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

by Iain Martin

  Perhaps it will come as some consolation to former staff that Goodwin lost at least £7m. That includes his losses on the shares which he held on to until the crash and the loss of the pay-off he was legally entitled to demand but gave up. George Mathewson was also hit, to the tune of more than £5m it is suggested. His losses from buying millions of pounds worth of shares in the rights issue were big enough to make his financial position so precarious that after 2008 he almost went under, say friends. With the aid of various directorships, he rebuilt his finances.

  I went to see Mathewson in his office at Stagecoach, the transport company, on the outskirts of Perth, Scotland. Stagecoach was the creation of his friend Sir Brian Souter, who built it from a one-bus company into a transport giant. It is a product of the entrepreneurial impulse that Mathewson was trying to foster when he ran the Scottish Development Agency in the 1980s. Until May 2013, Mathewson was chairman. In keeping with Souter’s cost-conscious approach to business, the international head-quarters of Stagecoach is in a drab, unprepossessing, identikit 1980s building that could have been used to film The Office.

  Pacing up and down as he talks, Mathewson is still a ball of energy, darting off at tangents, jumping between subjects and firing off pithy observations. It was that style – open to ideas, restless, enthusiastic – that those who worked on Project Columbus found so attractive in the early 1990s when they were remodeling the Royal Bank. It changed their world, as one of them put it. Mathewson might have been sober-suited but he wasn’t a boring banker; he was an entrepreneurial engineer determined to build something that might demonstrate to his small country that it could achieve great things again. Then what he built collapsed. Ever since his approach has been very different to the one adopted by Goodwin, who has said almost nothing and become the Greta Garbo of corporate calamity. Mathewson has continued to speak publicly, offering his views on banking and the economy. One critic says this is shrewd. The man who built the modern RBS, who created its culture, and then groomed Fred Goodwin, is there right in front of us ‘hiding in full view’.

  Who does Mathewson blame? ‘I know all the people involved in this, and I think the blame for this thing is very widespread. I think that I tend to reserve my ire for those who participated in this because of their trying to line their own pockets, as opposed to people who made genuine mistakes of judgement or have been caught out by events . . . I think I could blame the government, I could blame the Governor of the Bank of England . . . But I kind of think it doesn’t help everybody to go about blaming people and particularly not blaming individuals. I think the Fred Goodwin thing has been ridiculous. Why should he have all the blame, as a lightning rod for everybody else?’

  Is Mathewson bitter that the bank he built ended up in the condition it did? ‘Bitterness is a waste of energy. I feel sad, actually, particularly for the staff who lost all that money throughout Scotland, shareholders, and various places. I feel very sad for them. I felt sad for myself at the time, but I can’t honestly say I felt bitter because I don’t think anybody, apart from one or two, were doing anything other than what they felt was right. I don’t think Fred Goodwin did anything other than what he felt was right.’

  Really? Everyone involved apart from one or two just did what they felt was right and that’s how it goes, to the tune of £45bn plus of taxpayers’ money? That’s incredibly convenient for all those who let hubris blind them to the risks they were taking with other people’s money. But many of his old team are still very loyal to Mathewson. ‘When you see him he hasn’t changed, he’s still wee George,’ says one of them enthusiastically. He still keeps in touch with Fred, although very few of his former colleagues have seen Goodwin since. Mathewson has plenty to keep him busy, anyway. He is a friend and economic adviser to Alex Salmond. After RBS, Mathewson’s next project is helping the campaign to make Scotland independent.

  Of the others, Johnny Cameron has had the most attention. He tells friends he deeply regrets that when Goodwin asked him to produce the numbers to justify the ABN Amro deal he did it and was too much the soldier swept up in the momentum, complying with Goodwin’s request rather than being a general, leading. He will regret it until his dying day. Now he does some part time work at Gleacher Shacklock, a boutique investment bank, and sits on the board of a charity working on the rehabilitation of offenders. He did not lose a fortune when RBS went down, as he had been ‘light’ on the bank’s shares, and absolutely did not take up any shares in the rights issue. Incredibly, he is the only RBS senior figure who has faced any formal professional sanction (other than the stripping of Goodwin’s knighthood). This is an odd aspect of the aftermath, no matter what one thinks of bankers in general or Cameron in particular. True, in an epic disaster it can sometimes be the way that culpability settles on one or two individuals as others slink away hoping never to be mentioned again. Cameron made some misjudgments, which are detailed in this book. Yet it makes no sense that he alone should have been singled out for investigation by the FSA when others intimately involved have quietly continued their careers. In his case it was down to a confluence of circumstances. The chairman of GBM had received assurances on his departure that he would be allowed to work again. He was offered a City post just when the row over Goodwin’s pension flared up, whereupon the FSA announced it was going to investigate him3. The results of the investigation – along with the regulator’s report into itself – were turned into an FSA document titled ‘The failure of the Royal Bank of Scotland’. Many leading players in the drama were never interviewed by the regulator and, while it contains interesting information, it is not a full account of the rise and fall of RBS. In a very British way, there ended up being no proper wide-ranging committee of inquiry into the UK’s biggest ever banking disaster, or biggest ever so far.

  The FSA itself did not survive the crisis. Conceived as a model of regulation fit for the twenty-first century, it actually lasted less than two decades. Its former responsibilities have been divided, with the establishment of a new Financial Conduct Authority. The Prudential Regulation Authority, under the Bank of England, is now responsible for the stability of the financial system. Its first boss is Andrew Bailey, the Bank of England official who helped Vadera and Scholar design the rescue in October 2008 while flushing the banking system with emergency liquidity. The death of the FSA means that somehow Mervyn King ended up being the governor who had presided over a massive extension of the Bank of England’s powers by the time he stood down, despite it having made errors on a grand historical scale on his watch4.

  Brian Crowe gave up mammon for God. After leaving RBS he was ordained as a vicar and preaches in the Parish of Crosthwaite and Lyth, near Kendal in Cumbria. Leith Robertson, his deal-making deputy in GBM, is still in business. He is an adviser to a corporate finance company in the City and chairs 1st Credit, a debt-collection company. Sir Tom McKillop, the former chairman, issued an apology at the special meeting held for shareholders in November 2008 to approve the bailout. The meeting took place in the hall of the General Assembly of the Church of Scotland in Edinburgh, an appropriate place for sins to be acknowledged. He and Goodwin walked past the waiting photographers, through the courtyard featuring a large statue of John Knox, the austere founder of the Scottish Presbyterian movement. From the stage McKillop told the audience: ‘Both personally and in the office I hold, I am profoundly sorry about the position that we have reached . . . The buck stops with me as chairman and with the leadership of the Group. Accountability has been allocated and fully accepted. I am also acutely aware – every day – of the fact that thousands of our employees, past and present, have believed so much in their company that they gave more than their labour to it. They bought shares . . . They were proud of what RBS had achieved and were delighted to be associated with it. The anxiety they now feel is of great concern to the board, the executive and to me . . . And I am also sorry if any of our customers have suffered anxiety as a result of the situation.’ McKillop now sits on the board of two pharmaceut
ical companies. He tells friends that if he could turn back the clock he would have stuck with his first instincts when George Mathewson rang him in 2005 to ask him if he would chair RBS. He should never have said yes.

  Larry Fish is semi-retired and launched the ‘Fish Family Foundation’ which funds programmes educating immigrants and ‘green-card’ holders on how to become full American citizens. His pension pot, the equivalent of almost £20m, was bigger than Fred Goodwin’s. Alan Dickinson joined the board of Nationwide, and Carpetright. Gordon Pell, one of the original promoters of payment protection insurance, retired after a stint as deputy chairman of Coutts. Pell donated his earnings at Coutts to charity, it is said. Benny Higgins, who ran retail, was frozen out by Goodwin and left HBOS when he declined to do the aggressive lending required. He went on to run Tesco Bank. Cameron McPhail, who headed up Project Columbus, left RBS early in the Goodwin era and is now based in Jersey, from where he runs several businesses. Iain Allan, the RBS head of strategy sidelined by Goodwin when he raised concerns about ABN Amro, CDOs and the investment bank, has continued as a visiting professor at Cass Business School after an extended period of illness. Howard Moody, public relations man to Mathewson and Goodwin, left before the crash and works as a freelance consultant. Guy Whittaker lives in London and at the time of writing does not have a job. His predecessor Fred Watt qualifies as one of the luckiest men in the country by virtue of being the finance director who decided to leave RBS in 2006. Matthew Greenburgh, Goodwin’s favourite investment banker, retired from Bank of America Merrill Lynch in 2010, aged forty-nine.

  Plenty of those on the board that voted for the ABN Amro deal have continued life in the City. Peter Sutherland is still chairman of Goldman Sachs International, based in London, although he stood down as chairman of BP in late 2009, before the Gulf of Mexico oil spill. He is still a regular attendee at Davos and the Bilderberg Group, beloved of conspiracy theorists who suspect it of plotting to take over the world on behalf of a global corporate-political nexus. Steve Robson was badly shaken by the RBS experience, say friends. He remained on the board of the Financial Reporting Council, the body that sets the professional standards and codes for accountants, actuaries and investment firms. He is also a non-executive of Xstrata.

  The Australian Bob Scott, who was the senior non-executive director and chair of the remuneration committee that approved all the pay packages, stepped down from Yell after pressure from shareholders.5 Apparently the RBS connection did annoy investors who had lost money. Janis Kong, who used to run Heathrow Airport, sits on the board of Kingfisher, the owner of B&Q. Archie Hunter is retired, as is Bill Friedrich, the American lawyer. Another American non-executive, Charles ‘Bud’ Koch, the former boss of Charter One, has stepped back from finance. Colin Buchan stood down from the RBS board in 2011. Investment banker Joe MacHale left the RBS board in May 2013, the last of the group who were there in 2008.

  John Connolly, the former boss of Deloitte, RBS’s auditor, stepped down and became chairman of G4S just in time for the security group’s difficulties over its failure to hire sufficient numbers of staff to fulfill its contracts for the London Olympics.

  Victor Hong, the risk manager man who actually resigned from Greenwich on a point of principle, disputing the marking of CDOs, is now a consultant on risk management and regulation.

  Jay Levine became an investor in a firm headed by his former colleague, Ben Carpenter, which they hoped would become ‘the new Greenwich’, although it was a struggle to get such ventures off the ground after the financial crisis. Levine runs Springleaf Financial, a consumer lender that was badly hit by its earlier exposure to sub-prime mortgage loans. He and his wife Tammy have three houses in Greenwich and a family foundation that has sponsored cutting-edge research on economics. The Levine Family Fund sponsored a conference on ‘Neuroeconomics and Endocrinological Economics’ at his alma mater University of California, Davis.6 According to the conference organisers: ‘Neuroeconomics has emerged as a new field in recent years, as both economists and neuroscientists have used brain scanning technology such as functional magnetic resonance imaging to investigate how people make decisions.’ Rick Caplan set up an advisory firm on mortgage securitisation. Fred Matera works for Redwood Trust, a California-based firm that deals in mortgage-backed securities. Bruce Jin, once the head of risk at Greenwich, now works in a senior position for Nomura in New York. Bob McGinnis has retired from the business and spends winters in Florida.

  And then there is Fred Goodwin. His attempts to forge a career after RBS have not yet come to much. A position as an adviser to RMJM, the Edinburgh-based international architecture practice, did not work out, although the firm was facing financial difficulties before he arrived. The affair that broke his marriage also ended, with his girlfriend moving to Germany, leaving him home alone in Edinburgh, where he stays to be near his two children. His time is spent repairing vintage cars. Some friends have stuck with him, such as Sir Angus Grossart, the financier who was on the board at the Royal Bank until 2005, and Jackie Stewart, the former racing driver who was prepared to speak up for him at the height of the furore.

  Sometimes Goodwin will escape abroad for a few days when he receives an invitation to shoot or to play golf. Every time he goes to catch a plane at Edinburgh Airport, the journey from his house takes him along the old Glasgow Road. On the left, as he approaches the airport turn-off, is Gogarburn, the giant complex he planned and completed as the global headquarters for a great international bank. Like all who drive that way out of the Scottish capital, on the journey he is compelled to pass underneath the high arch of a bridge built to specifications he approved. In the middle of the arch hangs a decoration no passing motorist can avoid seeing. Finished in a dark metallic grey, hung between the suspension wires, it is 1.95 metres high, 1.95 metres wide and 200cm deep. It is a giant RBS logo.

  Afterword

  There were plenty of opportunities to stop Fred Goodwin. And yet hardly anyone at RBS really tried. Why? Money had quite a lot to do with it, with many of those involved making so much of it. A member of Goodwin’s staff, a woman who observed his senior executives carefully, put it brilliantly. ‘Grown men saying they were too scared of Fred to give him bad news? Isn’t that a bit pathetic? Was their reluctance to say anything related to the fact that they were trousering millions of pounds?’

  ‘Compensation’, no let’s be old-fashioned and call it pay, was so high at senior levels across the banking industry that those in receipt of the largesse had little incentive to cause trouble. The ‘bollockings’ and occasional indignities at RBS were worth tolerating. If you could just close your eyes, after grumbling a little to colleagues and working long hours, then you would get to the end of the year, when another enormous bonus would land in your account. It wasn’t greed alone, of course. Others were motivated by the desire to build empires.

  Those responsible include arrogant chief executives, weak management, boards that did not do their job, incompetent auditors, supine large shareholders, negligent regulators and a catastrophic Chancellor who fell for the epoch defining delusion that the ship he was steering was unsinkable. But beyond the blame game lies an awkward question that will not go away, even years after the crisis. If Britain’s banks became so big and dangerous that when several of them blew up they blew up the economy, are we comfortable that the sector is still so enormous?

  As research for the Bank of England shows,1 in 1960 the UK clearing banks were tiny. They had balance sheets that totalled a mere £8bn combined, which was just 32 per cent of GDP. Soon more Britons wanted to open accounts and the banks expanded to cope with the demand of a surging consumer society. In 1970 bank balance sheets were £20bn, or 38 per cent of GDP. In 1980 the figures were £128bn and 55 per cent and in 1990 £428bn and 75 per cent. By then banks were becoming big players in the mortgage and credit card markets and soon they broke the 100 per cent barrier, with some pushing on into investment banking-style activities too and expanding aggressively with interna
tional operations. By 2000 the borrowing and lending binge was getting into full swing and the clearing banks were increasing their leverage until they had balance sheets of £1.4 trillion, 143 per cent of UK GDP. From there it rocketed. In 2010, shortly after the financial crisis, the figure stood at an astonishing £6.24 trillion. That was 450 per cent of GDP. The figure was more like 500 per cent if other UK banks and savings institutions, not only the clearing banks, were included. Think about that for a second, and look at the extraordinary graphic on page 317 which the Bank of England’s economists produced to illustrate those figures. Over fifty years bank balance sheets grew until they were five times the size of the UK economy, which is one of the world’s largest economies.

  As they grew much bigger there were fewer clearing banks. A wave of mergers and takeovers swept the industry. In 1960 there were sixteen such institutions, yet by 2010, after decades of consolidation, there were just five much bigger groups: RBS, Lloyds, Barclays, HSBC and NAB (effectively meaning Clydesdale Bank, owned by National Australia Bank). RBS itself had swallowed eight of the sixteen that existed in 1960. And this smaller group of big banks were much, much larger relative to the rest of the economy.

  Some small economies such as Iceland and Ireland tried a similar experiment, loading excessive weight and responsibility on their banks. Switzerland has long been an economy built on international finance. French banks also grew fast in the boom years. But of the major economies it was the UK that really loaded up most noticeably. The American experience was quite different, despite the subsequent sub-prime problem. US companies tend to take a different attitude to borrowing, leaning more on shareholders for resources. Certainly the US banking system grew in the decade before the crisis but it had been consistently below 100 per cent of GDP since 1960. By October 2008, Britain had undertaken an extraordinary experiment in financialisation and concentration of control.