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

by Iain Martin

  IT, based in Edinburgh’s Fettes Row, was part of the vast, centralised ‘machine’ being built by Goodwin and Fisher, his wingman on integration who oversaw ‘manufacturing’. After the integration it had almost 20,000 staff, operated 400 IT systems, managed thousands of ATMs, processed and counted hundreds of billions in cash and handled the procurement of £3bn in services and goods in the UK and beyond. The theory was that with standardised back-room procedures and IT, the Royal Bank could purchase other banks or insurance firms and integrate them on the model of the NatWest takeover.

  In other respects the reorganisation from the spring of 2000 went as planned too. Gartmore, the fund management business that came with NatWest, was sold off speedily for a little over £1bn. One of the casualties was Gartmore chief executive Paul Myners. The ambitious former journalist and investment banker had been on the board of the old NatWest and it was said that Goodwin found him arrogant, although they only met for two minutes. Myners went. He had the consolation of an absolutely enormous pension pot and he went on to hold a string of other lucrative city posts. Eight years later, the newly ennobled Lord Myners – by then a Treasury minister appointed by Gordon Brown – would be handed the job of dealing with Goodwin’s severance arrangements and pension during the crisis of October 2008.

  Throughout the rest of 2000, with the integration running ahead of schedule, Goodwin’s management team got the first proper chance to see what he would be like as a day-to-day boss. The early signs were troubling. They were used to Mathewson’s freewheeling and unorthodox style, and an atmosphere in which those involved saw themselves in the words of one as ‘a happy band of brothers’. Goodwin started to introduce tension. He seemed to want to interfere in everyone’s business. That obsession with small details – which had been apparent at the Clydesdale Bank – was particularly noticeable again. ‘He was instantly very different from George,’ says a member of the management team. ‘If there was an issue or a problem Fred was more interested in finding a victim and having them crucified. The bollockings were pretty much daily.’ The new chief executive didn’t favour shouting, or at least not very often. His preferred approach once again was the remorseless application of logic, to expose the complete ineptitude of his victim. The assault then culminated in withering sarcasm or laconic asides about their endless capacity for incompetence. ‘Fill in the complaints book on your way out of the door,’ he told a senior executive who was leaving his office after a particularly bruising encounter.

  The morning meetings in Edinburgh were the main forum where he introduced his team to his management style. The gatherings were known as ‘morning prayers’, an epithet with austere Presbyterian overtones, or ‘morning beatings’. Some thought that Goodwin was just trying to impose himself, and to establish that he was going to be more rigorous than the restless Mathewson, who sometimes rambled and had trouble concentrating. There were moments when Goodwin’s dry wit came through. After flaying the management team for their alleged failures in the first section of one meeting he then had to deal with the results of the staff survey, which included feedback on how those around the table were perceived by those who worked for them. ‘Ah, a game of two halves,’ he said, as he ran through findings which gave his executives high marks.

  But it was the way he relished catching them out with sudden barbed questions that grated most. Remembers one senior executive: ‘He would ask you things in a meeting that anyone well-balanced couldn’t possibly know the answer to. How many mortgages did you sell last week in a particular branch? So you either said you didn’t know and got eviscerated or if you were sensible you made up an answer.’ When a problem was mentioned in the morning meeting Goodwin would often declare, with a shake of the head, ‘Right, drains up’, meaning that it was time to get down and dirty and examine the plumbing. He also hinted that he had a network of informants telling him what was really going on in the bank. The implication was that his management team could not be trusted and that its members could not trust each other. Says one of his lieutenants, loyal to him for many years: ‘When he found something out he used to say to us in the morning meeting “a little birdie tells me . . .” and I used to think, Fred, you know what you should do with all those little birdies? You should fucking shoot them.’

  Larry Fish, boss of Citizens, was appalled by Goodwin’s sarcasm and behaviour towards other subordinates when he flew to Scotland for a visit. At the end of one meeting of the management team in Edinburgh he whispered excitedly to fellow executives as they spilled out for a cup of coffee after a session with Goodwin. He had not seen anything like this in American banking. ‘This is simply outrageous. Is Fred always like that?’ ‘This is nothing,’ one of the Scots told him, ‘you should see him on a bad day.’

  Fish’s presence at some of these meetings in Edinburgh was a reminder that the enlarged Royal Bank wasn’t simply a UK bank and that it had considerable scope to expand overseas. Goodwin had ambitions to build on the existing Citizens network, then still a relatively small retail bank with branches clustered in New England. Mathewson loved Fish, seeing his folksy demeanour as key to helping unlock retail banking business in north-east America. He was good at wooing big customers, schmoozing the locals and singing the company song in places such as Boston. Others were less convinced. Members of the Royal Bank management team had watched, astonished, as Fish sucked up to his bosses blatantly. One observed: ‘Larry would say to George Mathewson in meetings, completely shamelessly in front of people, “George it’s been your vision that has driven Citizens and leaders like you are rare.”’ Another thought he was ‘the worst kind of American corporate guy’: ‘Larry Fish was the consummate American executive. All smiles and there were never any problems.’ ‘Larry’, adds a colleague, ‘was full of shit.’

  Fish certainly had a well-practised routine. How did he explain Citizens’ success? It was all about the ‘credo’, he told those who asked. ‘It’s about people,’ he added. ‘It’s nice,’ he observed, ‘to be nice.’ Fish developed the credo further when he took time off in 2002, to visit Japan, to read and to study flower-arranging, finally distilling his approach to what he termed ‘the three Cs’: ‘customers, colleagues and community’.

  In a lecture at MIT Sloan School of Management4 Fish told students that it came down to ‘saying thank you, and having a smile’. The audience was regaled with a story about the difficulty he had buying three screws from his local hardware store and problems he encountered at the dry-cleaners when he turned up to collect his shirts, encountering staff who were less than joyful. In contrast, he said, he wanted Citizens to be the best place in the world to work. To that end, he claimed he began each day by writing a thank-you letter to a member of staff: ‘Dear Betty, I heard you got that new account. Well done, proud to have you on the team. Yours, Larry.’ To spread the joy further, Fish explained that the bank prided itself on subsidising pet insurance for staff. ‘I met a lady in Detroit recently. She could not say enough about pet insurance. She has 13 canaries. They’re very fragile.’ It was a little like watching Woody Allen do an impersonation of a caricature corporate charmer. ‘And then,’ says a colleague in Edinburgh, ‘he had a story he always used about a cat. We heard so often about that bloody cat.’

  An elderly lady whose feline friend has gone missing walks into a branch of the bank somewhere in New England. Fish takes up the story: ‘She’s got a notebook-sized piece of paper with a picture of her cat, Fluffy. Would it be OK if I put this up on the wall?’ In other banks she would have been turned away, intoned Fish gravely. But not at Citizens. The notice was put up. ‘We do the right thing. Nice is good.’

  The cat anecdote was also deployed on trips to the UK in an attempt to impress investors and analysts, although several of his more cynical British colleagues, tongue in cheek, asked after one such presentation what had happened to the cat. ‘Did they ever find Fluffy?’ Fish ignored the question.

  But the mockery of their American colleague by those in Edinburgh an
d London was tinged with resentment. Fish was a controversial figure when he visited. For a start he earned so much. Consistently he had proven himself to be good at retail banking. And he was far from stupid when it came to negotiating his own pay and conditions, earning him renown in the Royal Bank HR department for the sharp-eyed nature of his demands. When Goodwin took over, he told colleagues that he would fly to the United States to ‘sort out Larry’ and what was perceived to be his overly high pay, although in the event it turned out to be bluster and Fish’s pay went up. For all Goodwin’s ‘Fred the Shred’ moniker, he could be extremely uncomfortable with certain elements of one-to-one confrontation. If there was an awkward move to be made or a firing to be done – which at the senior executive level was only very rarely – Goodwin got others to do it. Sorting out Larry came to nothing, for now. Fish’s compensation soared. In 2002 his pay packet was up 50 per cent on the previous year to £3.35m, including £2.66m in ‘performance bonus’.5 This package was much bigger than that enjoyed by Goodwin, who was on a total of £2.58m. Fish had also negotiated several performance-related arrangements. The unfortunately named ‘Phantom 2000 plan’ and the Citizens Long-Term incentive plan netted him many millions. ‘Larry roped and doped Mathewson and then he did the same to Fred for many years,’ says a colleague of both.

  Fish’s timing was perfect. The faster Citizens grew its income and the bigger it became the more money he had a chance of making. As Goodwin stormed through the integration of NatWest, the Royal Bank chief executive was eager to do more deals that would fuel expansion. With American property and mortgage lending on the up, the United States seemed to be the perfect place to look. Since the early 1990s, Citizens had been buying up tiny regional banks in its own neighbourhood. Now, if Fish, or friendly investment bankers such as those at Merrill Lynch, could help spot opportunities to snap up other bigger regional banks in the north-east of America, Goodwin was delighted to sanction such takeovers and bring the Royal Bank’s newly acquired expertise in integration to bear. Citizens, and its owner RBS, might then increase its footprint in New England and beyond. In time it might even be able to push into the American Midwest, where borrowers of all incomes (and none) were particularly keen to get in on the housing boom.

  The next opportunity to expand Citizens came in 2001. The Royal Bank lost out in the race to buy Dime Bancorp, which was sold to Washington Mutual, the Seattle firm which gorged on sub-prime lending and had to be seized by the American authorities in late September 2008 following the biggest bank failure in American history. In May 2001, during the holiday weekend, Fish took a call from Mellon Financial. Would the Royal Bank be interested in buying its retail banking arm? Fish phoned Scotland and Goodwin agreed in principle straight away. By July the deal was done, for $2.1bn, again with the assistance of Matthew Greenburgh at Merrill Lynch, and the money was raised in a day in the City of London.

  The purchase would more than double the number of Citizens branches – to just shy of 700 – and gave the bank a strong presence in Philadelphia. The following year the Royal Bank picked up Medford Bancorp, with branches in the Boston suburbs, for $273m. Fish was even busier in 2003 when in January the Royal Bank completed the purchase of Commonwealth Bancorp for $450m, and in July buying Port Financial Corporation in Massachusetts for $285m. From the purchase of a relatively small Rhode Island outfit in 1988, the Royal Bank and Larry ‘it’s nice to be nice’ Fish were growing a formidable American retail operation.

  It wasn’t only in America that Goodwin wanted to grow. Robertson’s newly expanded part of the Royal Bank was the most intriguing prospect. In some ways it was a straightforward corporate bank, now the largest in the UK, serving the borrowing needs of businesses. It looked after 75,000 corporate customers and served 200 of the companies in the FTSE 250. But it was much more than that. An integral part of the operation – alongside the corporate units of the old NatWest and the Royal Bank – were the various trading operations in financial markets. The Mathewson mantra had been that the Royal Bank didn’t do classic investment banking. Conventional banks, he warned, should be wary of trying to ape the fancy footwork of institutions such as Goldman Sachs or Merrill Lynch which indulged in huge amounts of proprietary trading in currency, derivatives and securities to make profits, alongside their work advising clients on deals.

  This soothing claim was at odds with the expansion that had started under Mathewson himself – who made it clear to Johnny Cameron when he hired him to work under Robertson that he was to expand the Royal Bank’s investment banking-type activities in London and beyond. It was also decided by Goodwin, Mathewson, Robertson and Johnny Cameron within weeks of closing the NatWest deal that after all they would not sell the Greenwich Capital business in Connecticut, which came with NatWest. Greenwich was expert in mortgage securitisation, was a dealer in US Treasury securities (the debt the US government issues), and was an underwriter, trader and provider of investment services to governments and big corporations. It would be hard to maintain the fiction that the prudent old Royal Bank didn’t indulge in investment banking activities, when it owned an outfit such as Greenwich in America and was expanding so fast in this field in London. An unspoken compromise emerged. The Royal Bank would do some of what investment banks did, but other names were used for it.

  In Robertson’s division, Enron was a particular problem. One of NatWest’s best corporate clients was the company that had emerged to dominate the American energy market. After the Royal Bank took over NatWest, Robertson and others did not want to lose Enron, and marvelled at their confusing business model in which it was never entirely clear where the money was coming from. An energy company need no longer worry too much about producing energy or selling it, it seemed. They focused more on selling on, sliced and diced, their energy contracts and futures contracts. Then they booked vast paper profits with the aid of accountants. ‘It’s a kind of alchemy,’ Robertson told his colleagues.6 When Andy Fastow, the financial chief of Enron, who was close to the firm’s boss Jeffrey Skilling, was in London he dropped into the Royal Bank. Robertson called several colleagues and told them to get up to his office quickly: ‘You’ve got to meet this guy Andy Fastow.’

  It turned out that Enron was a huge fraud and the business collapsed in late 2001, subsequently taking down Enron’s auditor Arthur Andersen. Trials followed. One of the most controversial aspects of the scandal was the extradition of the ‘NatWest Three’, British executives from NatWest who had done a deal with Fastow that made them and him millions in weeks. The whole Enron experience contributed to Robertson’s disillusionment and he agonised over why he did not spot it. ‘Iain was an old-fashioned honest kind of guy, and this just underlined for him that the financial world was now full of people prepared to do terrible things that he didn’t understand. It saddened him,’ says a colleague. Another colleague of Robertson’s says that the Enron scandal was a warning that should have been heeded, across the banking industry. Look at what Enron had been doing. They had taken contracts, parcelled them up and traded them on in such a complicated way that the whole business became entirely disconnected from any notion of worth or underlying value: ‘The roots of what happened later with sub-prime mortgages were there in an extreme form in the financial engineering in Enron, and we didn’t see it.’

  Goodwin’s concentration though was on growth. If it was unfair at that stage to call him a ‘deal junkie’, someone obsessed with the thrill of doing the next big transaction, he did revel in the process of making a purchase and then applying his project-management skills to incorporate it into the group of Royal Bank businesses. Although his colleagues thought he had a quixotic taste in targets and a highly unconventional take on what a bank should be buying, some of the purchases worked. International Aviation Management was bought in August 2001 for just £16m. If leasing aircraft did not seem like a natural fit with a Scottish-based bank, the expanded division was worth $7.3bn by the time it was sold in 2010. And it gave Goodwin a way of getting access, for the
first time, to a private jet.

  Other experiments were costly and time-consuming failures. Should a bank with bold ambitions really be in the second-hand car business, beyond offering simple loans to customers? The motoring-obsessed Goodwin believed it should be and that there was an opportunity in selling cars and then providing the finance deals to customers, which might complement the Lombard car and van leasing business that they already owned. In buying car dealership Dixon Motors in April 2002 for £118m, Goodwin made Paul Dixon and his son Simon Dixon very rich, as they pocketed more than £4m each,7 but it turned out to be a very poor deal for the Royal Bank. Senior bankers couldn’t quite believe that so much attention was being lavished on a mere car dealership. An appalled Johnny Cameron was given the job of agreeing to the deal, having to confirm it was partly his decision so that the board didn’t think the Dixon Motors deal was a manifestation of Goodwin’s mania for cars. Alan Dickinson was eventually dispatched to review the situation once the first concerns emerged and he did not like the balance of the deal one bit. ‘It smells’, he told Cameron, ‘as though we are being ripped off.’ ‘Oh Christ,’ Cameron responded, not enjoying the thought of having to tell Goodwin.

  The chief executive responded to the news that his investment was looking like a dud by digging ever deeper into the micro detail. ‘As it got worse we wasted hundreds of valuable hours talking about this thing at the morning meetings. We were discussing a bloody car dealership. It went on for ever,’ says another member of the management team. In the end, Dixon Motors was sold back in a management buyout in 2005. The Royal Bank was down tens of millions and the car dealership later went into administration under new ownership. While the slowly unfolding farce contributed to a sense amongst his team that Goodwin was inexperienced, it was accepted that a chief executive might make mistakes. What was more worrying to Cameron, Dickinson and others was that it also suggested he had trouble admitting error. They felt that they were blamed for the car dealership imbroglio when they had not been enthusiastic about the deal in the first place and it had been Goodwin’s baby. A pattern was established, where those with doubts about a transaction didn’t feel it was worth speaking up sufficiently robustly because in doing so they would be taking on a chief executive with a boundless capacity for grinding down opponents.