of ‘shredding’ to be done. As many as 18,000 staff in the combined group lost their jobs when positions were scrapped and back-room and head-office functions were merged, to create the ‘synergies’ Goodwin had promised investors in the bid document. The senior executives in both banks were also put through assessments, to establish who would stay, who would depart and who would take the top positions. Some senior NatWest people stayed on, such as Gordon Pell, a retail banker who had previously spent a long time at Lloyds, where he was one of the early advocates of something called payment protection insurance (P
PI). Just days after the takeover of NatWest, Goodwin took Pell to lunch at Rhodes, in the City, and the pair discovered they got on well and had similar ideas on what to do with NatWest.2 Pell joined the Royal Bank board, holding a number of senior executive positions while managing to avoid gaining a public profile.

  Larry Fish ran Citizens, the US institution owned by the Royal Bank. Fish had taken over from Charles Grayboys in 1992 and was on the board of the Royal Bank, along with Norman McLuskie, who oversaw Retail Direct, the credit, charge and debit card end of the business. The finance director was Fred Watt and Iain Robertson – the old friend of Mathewson’s from Scottish Development Agency days who was known affectionately as ‘the bald eagle’ – was now the director overseeing of Corporate Banking and Financial Markets (CBFM).

  The guiding philosophy of the NatWest integration was that with a merged back room the bank could create and market financial products which could then be sold under the banner of the different brands in the group. So a NatWest customer would remain with the bank, but everything would be run on Royal Bank systems. This posed an enormous challenge for John White, head of IT. White was a veteran of IBM’s plant in Greenock, from which Mathewson had drawn senior staff and inspiration in his days at the Scottish Development Agency. There were suggestions that parts of the NatWest computer setup might be superior to those in the Royal Bank. To maximise the cost-savings they pressed ahead with the original plan, Goodwin ordering that the systems for managing accounts of NatWest and its subsidiary Ulster Bank be bolted on to those of the Royal Bank in Edinburgh.3 This process was declared an unqualified success by Goodwin in November 2002 and the press was informed it had been completed ahead of schedule. It meant that Ulster Bank, the smallest of the three in retail terms, would go last in the queue, with its customers’ transactions processed each day after those of its sister banks.