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

by Iain Martin

  Consolidation and growth of the UK banking sector 1960 to 2010(a)

  Published by the Bank of England, Quarterly Bulletin (December 2010). Evolution of the UK banking system. Richard Davies, Peter Richardson, Vaiva Katinaite and Mark Manning.

  Sources: Bankers Magazine, Collins (1988), published accounts and RBS Archives

  (a) The figure shows bank mergers involving the 16 London and Scottish clearing banks present in 1960, together with their acquisitions of building societies and demutualised building societies.

  (b) The balance sheets of institutions are included from the point of merging or acquisition.

  (c) Clydesdale was owned by Midland Bank until 1987 when it was sold to National Australia Bank.

  Sources and Acknowledgements

  Early on in my research for Making It Happen a banker seeking to explain his trade asked me how well I understood collateralised debt obligations (CDOs). About as well as most political journalists, I responded. I am not a financial journalist by trade, meaning that most of my career has been spent in the vicinity of politicians rather than financiers. Of course, writing about politics for a living means I have witnessed plenty of chicanery and confusion masquerading as certainty. But for sheer chutzpah, what some bankers managed to do, aided by policymakers, really scoops the pot.

  I wanted to understand how and why a particular group of those senior bankers, those at the Royal Bank of Scotland, did what they did, and to understand why others did not stop them and in some cases even created the conditions in which it became possible. I was learning as I went, occasionally open-mouthed at the vanity of what otherwise intelligent people would do if a lot of money were available. Others made mistakes, with honest intentions, and now regret that they did not do more to prevent the disaster. But gradually it dawned on me that behind a great deal of the complicated terminology and theorising quite a few of those in positions of authority in the run-up to the crisis didn’t, when it came down to it, understand all that much either. They had at best a partial understanding of the businesses that had made them so much money.

  Fred Goodwin did not understand what CDOs were until the bank he ran had quite a few of them and the financial system was about to catch fire. One of his colleagues even did a drawing for him explaining how it worked, and got no reaction. Others also explained it, although by the time the implications penetrated it was much too late.

  I set about interviewing as many former RBS bankers as I could, with executives and board members opening their diaries, notebooks and papers. Almost all the interviews, with more than one hundred individuals, were conducted off the record. The aim was to get candour and frankness from as many leading players and witnesses as possible. Many who spoke to me at length wanted to be able to deny to their colleagues – other board members, or fellow executives, or their new employers – that they had spoken. Some are still worried about potential court cases.

  This is not a book about the banking bailout, but for several key chapters I did need to understand the events before, during and after the RBS rescue. The argument will rage for decades about whether the giant bailout should have been implemented differently or not done at all. I am generally a banking bailout sceptic, but I can see that those attempting to deal with the disaster did not have the luxury of being armchair critics and were doing their best in appalling circumstances. They were operating during a civil emergency and were working for only a small fraction of what the bankers they were dealing with got paid.

  In the final chapter Stephen Hester and Sir Philip Hampton are interviewed on the record. In addition, in that final chapter I have quoted George Mathewson on the record. The former chief executive and chairman is such a central figure in the rise and fall of RBS. From 1987 to 2005, for eighteen years, he was either the driving force in the company or its father figure. I wanted him to explain what he thought it was all about. The man he hired and groomed as his successor, Fred Goodwin, spoke to me neither on nor off the record. All bids to interview him, with approaches made through friends, were rebuffed or ignored. Still employed within RBS are several people who have been extremely generous with their time and recollections. I won’t name them and they know who they are. It would have been impossible to cover so much ground, and get access to so many key witnesses, without their assistance.

  I have attempted at every stage to write a book that explains high finance, the extraordinary story of RBS and the blow-up of the UK economy, in terms that are, I hope, as straightforward as possible. If there are any mistakes either in terminology or understanding the errors are mine alone and I apologise.

  A long list of people deserve thanks. Ken Mooney, a former investment banker studying at Cass Business School, crunched the numbers expertly and analysed the data on RBS’s share price. Ruth Reed and her team at the Royal Bank of Scotland archive were wonderfully efficient and a source of great assistance. Richard Davies, formerly of the Bank of England and now at the Economist, and Belinda Turner of the Bank of England, pointed me to fascinating research on the UK banking system and questions such as banks being ‘too big to fail’. Richard produced, in British terms, the single most revealing graphic of the entire financial crisis period which is reproduced in the Afterword with the kind permission of the Bank of England.

  Ian MacGregor, the editor of the Sunday Telegraph, and colleagues Damian Thompson, Andrew Brown, Tom Chivers and Luke McGee all showed marvellous patience when I needed time away from writing for them to work on the book.

  Professor John Kay has thought deeply and written insightfully about the themes explored in the Afterword. He was kind enough to spend time talking with me early on in my research, firing my enthusiasm and suggesting interesting lines of enquiry. Harry Wilson, the banking editor of the Daily Telegraph, who has broken so many stories in his field, offered wise advice. Ferdinand Mount provided encouragement and pointed me in the direction of the collapse of the Ayr Bank and Adam Smith’s observations on that early Scottish banking disaster. David Broadhead and his staff at The Travellers Club were wonderfully accomodating and helpful throughout.

  I want to single out friends and colleagues who provided invaluable guidance and support. Gerald Warner read the manuscript, made canny observations and provided a much-needed boost at several points of low ebb throughout a long project. Bruce Anderson proofed the manuscript and suggested improvements. Patience Wheatcroft was, as ever, a huge source of inspiration and encouragement. Ian Stewart, editor of my old paper in Edinburgh, the Scotsman, cleared the way for me to access the archives and Craig Nelson tracked down the pieces I needed. That proper banker of the Swiss school, Henry Angest, of Arbuthnot Banking Group, was a great host at various points and he is an incisive thinker on the City, international finance and human nature.

  Simon Nixon, a friend and former colleague from my spell at the Wall Street Journal in London, brought his enormous expertise to bear, challenging my assumptions and arguments with marvellous clarity of thought. Similarly, Peter Thal Larsen, Ben Wright, William Wright, Iain Dey, George Trefgarne and Martin Vander Weyer each provided hugely valuable insights into banking, the culture of the City and RBS. Steadfast friends – Andrew Neil, Jonny Patrick, Anna Holland, Jenny Hjul, Andrew Wilson, Kirsty Milne, Con Coughlin, Ben Wallace, Alison Gray, Tim Montgomerie, Fraser Nelson, Michael Donn, Adam Bruce, Johnnie McKie, Michael Paterson, George Bridges and Gillian Bowditch – encouraged me to press on when my spirits flagged. The same is true, as ever, of Jack and Margaret Martin and Jim and Pamela McJannet. Both Alan Cochrane and Chris Deerin were selflessly prepared to listen to me ruminate at length about this book, sometimes over a glass of wine. They brought their brilliant journalistic instincts to bear. And without the meticulous research of that unbeatable wine critic and dear friend Will Lyons, I would never have known how much a bottle of Château Latour 1970 cost in 2000 prices. It was the wine drunk at the private dinner held to celebrate the Royal Bank takeover of NatWest.

  My agent, the fantastic Peter Robi
nson, never flagged in his faith that this was a book that needed writing. Martin Bryant edited and improved the manuscript with great care and precision. Mike Jones and the team at Simon & Schuster were superb, expertly steering this, my first book, from conception to completion.

  The biggest debt of gratitude I owe is to my wife Fiona and son William, who both tolerated my lengthy fixation on the Royal Bank of Scotland and all matters related to the financial crisis. Throughout they provided love, support and laughter. If William becomes an investment banker when he grows up then he cannot say, when he has read this book, that I failed to warn him.

  Notes

  Chapter 1

  1 Banks ask Chancellor for capital, Peston’s Picks, 7 a.m., 7 October 2008.

  2 Hansard, 6 October 2008, statement on the financial markets. Darling’s exchanges with George Osborne, then the shadow chancellor, were particularly fraught that day. Osborne offered temporary Tory support for efforts to rescue the banking system. But Darling’s team felt that Osborne had gone public with demands for the recapitalisation of the banks that weekend when the Tories had been told in confidence that the government was considering such a move.

  3 Unlike in the case of Northern Rock there were no queues. The run on RBS – the withdrawal of deposits – was more gradual, taking many months and involving large corporate customers removing large amounts. At no point was there a shortage of cash in the retail branches.

  4 FSA report, The failure of the Royal Bank of Scotland (2012), paragraph 458.

  5 Hornby had arrived at HBOS from Asda following a spell at the Boston Consulting Group. After the financial crisis he became chief executive of Alliance Boots, and then in 2011 Gala Coral, the bookmaker, bingo and casino operator.

  6 There remains a certain amount of bitterness about the curry. Several senior officials were not invited to partake.

  Chapter 2

  1 The best account of the Company of Scotland and the Darien disaster is Douglas Watt’s. He mined the Company’s records and Scotland’s national archives. Instead of the traditional concentration on alleged English perfidy, he offers a devastating assessment of the miscalculations made by William Paterson and his colleagues. The Price of Scotland (2007).

  2 ‘Historic new records shed new light on Scotland’s Darien disaster’, Caledonian Mercury, July 2011.

  3 William Ferguson, The Oxford Companion to Scottish History (2001), p.162.

  4 Equivalent Company, company of debenture holders, 1721–1851, RBS Heritage.

  5 In the mid-1920s Neil Munro, the celebrated Scottish writer, most famous for the Para Handy stories, was commissioned by the Governor and directors to write The History of the Royal Bank of Scotland 1727–1927 to mark the bank’s bicentenary. It contains an entertaining account of the earliest days of RBS.

  6 In Edinburgh in the ’45: Bonnie Prince Charlie at Holyrood House (1995), John Sibbald Gibson brings to life the occupation of the Scottish capital by the Jacobites. Gibson came from Paisley, served with No. 1 Commando in the Second World War and then combined a career as a civil servant in the Scottish Office with his work as a historian.

  7 John Campbell’s diary was published, with an introduction, by the Royal Bank in 1995.

  8 On the birth of the modern insurance industry and the actuarial profession, see Niall Ferguson’s The Ascent of Money in 2008, pp. 191–200.

  9 The Country Bankers Act of 1826 allowed for joint stock banks in England as long as they were outside London. The success of the system in Scotland was cited as a reason for reform.

  10 Neale, James, Fordyce and Downe was a London-based finance house that had indulged a taste for wild speculation and shorting stock. There was a panic, a shortage of liquidity, and many private bankers both north and south of the border went bust. The disaster is charted on pp. 124–34 of S. G. Checkland’s Scottish Banking: A History, 1695–1973.

  11 Neil Munro’s The History of the Royal Bank of Scotland 1727–1927 contains a list of those present at the bicentenary dinner at the North British Hotel and a full transcript of the various speeches made.

  Chapter 3

  1 Tom Devine in The Scottish Nation: 1700–2000 (2000) sets industrial decline in political context. As Scotland’s old industries started to come under global pressure, the Tories and Unionists were increasingly seen as unsympathetic. In 1967 the Scottish National Party’s Winnie Ewing won the Hamilton by-election and after that pressure grew for ‘home rule’ or devolution.

  2 In the late 1970s and early 1980s it was taken for granted by those seeking to take over a bank that it was necessary to gain informal approval from the Governor of the Bank of England.

  3 Report on proposed merger between the Royal Bank of Scotland and the Hong Kong and Shanghai Banking Corporation and Standard Chartered Bank, the Monopolies and Mergers Commission, HMSO, 1982.

  4 See David Kynaston, City of London: The History, 1815–2000 (2011).

  5 Direct Line was the brainchild of Peter Wood.

  6 ‘The rise and fall of the RBS American Dream’, Kenny Kemp in the Sunday Herald, 6 February 2011.

  7 George Younger left no memoirs, although David Torrance’s biography George Younger: A Life Well Lived, published in 2008, is excellent. Younger did write an account of Thatcher’s fall for Scotland on Sunday in 1993.

  Chapter 4

  1 ‘Modest venture which grew to span the world’, Herald, 21 November 1991.

  2 The Clark family fortune – as in Tory politician Alan Clark and Kenneth Clark of Civilisation fame – originated with the family’s now long-gone textile business in Paisley. The other major textile concern in the town was J & P Coats.

  3 When Goodwin was at RBS and the Sunday Times published a piece which revealed the incident and his father’s role he made no complaint and did not even mention it when discussing the article with colleagues.

  4 Scottish Banking: A History, 1695–1973, S. G. Checkland (1975), pp. 335–57.

  5 Cole-Hamilton went on to be chosen as the captain of the Royal & Ancient, at the home of golf in St Andrews, for 2004–2005. By coincidence, after the financial crisis, Goodwin had to withdraw his application to join the R&A.

  6 Later Cicutto did go on to run NAB, but he resigned in 2004 after a difficult period for the group.

  7 For a considerable time after the film was released in May 1995 Scottish politicians of all parties competed to exploit the patriotic Braveheart effect. The film was credited with a surge of interest in Scottish history.

  8 Goodwin’s former colleagues are divided on whether he was ever serious about making the move to Australia, or whether he did it hoping it would give him bargaining power.

  Chapter 5

  1 Scottish Housing Market Review, Scottish Executive, 2007.

  2 The building work at Harvey Nicks caused some disruption, particularly when the developers were accused by Fred Goodwin’s staff of getting dust on his car.

  3 Independent, 8 May 1997.

  4 ‘Halifax trumps Royal Bank’, Independent, 10 March 1998. The defeat by Halifax was embarrassing, although Mathewson felt it had provided the opportunity for his team to gain experience ahead of future potential takeovers.

  5 Statement by NatWest board, issued on 24 September 1999.

  6 ‘The bidding for NatWest’, Economist, 30 September 1999.

  7 ‘Wanless’s £3m pay-off’, Herald, 4 May 2000.

  8 Royal Bank of Scotland press release, Friday 26 November 1999.

  9 ‘National Westminster attacks offer from rival Royal Bank of Scotland’, Wall Street Journal, 21 December 1999.

  10 ‘Value of Royal Bank bid falls’, Guardian, 1 December 1999.

  11 From then on Goodwin used the Savoy as his London base, except when the hotel was being renovated and he moved to a suite at the Ritz.

  12 The Lex column did back the Bank of Scotland bid in the next morning’s Financial Times.

  13 ‘The Giant Killer’, Sunday Herald, 13 February 2000.

  14 ‘A victory for ski
ll and financial enterprise’, Scotsman, 11 February 2000.

  Chapter 6

  1 In 1994, for their father’s 80th birthday, the Brown brothers had a selection of their father’s sermons published as a book by Gordon Brown’s friend Bill Campbell, the owner of Mainstream publishing in Edinburgh: A Time to Serve: A Collection of Sunday Sermons.

  2 In a piece for the Daily Mail in 2006, Tom Brown (no relation but a close friend of Gordon Brown’s) explained how his father’s teaching had shaped the aspiring politician’s philosophy: ‘In the Name of the Father: the Gospel of Gordon’, 26 October 2006.

  3 Brown’s efforts to rebrand Smith reached a climax when he was Chancellor. See his involvement in the Enlightenment Lectures at Edinburgh University in 2002 – ‘Can both the Left and Right claim Adam Smith?’ He also wrote the foreword to Adam Smith: Radical and Egalitarian by Iain McLean (2006).

  4 See DC Confidential, by Sir Christopher Meyer, for an account of those first visits.

  5 ‘Learning from Clinton, stealing from Thatcher’, John Rentoul in the Independent, 18 January 1995.