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

by Iain Martin

  By now it was obvious to the members of the management team that the gradual lead-up to the deal had just been corporate gamesmanship by Goodwin. All along he had desperately wanted to get ABN Amro, to avoid being beaten by Barclays and to make RBS a truly global company. There was also the question of potential loss of face. Goodwin was chairing the consortium and backing off, saying that he was standing aside for John Varley, would risk humiliation in front of his peers and the media. There were more whispers of nervousness in the management team, although they never got above a whisper. Alan Dickinson, running the UK corporate bank, wondered what they really knew about Dutch banks. At an executive meeting in this period when Goodwin went round the table, seeking views, several of those present asked what was actually in ABN Amro, and what the quality of its assets might be. Ominously, Crowe said: ‘We just don’t know.’ Goodwin simply moved on to the next person. ‘You’ve got to stop him, Johnny,’ Dickinson said to Cameron afterwards. The chairman of GBM said he didn’t think Goodwin wanted to hear it. The RBS chief executive had anyway decided that the numbers from Cameron’s investment banking arm were providing the reason for doing the deal. Expanding the part of the operation which included GBM – and Greenwich and all those ‘super-senior’ CDOs sitting there on the balance sheet – ended up being the rationale. It was an enormous bet on the kind of banking that was about to help trigger the blow-up of the rest of the bank and then the British economy. Goodwin wasn’t alone, however. The bet was taken up willingly by the overwhelming majority of the shareholders of RBS – led by the large companies and pension funds that were the owners of the bank. When they voted on the ABN Amro deal it was a resounding yes, with 94.5 per cent of those shareholders eligible to vote backing the bid. Standard Life, Barclays, M&G Investment Management, Aviva Investors, Fidelity Investments, Franklyn Resources Incorporated, Bailie Gifford and Company, Insight Investment Management and Goldman Sachs International, all voted for it.

  That autumn Goodwin was a chief executive with an extraordinary amount going on. In addition to the takeover, there was another serious distraction. He was leading a double life. In the greatest secrecy he had begun an affair with one of his colleagues. The complex at Gogarburn had hotel facilities for the business school and several colleagues noted that Goodwin and his mistress started spending more and more time together, after she hung around him at company events. That autumn he got himself a personal mobile phone, distinct from the RBS company mobile he had always relied on, and there was more whispering that he seemed preoccupied, although most of his senior RBS executives say they were unaware until after the bank had collapsed. Joyce Goodwin did not know, yet. Her husband was juggling a disintegrating personal life and difficulties at GBM, just as he moved to close the ABN Amro deal. On 17 September the Dutch Central Bank and the country’s Ministry of Finance said that they had no objections. The consortium had won and on 5 October Barclays admitted defeat. RBS and its partners completed the acquisition less than a fortnight later. The timing could not have been worse. And then several of Goodwin’s executives noticed that ABN Amro had a corporate slogan that sounded eerily familiar. RBS promised to ‘Make it Happen.’ The end of the Dutch Bank’s TV adverts declared ABN Amro’s mission in similar terms. The slogan was ‘Making More Possible’. The takeover was certainly about to make more possible, in the wrong way.

  13

  Bank Run

  ‘We’ve rerun all the models and it could even be as bad as £4bn.’

  Fred Goodwin to Tom McKillop, March 2008

  On 17 October 2007 the private jet carrying Fred Goodwin touched down in Amsterdam and a car sped the RBS chief executive towards the headquarters of ABN Amro. That day the consortium led by Goodwin was completing its takeover of the Dutch bank and he was due to make a presentation to staff. Goodwin was keen to impress. To avoid looking overly ostentatious he asked to be let out of his Mercedes further down the road, so that he could be pictured arriving on foot at the front door of his new purchase. In the ensuing conversations with wary senior Dutch bankers Goodwin was well behaved, going out of his way to try to woo his new employees.

  Back in London that evening the tenor at dinner was downbeat. Matthew Greenburgh was hosting at Merrill Lynch, the investment bank that had advised RBS. Greenburgh’s bonus that year, for his role on ABN Amro and other deals unrelated to RBS, would be in the region of £10m. Joining Goodwin at the long table for dinner were Mark Fisher, his sidekick and integration expert, John Hourican from Cameron’s GBM team, strategy director Iain Allan (who had been sceptical about the deal after LaSalle disappeared), other members of the Merrill Lynch team and RBS’s lawyers. It was all very different from the event held when the Royal Bank of Scotland conquered NatWest in 2000. Then, Goodwin, Mathewson, Greenburgh, assorted investment bankers and senior executives from RBS had gathered for dinner outside Edinburgh, toasting their triumph with Château Latour (1970) raided from the English bank’s cellars. At the dinner to mark the ABN Amro deal, the wine was much more modest. The outlook hardly called for the finest Bordeaux.

  It was obvious to some of those at dinner that RBS had completed the purchase of ABN Amro at an extremely difficult moment. Now they had to get to work unpicking Goodwin’s latest acquisition. Mark Fisher was moved to ABN Amro, to begin dispersing the various components to Santander and Fortis, while the work of integrating the parts RBS had bought got under way. Brian Crowe – who had been ill, and who had had to take time off work – crossed over the street in Bishopsgate, to take charge of the ABN Amro investment banking arm.

  It took Crowe away from Cameron’s GBM, and Leith Robertson, who did not have Crowe’s experience of markets, stepped up. Hourican went to ABN Amro as finance director. Again Mark Fisher was put in charge of integration, and given forty-five days by Goodwin to implement a plan in the same way they had always done since taking over NatWest. It rapidly became clear that this time it was different. Not only did Fisher find the Dutch regulator tricky to deal with, but the Dutch bankers also did not think much of being bought by foreigners. Added to this RBS had limited experience of Asia, although it now found itself with larger teams there and clients to figure out.

  Cameron, Crowe and their colleagues realised suddenly that the doubling of the balance sheet thanks to the ABN Amro takeover was a massive problem. Little consideration had been given to this by Goodwin when the bid was being prepared. Indeed, throughout the boom years, massive expansion of the balance sheet was seen mainly as an inevitable consequence or by-product of the push for growth. At the end of 2004 it stood at £588bn. Before the chase for ABN Amro, at the beginning of 2007, it topped £870bn. Now, less than a year later, it had more than doubled. It was a staggering £1.9 trillion. To put that in context, this was a number bigger by at least £400bn than the entire output of the UK economy. RBS’s share of the ABN Amro purchase price, once it had been handed the proceeds that the Dutch bank had secured for selling LaSalle earlier in the year, was only 14bn euros, a lot less than RBS had paid for NatWest years previously. Unfortunately, the price obscured a horrible truth. What they had purchased was a third of the company but it came with 70 per cent of the ABN Amro balance sheet.1 The parts that Goodwin had agreed to buy were the riskiest, on the investment and corporate banking side, involving a huge amount of assets – loans, trading exposures, securities, CDOs. Just at the point when analysts and investors were worrying about who had hidden liabilities or books full of potentially toxic material, RBS had made itself the biggest bank in the world by balance sheet. Goodwin’s wish to be bigger than the American giant J. P. Morgan had come true, at precisely the wrong moment.

  What was all this stuff exactly? When Crowe’s team got to work that autumn they discovered that the Dutch bank contained a lot of junk, as the investment banker John Cryan from UBS had attempted to warn Goodwin. Hourican plunged into the finances and discovered that the valuations that ABN Amro had put on many of the assets they held were at best optimistic. RBS was exposed on its own CDOs, a
nd the leveraged finance deals that had been done by GBM. Now, it had just taken on more of the same material that was difficult to value with any precision. The vast balance sheet and RBS’s activities also had to be funded, to keep the money flowing through it and on to customers. Like other banks RBS relied, to varying degrees, on the ‘wholesale’ international money markets. It meant taking out a combination of longer-term loans and engaging in short-term borrowing from other banks that would extend overnight credit to each other. In the boom era of easy money it had become standard industry procedure, although as recently as the year 2000, RBS had had zero, net, reliance on wholesale funding.2 With a balance sheet so vast RBS now needed to do rather a lot of it, tapping funds overnight or for a period of just a few weeks. Making the situation even more precarious, to the chagrin of Brian Crowe and Hourican, Goodwin had opted to fund the majority of the ABN purchase price with short-term debt that needed to be rolled over, or re-financed, in a few months’ time. During the bid it had been presumed by RBS that this would be straightforward. Growth in the wider economy seemed strong, despite concerns about sub-prime property, and the markets flowed with a seemingly endless and steady stream of cheap money. Now it was starting to dry up. By November, the members of the bank’s Group Assets and Liabilities Committee were growing concerned at what was happening to liquidity and Guy Whittaker, the finance director, established a subcommittee to deal with the subject. Goodwin demanded that it report to the board and concerned senior executives. ‘Until then liquidity had been almost a joke when it was mentioned. Liquidity? Oh yeah, there’s so much money out there,’ says a board member. It was now deadly serious.

  Did they have enough capital? To facilitate the ABN Amro deal, RBS had run it low. Goodwin had long argued for ‘efficient capital’ as the RBS way. In 2006 he noted: ‘We don’t like carrying more capital than we need to.’3 This had started to concern the regulator, which had concluded only at the ABN Amro takeover that it might be a problem. It had not attempted to block the deal. McKillop was invited to the FSA for a discreet chat and it was a little embarrassing. The officials were concerned that the RBS chairman seemed not to have a full grasp of the numbers on capital. ‘Give me a bit more warning next time and I’ll prepare properly,’ an exasperated McKillop said. Goodwin was also called in. He told Hector Sants it was a question of liquidity, rather than capital. But the two are connected, as a senior Royal Bank staffer points out: ‘It was obvious we had a problem accessing liquidity because the market feared we did not have sufficient capital.’

  To do the ABN Amro deal, core tier 1 capital had been run below 4 per cent. In December 2007 the FSA quietly put RBS on its watch-list. The high hopes the board had placed in Guy Whittaker, the finance director who had worked so closely with Goodwin on ABN Amro, were now fading. His exasperated colleagues found he appeared to be struggling to understand or explain the concepts involved. They noted that he did not seem particularly reassuring or robust in a crisis. He certainly could not stand up to the chief executive. He had meekly sanctioned Goodwin’s plan to rebuild the capital after the ABN Amro deal, as the planned extra profits flowed from the integration.

  To the astonishment of Goodwin, and adding to the pervading sense that he had just made a horrible mistake, Santander cleverly sold on one of its parts of ABN Amro. Here was a superb piece of business by Emilio Botín, friend of George Mathewson and Goodwin, and boss of Banco Santander. ‘Emilio played Fred brilliantly,’ says a member of Goodwin’s executive team. ‘He put his arm round Fred’s shoulder and told him he was a great CEO and must lead the consortium, and all the while he was picking his pocket.’ RBS was lumbered with the garbage, while Botín sold Antonveneta, an Italian bank owned by ABN Amro, for 9bn euros on 8 November.4 It had been valued at 6.6bn euros when the consortium closed the deal in October. That meant he had made a profit of 2.4bn euros in three weeks. In Amsterdam, Mark Fisher was astonished when he heard.

  The board, in the words of one member, was ‘starting to get educated’, a little belatedly. McKillop had supported the ABN Amro deal and now he was appalled by what he heard. The balance sheet was exploding and RBS discovered it had ‘double exposures’ all over the place. Goodwin attempted to maintain his cool, although he became steadily more anxious and tense in his dealings with the chairman. McKillop started to think he might need to find a new chief executive.

  As Goodwin concentrated on ABN Amro, Greenwich was continuing to unravel. The argument raging at Steamboat Road about what the super-senior tranches of CDOs should be priced at was becoming more fraught. A worried Bruce Jin, head of Risk Management, hired Victor Hong as managing director for the department at the end of September. Hong came from J. P. Morgan, where he had been vocal in insisting that the firm should not get into the kind of ‘super-senior’ risks that RBS had, even though the money looked easy. It looked easy because this stuff was highly risky to the point of being toxic, he told his colleagues. The mark-downs that RBS had done on the CDOs struck Hong as wholly inadequate when he arrived. At the end of August they were recorded as still being worth 90 cents in the dollar. To be credible the marks needed to be much, much lower, Hong argued.

  In October, when the ratings agency Moody’s started downgrading the CDOs it had previously stamped AAA, some banks were hoping they were worth in the region of 80 cents. They were actually trading in some cases at between 20 and 50 cents, the Economist reported.5 The argument made against tougher action was that it was hard to say accurately, and that some of the RBS CDOs were supposedly of a higher quality than those being marked down by other banks. Hong’s attempts to meet with the auditor Deloitte, to raise his concerns, were blocked. By 8 November, after only six weeks in post, Victor Hong had seen enough of Greenwich. He then did something extraordinary, something that very few people in the entire RBS story did. He resigned on a point of principle. His terse resignation letter went to Chris Kyle, the finance director of GBM back in London, and was forwarded to Cameron. Hong wrote: ‘My expected oversight and sign-off responsibilities for monthly price verification would be intolerable, based upon persistent discrepancies between trader marks and analytical fair market values.’

  Bob McGinnis had already left on 9 October, the day the Dow Jones index on Wall Street hit an all-time high, often a sign of looming trouble and the imminent bursting of a bubble.6 Jay Levine would leave at the end of the year and Symon Drake-Brockman, a protégé of Brian Crowe’s, was flown in from London tasked with trying to assert control and ‘de-risk’ where he could. Drake-Brockman knew Greenwich, as part of his team in GBM was based there, but he needed help. He later re-hired McGinnis as a consultant, to help him try to deal with the mess. While some of Greenwich was still a good business, trading in US government debt for example, the move into being more aggressive on CDOs had been a disaster. It had coincided with something changing in Greenwich in 2006, noted several members of the team. Greenwich the town had become even more ostentatious as the rewards grew in hedge funds and banks, with proximity to ever-larger amounts of wealth fuelling greed. At the RBS office in Steamboat Road, traders and staff had argued with each other even more than usual about how much their colleagues were making in bonuses. An extreme hunger for risk-taking, profit and massive ‘compensation’ had blown a hole in RBS. The question was how big a hole. Drake-Brockman could not believe what he found when he pitched up at Greenwich to take over from the departed Levine. The backbiting, bitchiness and fighting over money was out of control. He summoned together senior staff and made a speech. He told the bankers and traders: ‘All I’ve heard in recent years is that this is the very best place to be in RBS, that Greenwich is the jewel in the crown. Well, I don’t think I’ve run into a more whiny, sappy group of individuals. You should be embarrassed. I’m embarrassed for you. Things are going to change.’

  Yet it was already too late, as head of strategy Iain Allan realised. Back in Gogarburn he had become steadily more anxious as it became clear that RBS had a large number of CDOs. Allan, an actu
ary by training and visiting professor at Cass Business School, started to think that RBS and other banks might go bust. He was worried about the severity of the risks inherent in CDOs. The chief executive still did not seem to understand the scale of it. He took comfort from the AAA ratings. On 6 December, RBS announced write-downs of 2007 of £1.2bn, with exposure to CDOs making up the bulk of it. In the eyes of some observers, these declarations were still at the optimistic end of the spectrum. On financial blogs this was zeroed in on immediately: ‘RBS seem to have rose tinted glasses when it comes to marking their own CDOs – there will be further write downs to come in due course,’ commented one contributor.7