by Iain Martin
If Goodwin could not be jailed there must be another means available of settling the score. And then, in early 2012, it was suddenly remembered that he had a knighthood. A campaign began to remove it, with questions asked in the House of Commons and ministers in the coalition government busily stirring the pot. A body hitherto hardly ever heard of, the Honours Scrutiny Committee, was charged with looking into it. Perhaps only in Britain could this happen, as all the while the former chairman of the doomed HBOS, Lord Stevenson, continued to sit on another such government honours committee handing out gongs to those from the arts and media. (He stood down later.) The Queen and Prince Charles were concerned about the implications of the Goodwin case and sympathetic to him, it was said. He had been a good custodian of their charities and served quietly after his departure from RBS. Nonetheless, the pressure was too great and the committee announced that Sir Fred Goodwin would revert to plain old Mr Goodwin. And so too by extension Lady Goodwin would once again be Mrs Goodwin. Alistair Darling spoke up and condemned the removal of the knighthood. Writing in The Times, he declared: ‘There is something tawdry about the government directing its fire at Fred Goodwin alone; if it’s right to annul his knighthood, what about the honours of others who were involved in RBS and HBOS?’ There was more than one man to blame for the financial crisis.
15
Five Years On
‘The big lesson is that the unthinkable can happen if you let it’
Sir Philip Hampton, chairman of RBS (2013)
The furniture and colour scheme were chosen by Fred Goodwin, but the man himself is long gone from the 12th floor of 280 Bishopsgate. Instead it is his successor, Stephen Hester, who strides into the room and shakes my hand. Hester looks relieved, more relaxed than I have seen him and, with good cause, positively ‘demob’ happy. A few days ago he was fired. Officially he was not so much fired as ‘exited’ from RBS by ‘mutual agreement’. In the week after it was announced to an astonished City, on the 12th of June 2013, the bank’s share price took a hammering. Worried investors fretted about the possible breakup of the bank and the removal of a chief executive who successfully took £1 trillion off the balance sheet and had been expected to stay on to lead the start of the effort to privatise RBS. He is now parked in the corporate departure lounge, having agreed to stay on until a successor is appointed by the board and the government. By the time this book is published Hester will probably be on a beach, enjoying an extended period of leisure. His inclination once he leaves, he has told friends, is to just ‘hang’ and to work out what really matters in life after a difficult five years at RBS.
But on a purely personal level isn’t he angry about his removal? He says not. ‘I never take things personally anyway. Business is business. Politics is politics. People make decisions, they’re entitled to. I’ve made decisions my whole life about people who’ve worked for me. So I never have any personal resentments about these things.’
His relief can be explained in part by hatred of the limelight and the expectation that soon he will be away from it. Media scrutiny made him extremely uncomfortable, and he only appeared on the nation’s television screens with such regularity because he felt that his staff at RBS expected someone to be out there defending the wounded, ruined institution they were trying to rebuild.
‘I feel lucky that the great majority of what we set out to do we did successfully. I was only one of 100,000 people. That will always be seen as a really big set of business and societal accomplishments by the people at RBS. To go from a very challenging, and often bruising job, with head held high, is a manner and timing of going that often people don’t achieve, and that for a great deal of the last five years I might not have achieved. I’m proud of what we have all accomplished. At the same time I have a smile on my face, I’m leaving with a life ahead of me that will have a job without these stresses and strains.’
Not everyone agrees that RBS is almost fixed. In essence, the argument raging in the early summer of 2013 about Hester’s departure rests on a dispute about whether enough has been achieved. While Hester’s supporters, and the government as well, give him credit for ably defusing the biggest time-bomb in British banking history and in difficult circumstances cutting that astounding balance sheet more than in half, there is no agreement on what to do next with RBS. Worse, there are those inside government and in the City who say that the clean-up was not as comprehensive as it should have been and that the RBS balance sheet is still full of horrors needing to be owned up to.
Hester denies it vehemently, saying there are ‘no secrets or mysteries’ about the state of RBS and that he got it into a sound condition where it is capable of being privatised: ‘The facts show that RBS has recovered ahead of all the plans that have been in place for five years.’ But there is no denying that the government had for some time been coming round to the view that more radical surgery may be needed and that Hester is not the man to do it. Hence his departure.
So, did the Chancellor George Osborne lean across the table, point at Stephen Hester and, Alan Sugar style, snarl ‘yer fired’? No. His termination was the product of months of Whitehall scheming and internal Royal Bank wrangling. Just before Christmas 2012, the fear inside the Treasury was that RBS might be turning into a ‘zombie’ bank, the name given to enormous institutions that stagger along laden with toxic assets, dragging down the economy in the process. The Chancellor was determined to begin privatising RBS in time for the 2015 election, but wanted to be as sure as possible that there were not nasty surprises lurking in its loan book. A central concern was what would happen if privatisation went ahead and there was then a serious external shock, such as a resumption of the crisis in the Eurozone or a blow-up in the Chinese economy. The Treasury estimate of there being £60bn of potentially questionable assets in RBS means that they would only need to be 10% worse than claimed for it to punch a £6bn hole in the bank. The Treasury’s nightmare scenario involved launching privatisation only for ministers to have to launch another state rescue later.
Against this backdrop, the line that had been pushed since before the crisis by Sir Mervyn (now Lord) King at the Bank of England, that RBS should be split into a so-called good bank to be privatised and separate state-owned bad bank, containing the toxic material, started to get a fresh hearing in the Treasury. The Chancellor was not sure, and in public seemed to have set his face against it. But behind the scenes it was being discussed as part of a debate about what on earth to do with RBS. The BoE and the regulator had also been pushing the idea that the banks in general still have insufficient capital and are not ready for the next crisis1. In this context there was also a split about what shape and size RBS should be. Hester was firmly of the view that it should continue as a large universal bank, with an investment bank and international operations. The government view by early 2013 was that it should be ultra-safe, like Lloyds concentrating only on the UK, with much less investment banking and fewer foreign entanglements. Hester disagreed, pointing out that operations such as Citizens were potentially going to be very profitable again if the US economy recovers strongly. If the Treasury could not get Hester to change his mind about the way ahead, it would make a change at the top of RBS.
Hester’s difficult relationship with Osborne – which was polite on a one to one basis – complicated matters. Osborne is obsessively political, and the Treasury struggled to cope with the notion that the RBS CEO preferred not to play the Whitehall game. After the government announced in late 2011 that it would implement the Vickers proposals to force banks to ring-fence, meaning separate retail and investment banking, there was astonishment in the Treasury that Hester would not endorse the policy. Hester’s refreshing view was that as he did not agree with it he was not going to pretend.
Pay was another long-running source of tension. Hester’s supporters in the City say that in the intervening years he has earned much less than he would have as chief executive of another firm (which is certainly true). Critics respond that bankers still
have a completely warped idea of what constitutes low pay. The argument about Hester’s ‘compensation’ became a fixed item on the media calendar and in 2012 he was furious when Treasury pressure meant he had to waive a £963,000 bonus following an outcry.2
By early 2013 Hester was seen rather unfairly by the politicians, and by the regulators working for the new head of the Prudential Regulation Authority, Andrew Bailey, as a problem that needed dealing with. In March, Hester’s advisers at RBS told him that support for him from the politicians and the regulators was weakening, and that he should start to think about what he might do next. Simultaneously, Sir Philip Hampton, the Chairman of RBS, was coming to the view that it was time to find a new CEO who might have a less problematic relationship with the government. By the Spring, there was a meeting of minds with the Treasury and those running UKFI, the body that oversees the taxpayers’ 82% share of RBS at arms length from the government. The relationship between Hester and Hampton was never good, and, while it always remained professional, insiders say that a testiness in their dealings latterly tipped over into outright conflict. Hester is driven, used to getting what he wants and impatient when he does not get it, whereas Hampton saw it as his job as chairman to act as a brake, stress-testing assumptions and asking awkward questions. Hadn’t part of the historic problem at RBS been that strong chief executives faced insufficient challenge from the chairman and board?
If Hampton and the Treasury were to get a new CEO, there remained the question of the RBS board, which in theory and law had responsibility for any decision. Here it got messy. It was communicated to the board that the government would be supportive if its members decided to find a new chief executive. At the board meeting ahead of the RBS AGM in May there were the first formal discussions and there was division. Several members of the board were unhappy and there was a groundswell of opinion in favour of Hester staying at least until March 2014, which would have been the fifth anniversary of the launch of his five year reconstruction plan. If Hester wanted to fight to stay on, they would back him. ‘We didn’t want him to go, the Chairman and the government did,’ says an insider. The board took legal advice about the government’s position. Hampton explained that while the board members should decide they really had to take very seriously what was wanted by ministers, who represent the taxpayer, which owns 82% of the company. And the government was clear that it backed a change.
Hester brought matters to a head in May. Dialing in by phone to a board meeting he said that he would only stay if he had full support, meaning the unequivocal support of them all. There was an awkward silence on the line when he had finished speaking. Afterwards Hampton let him know that as he could not count on full support it had been decided that it would be best to arrange for his employment to be terminated by mutual consent. In addition the Treasury was keen to save at least two million pounds by having him leave now. If Hester had stayed until 2014 he would probably have got a bonus in the interim, triggering a much higher pay-off in line with the terms of his contract.
When news broke of the coup against Hester, there was turmoil in the City. Within days the Chancellor also announced in his annual speech at the Mansion House that his officials were looking at the good bank, bad bank option with a view to reporting back by the autumn of 2013. The aim was to be certain – one way or the other – if it was an idea worth pursuing, as it would delay privatisation, or whether they could just press on. Either way, it illustrates that five years on from the incredible events at RBS of late 2008, there is still no resolution in sight. Against this challenging backdrop, in the summer of 2013, RBS is hiring a new chief executive. Although it is not quite the worst job in the country – as it has been dubbed by some in the City – and plenty of Britons would happily do it for a tenth of the £1.6m salary, it is hardly going to be a straightforward assignment.
Hester shrugs. ‘Individuals are never really as important as they’re made out to be. Whether in good times or bad times. I’ve said to you before, I don’t think Fred Goodwin was as bad as he’s subsequently made out to be, and he wasn’t as good as he was made out to be at the peak of his reputation. And the same will be true of me. I think life will go on remarkably quickly. Pages get turned. That’s just how the world works.’
Indeed, when I interviewed Hester on an earlier occasion in 2012 his view of Goodwin was surprisingly generous, considering the state of the inheritance he bequeathed in the autumn of 2008. ‘I liked Fred. I thought he was a talented man. I thought he came across as much more humble in person than his external reputation. I don’t have anything against him personally. That doesn’t mean to say he didn’t make some significant business mistakes – that’s another issue.’
Quite. Hester’s diagnosis of what went so spectacularly wrong at RBS in the boom years after the NatWest takeover is damning. ‘We financed ourselves in an unstable way, we were too leveraged, the strategy wasn’t clearly focused on the things we were actually going to be good at, risk controls were poor, management process was a bit dysfunctional, and we were driven too much by profit expansion without thinking about the inputs.’
In late 2008 and early 2009, the first job was to try to stabilise the situation, to establish what could be salvaged, clear out half of the management team and recruit or promote replacements. Several of Goodwin’s team – such as the finance director Guy Whittaker and Alan Dickinson – stayed for a while to help sift through the wreckage, or in Neil Roden’s case to work on the restructuring. The board members, apart from MacHale, Hunter, and Buchan, were summarily dismissed. In March 2009 the Hester plan was unveiled, based on his belief that RBS was worth rebuilding rather than being broken up and sold off in pieces. Reconstruction since then has been a fraught business. At several points public anger has boiled over, such as when computer meltdowns locked NatWest and Ulster Bank customers out of their accounts. Goodwin’s decision, hailed by some of his colleagues as a masterstroke during the NatWest integration, to bolt everything onto the smaller Royal Bank platform, turns out to have not been so smart.
But how had RBS ended up as a time-bomb in the first place? The pace of expansion, particularly at GBM, bordered on the insane, surely? The investment banking profits in the boom years seemed so vast and the growth so rapid that it encouraged Goodwin to keep pushing the entire bank, and never to ask what might go wrong if the market went into reverse. It was to grow that part of the business that he pressed on with ABN Amro.
‘The investment bank underlying was a good business, with good people doing good things that customers really want,’ says Hester. ‘But it had been allowed to grow at a pace and a scale that was much too fast and became dangerous.’
Instead it was mainly bad basic banking that did the damage, he believes. ‘We will have lost [from the crisis] more money on regular lending than we will have ever lost in the investment bank. Our worst loss is our real estate lending in the British Isles, Ireland being the worst, UK being the second worst. So again it was convenient to media and politicians to say this is all about evil investment bankers doing complicated things that we didn’t understand, but I don’t think it’s at all to do with that. This is about a world economy that revved itself too much and about some asset bubbles that policymakers allowed to develop and banks financed, the worst of which was in real estate, and it’s no coincidence that the countries that suffered the most economically and the banks that suffered the most are ones that were in countries that were allowed to have big real estate booms – Ireland, Spain, United States, Britain.’
It was an old-fashioned mania then, in which once again people forgot that bust quite often follows boom?
Hester nods: ‘Somehow, every single generation, people forget and there’s another real estate boom.’
At the other end of the corridor from Hester sits Hampton. The RBS chairman occupies the large corner office that used to belong to Sir Tom McKillop, with views stretching out over north London and beyond. Hampton is a City veteran, an accountant who switched
to investment banking with Lazard and then chaired the supermarket Sainsbury’s. He made a stand when he was finance director at Lloyds Bank, opting to leave because he did not think the assumptions being made about growth were sensible. It is not easy or cost-free to resign from a job on a point of principle when corporate culture tends to require that all employees sing the company song. But a few more senior resignations in RBS in the run-up to disaster might have alerted the board, or helped to prompt the kind of constructive opposition that was so badly needed ahead of the ABN Amro deal. He believes that the disaster at RBS in 2008 demonstrates why powerful chief executives need checks and balances. ‘Lots of people thought Fred Goodwin wasn’t much constrained by the board or regulators. It’s very difficult for anyone, over time, to make the right judgements if they are not much challenged.’
Why does Hampton think the smash happened? ‘To me the big lesson is that the unthinkable can happen if you let it. Just because UK banks hadn’t gone bust since Victorian times didn’t mean they couldn’t. Wholesale borrowing by UK banks was almost zero, net, in 2002. By 2008 it was £760bn. RBS had around £300bn. With hindsight it was a ludicrous borrowing binge. RBS borrowed far too much, and lent the money very unwisely.’
A lot of people have suffered unfairly as a result, he acknowledges. ‘The people who have most right to be angry at the bank’s financial collapse are people who did nothing wrong and lost their jobs, or in the case of many small shareholders, much of their life savings. Big financial failures can have massive collateral damage, which is why we need a strong banking system and effective regulation.’ A total of 41,000 of the bank’s employees, in the UK and abroad, have been laid off since 2008. It has not been easy for many of those who kept their jobs either. The vast majority of the bank’s staff are not traders, or leverage finance merchants, they are people working hard in branches, call centres and back offices for modest remuneration.
