by Iain Martin
On the Sunday afternoon and evening control was slipping away from Goodwin. Neil Roden, the HR director who had worked closely with Goodwin at Clydesdale Bank, and then RBS, now had to ‘exit’ his boss in extraordinary circumstances. McKillop had summoned Roden from Scotland after the board confirmed the decision. On the Sunday Goodwin turned up at 280 Bishopsgate to arrange his departure. It was a laborious process, involving going through documents and arranging a so-called ‘compromise agreement’, which allowed him to stay on working in Edinburgh for a few weeks. Goodwin drafted in an Edinburgh law firm, Maclay Murray & Spens, to represent his interests. That evening the outgoing chief executive talked to Lord Myners by telephone about his departure. By this point those in the Treasury were absolutely astonished at how much attention the RBS executives were giving the issue when the banking system was in the middle of a meltdown. The board had delegated the question of Goodwin’s departure to McKillop and Bob Scott and the decision was taken to treat Goodwin ‘in the normal way’, by which it meant he was being regarded as ‘a good leaver’. This had the effect of doubling his pension pot. Bob Scott had asked Neil Roden to have the pension numbers totted up and thought Goodwin had a pot of £15m or maybe a good bit more. Scott maintains that he told Myners this when the pair spoke that Sunday evening, but Myners denies it. In his defence Myners and his colleagues were battling to deal with a collapse of the financial system and operating at high speed. Myners did emphasise that the government did not want RBS to breach any contractual requirements as it had no desire to end up in court. At 1.30 a.m. on 13 October it was all settled anyway, when in a conference call the board, in the form of the chairman’s committee, agreed the deal that would give Goodwin an annual pension of £703,000. By 3 a.m. he had put his signature to the various documents required. The veneer finally cracked at several points and Goodwin became very emotional about leaving the bank he had built and brought to this point. Visibly upset, at 3.30a.m. he was deprived of his pass for the building and signed out of 280 Bishopsgate for the last time.
He wasn’t the only one upset. The taxpayer was about to make an eye-watering commitment. On Monday 13 October, Brown and Darling hosted another Downing Street press conference at which the precise terms were laid out. The state was putting £20bn into RBS, and would own 63 per cent of it, and £17bn into Lloyds and HBOS, meaning the taxpayer held 41 per cent of the newly merged entity. Brown, in the sonorous tones which had on so many occasions hailed the British economic miracle of low interest rates, a surging City and constant growth, emphasised that this mattered to every family and business in the country. ‘The action we are taking is extraordinary . . . We must, in an uncertain and unstable world, be the rock of stability on which the British people can depend.’
Boom and bust had not been ended after all. The world had become, as history suggests it can quite suddenly, ‘uncertain and unstable’. Just at the point when this became apparent, in a febrile atmosphere, Brown seemed for a while to have been reborn, to the astonishment of his enemies and joy of his supporters. Hailed by leaders in other countries, the self-proclaimed supposed ‘saviour’ of the world and proud engineer of massive bailouts was recast briefly as the man who knew what to do in a crisis. Knowing what to do seemed to involve taking hundreds of billions of pounds of other people’s money and spending it. After more than a decade in government spending money, this was an activity at which Brown was always going to excel.
In the event, the UK government also had to come back with many more taxpayer billions for the Royal Bank later. ‘It quickly became clear that the recap hadn’t worked,’ says an official. Several more attempts were required to begin stabilising the stricken bank, once it became apparent how big the losses run up by Goodwin would be. In February the government was compelled by market pressure to organise a second bailout, with another £19bn of capital. In the end the taxpayer ploughed in a total of £45.2bn and owned 82 per cent of RBS. An asset protection scheme was also required, which allowed banks to insure their bad loans, thus reducing their risk of losses and reassuring them sufficiently so that they might begin giving new loans to businesses that needed it. RBS placed £325bn of bad loans in the scheme.
With the banking system broken, a downturn in the real economy was never going to be far behind. A recession, the first of two downturns that followed the financial crisis of 2008, began. The economies of America and the leading Western countries slumped. In the UK the boom years had been built on a great deal of private-sector debt. There had been an explosion in what many Britons were allowed and prepared to borrow, on the back of assurances that this was a new paradigm. On the eve of the financial crisis, in June 2008, total UK personal debt was £1.4 trillion.6 That meant it had doubled in under a decade. The average Briton owed £3256 on credit cards and 33 per cent of mortgages taken out were interest only. McKinsey produced a report that labelled the UK, along with Japan, one of the most indebted countries on earth by the time of the crisis in 2008. Add together government, household and corporate borrowing and the UK had a debt to GDP ratio of 469 per cent, much higher than America on 300 per cent. Even stripping out the foreign debt of the UK banks from that figure, the UK was still borrowed – at 380 per cent – up to its eyeballs.7
That lending undertaken by RBS and the other banks in the UK and Ireland had not been done in isolation. On the other end of those loans were real people, customers who would now struggle to pay, as trade contracted, order books closed, companies struggled and consumers took fright. There were dire implications for government and the public finances, as well as the banks. The sizeable increases in public spending instigated by Blair and Brown had been predicated on the notion of a benign outlook stretching out far into the horizon. As the economy shrank, there was a dramatic fall in tax revenues. The deficit, the gap between income and government outgoings, shot up, as happens in a recession, although this was a very deep recession. The deficit was £69bn in 2008, £156bn in 2009 and £142bn in 2010. That was money added to the vast stock of national debt. In 2012, after the coalition government made great play of trying to make economies, the national debt sailed above £1 trillion heading for £1.5 trillion.
Early in 2009 RBS had its own enormous deficit to worry about. Goodwin’s replacement Stephen Hester readied himself to unveil RBS’s annual results that February and when they came they were horrific. In 2008 the Royal Bank had lost £24.1bn, the biggest corporate loss in British history. Once the numbers had been sifted it was not all down to what had happened at GBM in London, or in Jay Levine’s operation in Greenwich. The investment bank accounted for £8.6bn of losses, 28 per cent of the total. A third of the overall losses were in old-fashioned poor lending on commercial property. The exposure to the property mania in Ireland was particularly disastrous. Between 2008 and 2010 Ulster Bank, in theory just one small corner of the RBS empire, accounted for £4.4bn of losses, with much more to follow. The commitment to flat-out growth in Alan Dickinson’s corporate bank, and Cormac McCarthy’s Ulster Bank, had turned out to be extremely costly.
Where the problems with CDOs and investment banking had done most damage was in the long bank run on RBS during 2008. Investors did not know then about the later losses in Ireland or elsewhere, which only showed up when the recession began. In the crucial period, when panicked investors and analysts wondered who held what relating to sub-prime mortgages, it looked as though Goodwin and his team could not say or did not know. And it had been largely in order to grow GBM that Goodwin had done the cursed deal in the Netherlands. The rapid expansion of the investment bank fuelled the corporate confidence that led Goodwin and his colleagues to buy ABN Amro and double the balance sheet at just the wrong moment.
The losses – whether they had come from fancy trading or duff basic lending – made the demands by the new RBS management that it should carry on dispersing bonuses seem almost unfathomable to many watching Britons. Not only were bankers avoiding prosecution, they were demanding money on top of their pay packets, havin
g been saved and subsidised by the taxpayer. In attempting to explain that in order to make money to pay back the taxpayers it was necessary to hire the best, Hester was making a case unlikely to cut through. Not when living standards were falling for millions of people. Equally, it was not an easy argument to make when the banking scandals kept on coming in the years after 2008. There was Libor manipulation, centring on traders attempting to fix the London ‘inter-bank’ lending rate, the figure used by global banks to make their calculations when they were lending to each other. The chicanery had been going on among small groups of traders at the largest banks for years. The traders sent juvenile emails and messages boasting of how easy it was to manipulate a benchmark that was supposed to underscore the City of London’s position as a leading financial centre. RBS paid £390m in fines to various regulators, Barclays £290m and the Swiss bank UBS £940m.
It was decreed that RBS needed to offer a sacrifice to public opinion. When the investigation into Libor concluded, the government privately demanded the head of a senior RBS figure. John Hourican, who ran the successor to Johnny Cameron’s GBM, was like Hester ignorant of the traders’ rate fixing but fearing a public backlash the government wanted someone at or near the top to go. Under pressure, with the Treasury demanding it, he agreed to resign. In the event there was little public anger, perhaps only weariness. Once again a group of well-paid traders had been found to be at it. Only someone who has been living in solitary confinement since 2008 could possibly be shocked. Hourican, once deemed a possible successor to Hester, was removed, in the end probably needlessly.
Libor was not a one-off though. The revelations about the conduct of the banks came in waves. There was the scandal of interest rates swaps, in which businesses were sold products that they very often did not need or understand.8 Customers were encouraged, sometimes compelled if they wanted a loan, to take out cover that would protect them in the event of interest rates rising. The reverse happened. Rates, since the crisis, have plummeted. The investment bank trader culture, of hedging, and swaps, with devices invented that ended up fleecing customers who thought they could trust their bank, had infected ordinary lending to businesses. Billions more were set aside by the banks to compensate customers when the racket was exposed. Equally, payment protection insurance (PPI) was from the late 1990s another egregious example of the way in which banking changed in the long boom years, as bank executives sought new ways in which to drive growth and their own ‘compensation’, which is what the rest of us call ‘pay’. Retail banking may have been run relatively conservatively by Gordon Pell and others at RBS, contributing a few billion to the losses after 2008 and nothing out of line with what personal lending usually loses in a recession for any bank. But at RBS and other financial institutions a sales culture took hold, in which staff were given aggressive targets and taught to sell hard to customers. Many customers who ticked the box for PPI were clearly operating under the mistaken assumption that their banks, while being very far from perfect, broadly had their interests at heart.
Some of those who designed Project Columbus for the ambitious George Mathewson in the early 1990s reflect on such scandals now and see that the reforms they helped unleash at RBS unwittingly helped create the disaster. Many of the bank’s lower-paid staff were recast as salespeople and assigned goals and revenue targets by management which seem to have blinded those involved to the reality of what was being foisted on the customer.
Of course, the overwhelming majority of the staff of the Royal Bank, earning modest salaries, did nothing wrong. Indeed, many had lost out themselves. If they had taken shares in the rights issue, at the offer price of 200p, after October 2008 they had lost 90 per cent of their investment. As recently as April 2007, on the eve of the ABN Amro bid, the bank’s shares had been worth more than 600p. The collapse represented a terrible, calamitous destruction of wealth. Hundreds of thousands of retirement nest eggs had vanished. In the weeks after the collapse Alan Dickinson and several of his colleagues toured the branches and call centres, offering bewildered and mutinous staff a chance to take it out on someone from the management. One RBS cashier, close to retirement, explained quietly to Dickinson that year after year over the decades she had invested in RBS stock every time it was offered to her. Not long ago her carefully husbanded investment had been worth almost £250,000, and now a mere fraction of that was left. She had trusted those at the top and believed unfailingly in the reputation of the bank for which she worked. Of course, the impact was felt well beyond the staff, by many more small investors gulled by the bank’s proud Edinburgh history and more recent success into believing that it could never fail.
Fred Goodwin got much of the blame. He was even named as the ‘world’s worst banker’ by Newsweek magazine: ‘He aced every requirement for a hubristic CEO.’9 In February 2009, three months after he left RBS, inevitably there began the war over his pension. The revelation that RBS had agreed to pay him £703,000 a year scandalised opinion. The mood was for the architects of the banking disaster to be jailed, not for them to enjoy retirement on a pension twenty-seven times the average wage. In an effort to defuse the row, discreet diplomatic entreaties were made, involving the then Chancellor, the new chairman of RBS, Philip Hampton, and several Treasury officials. If he would cut his pension in half that would go some way to assuaging the widespread anger. Edinburgh is a small city, Darling reminded Goodwin. People could be cruel. He had a family to think of. Better surely to make the gesture of conceding and hope to convince the public that it was an act of penitence. And look, £350,000 was still a lot of money.
Goodwin was, as he had often been in the past, stubborn in a negotiation. One of the reasons he was determined to hold on to the pension pot in its entirety was that it also contained his contributions from the Clydesdale Bank and before that Touche Ross and Deloitte, accounting for more than fifteen years of his career. That quirk can be traced back to the unusual way he was hired by George Mathewson in 1998. When Goodwin arrived he had been given vague assurances that he could transfer over all of his pension, and be treated as though he had actually been at the Royal Bank since the age of twenty. ‘It was a shocking thing to have done in corporate governance terms,’ says an RBS executive. ‘It was a case of, aye that’ll be fine, we’ll sort that out later.’ In 1998, Miller Mclean, the company secretary, was given the job of resolving it, which took years and ended with Goodwin getting a contract that gave him an advantageous pension arrangement. In October 2008 he had only agreed to go in the manner he did – without any kind of pay-off – on the understanding that his £16.9m pension pot was intact. He was very clear he would go quietly if he kept it. Yes, Darling told him, but that ignored how angry taxpayers now were. McKillop and Myners also clashed over differing accounts of that meeting in October 2008 in the Treasury. Had the government been properly informed? McKillop insisted it had been made clear that Goodwin had a big pension. In June, after months of pressure, Goodwin accepted a cut. He had resisted, sustained another drawn-out hit to his reputation and then conceded.
For the sake of their two children, Fred and Joyce Goodwin tried living abroad, sheltering in the South of France and Switzerland with various friends. They found it hard to settle and Goodwin told friends in Britain he was determined not to be forced out of his own country, Scotland.
Soon after they returned the marriage collapsed. Joyce Goodwin had not known about the affair with a member of staff at RBS. When her husband took out a super-injunction to ban the press revealing details of how he had breached the bank’s code of practice and spent several years conducting an affair with a member of his own staff, Joyce could not avoid learning the truth. There exists an extraordinary situation in which, as the result of the judgment by Justice Tugendhat on 9 June 2011, Goodwin’s now former mistress cannot be identified, seemingly for life, to protect her privacy. It is as though the affair – which it is not denied happened at the height of the period in which Goodwin was making catastrophic mistakes – is deemed to be
the financial crisis equivalent of Bletchley Park, the secret installation in World War Two that was not allowed to be mentioned for decades after the end of hostilities. This is bizarre. Should the justice system really shield the public from the truth? In the summer of 2011 Goodwin moved out, back into the old family home in the Grange, Edinburgh. His wife remained in another house they had bought in Edinburgh because it came with large gardens and high security. The family had faced attacks after the financial crisis and the police had to be called in when their house and a car was vandalised. A group calling itself ‘Bank Bosses are Criminals’ claimed responsibility. The perpetrators were applying a very broad definition by using the word crime. Incredibly, almost everything that caused the financial crisis was entirely legal.
