20 October 2008
(Note: this is the full, unedited version of an article commissioned by the Mail on Sunday on October 16, 2008. see published version here)
SIR Fred Goodwin, the chief executive of Royal Bank of Scotland, seemed extraordinarily chipper and relaxed as he hosted a champagne reception for Scottish politicians, journalists and editors on January 21st, 2008. At the bash, held in an immaculately refurbished Georgian town house on Edinburgh’s St Andrew Square, Sir Fred seemed remarkably self-confident.
The market backdrop was inauspicious. Earlier that day, dubbed “Black Monday” by City traders, the Footsie had plunged by 5.5% on fears about the plight of the US economy. RBS’s shares had plunged by eight per cent to 342p. In those more innocent days, these were seen as frightening falls. However the 50-year-old Paisley-born accountant-turned-banker, a man feared and respected in equal measure in Scottish business and financial circles, was showing no sign of unease.
As he chatted animatedly to guests including Scotland’s finance minister John Swinney and opposition leader Wendy Alexander, Goodwin was taking RBS’s tumbling share price and economic worries in his stride.
Sir Fred had spent the previous eight years growing RBS from a small mid-sized provincial player through a dizzying series of 27 acquisitions – including the “nodding dog” motor insurer Churchill, the Irish mortgage provider First Active and the Ohio-based bank Charter One – as well as through dramatic organic growth of RBS’s investment banking activities in Europe and the US into one of the world’s largest financial institutions. He assured his guests that the market falls were largely sentiment-driven, and displayed an unshakeable belief in his bank’s prospects. Further “write-downs” on RBS’s portfolio of toxic assets would only be necessary if the US housing market deteriorated further, he said.
As Goodwin unveiled profits of £10.3 billion for the year to December 2007 and a hike in the RBS dividend a few weeks later, it seemed like Goodwin had been vindicated. On results day, February 28th, 2008, he was still insisting that the bank had “no plans for any inorganic capital raisings or anything of the sort” and that it was less exposed to sub-prime slime than many had feared. Nine months later, however, RBS has effectively collapsed and is set to be nationalised by the UK government. This makes one wonder kind of mind-bending substance Sir Fred was taking in January and February this year. Or like Dr Pangloss in Voltaire’s Candide, had he deluded himself into thinking that “everything was for the best in the best of all possible banks”?
Or, like the crustier bosses of the busted Barings Bank in 1995, had he become so partial to the profit streams that his bank was earning in somewhat risky and questionable ways – for example through being one of the biggest traders and indeed owners of exotic derivatives whose riskiness it did not fully understand (via its US arm RBS Greenwich), as well as being one of the biggest syndicaters of private equity debt (through RBS Global Banking and Markets) — that he had chosen turn a blind eye to the manner in which the profits were being achieved?
Even though he has little time for small talk, I always found Goodwin -– who I first met about nine years ago –- an engaging interlocutor, with an easy and relaxed manner. Occasionally his intense focus and concentration would be betrayed by a facial twitch. In person, however, the man dubbed by some investors and former colleagues as a “control freak” and a “megalomaniac” comes across as cool and witty. Yet a caustic streak lurks just below the surface. Adjectives used to describe Sir Fred by people in Edinburgh financial circles include “driven”, “hugely ambitious”, “dogmatic”, “incredibly single-minded and opinionated”, “highly intelligent” and “blunt to the point of rudeness”.
Until quite recently Goodwin had a huge fan club among Scottish business people. Many of these cheerleaders admired his vision of building a global bank from an Edinburgh base which would be able to compete on equal terms with giants like Citigroup and HSBC. Others, however, were harsher on Goodwin. Some accuse him of instituting a virtual reign of terror at the bank after he took over the reins from his “tough guy” mentor Sir George Mathewson following the NatWest acquisition in March 2000. “Most people in the bank were absolutely terrified of him,” said corporate financier Peter de Vink, managing director of Edinburgh Financial & General Holdings. “He treated anyone who had a different view from his own with contempt.”
Some suggest that Goodwin is in fact quite a shy man, and that his shyness translates into arrogance, a macho “take-no-prisoners” management style and the inability to brook dissent. If true, the overall effect was that he lacked trusted lieutenants who he could use as a sounding board — or who would dare stand up to him.
One senior investment manager detects parallels between Goodwin and Richard Fuld, former head of the now bust US investment bank Lehman Brothers. “They both preferred to exist on the fringes of the financial establishment,” said the source. “One of the reasons that Lehman Brothers went down was that there are lot of people with massive egos on Wall Street who didn’t like Fuld. There are parallels with Goodwin, who did not bother to develop sufficient support across the financial community.”
The son of an electrical engineer Goodwin was born and raised in Paisley, a textile town near Glasgow. After attending Paisley grammar school and after studying law at Glasgow University he qualified as a chartered accountant. He became a partner in the ‘Big Eight’ firm Touche Ross, at 29 after successfully readying the troubled Rosyth dockyards for privatization during the Thatcher years. He earned his stripes overseeing the liquidation of the collapsed Middle Eastern bank BCCI in 1990.
At just 32, he was running a staff of 1,000 with teams from London to Abu Dhabi unraveling one of the most complex and biggest financial frauds in history. To his credit, Sir Fred managed to rescue about half of creditors’ cash and the meticulous way in which he handled the complex liquidation got him noticed in the corridors of power.
Despite accusations of being too dominant at RBS, Sir Fred was respected both inside and outside the organisation because of the operational efficiencies he had introduced, particularly following the 2000 acquisition of NatWest. His former boss Sir George Mathewson said in 2006 “Fred’s more hands on, detail-orientated and also younger -– and these are important qualities.”
Goodwin was named as global business leader of the year by Forbes magazine in 2002 and knighted for services to banking in 2004. Some say that the accolades went to his head and prompted him to take more and bigger risks with investors’ cash.
These included the $10.5bn takeover of Ohio-based Charter One in 2004, a deal which infuriated some investors who argued Fred had overpaid for a questionable asset. After this, RBS’s share price stagnated, and investors increasingly questioned his penchant for sacrificing shareholder value on the altar of global growth.
By 2005 a significant number of institutional investors in RBS were getting nervous, and some sought to rein in Goodwin at this stage. A Deutsche Bank research note published in 2005 suggested that, of the 21 acquisitions the Edinburgh-based bank had done since 1997, only a handful had matched the cost of capital. For a spell it seemed like Goodwin was listening. In March 2007 he promised to slow the pace of acquisitions, claiming that here were no deals he could see that were “desirable, doable, or affordable.”
Goodwin never had a particularly harmonious relationship with investment managers or investment analysts. He had an even cooler relationship with the media, and hardly ever gave formal interviews or speeches. The prickliness came to a head in 2004 when he issued a libel suit against The Sunday Times after it ran a diary story about the design and construction of RBS’s grandiose new £350m headquarters at Gogarburn amid suggestions that the golf club Bruntsfield Links had turned down his application for membership. Eventually Goodwin withdrew the writ, but some observers were surprised at his willingness to go to court over what were essentially frivolous articles.
A similar vindictive streak came to the fore during the €71bn battle for ABN Amro last year. On April 23rd 2007, Sir Fred flew to Amsterdam with his dos amigos (he was bidding in tandem with Santander’s Emilio Botin and Fortis’s Jean-Paul Votron at the instigation of advisers Merrill Lynch) to present the consortium’s takeover proposals to Rijkman Groenink, the chief executive of ABN Amro. Despite a pre-arranged rendez-vous, Groenink snubbed them, refusing to even see the highfalutin bankers or their overpaid advisors.
Groenink had cancelled the meeting at short notice because he had an even more important appointment — a press conference with the Barclays’ chief executive John Varley to actually announce a merger with the London-based bank which was willing to move its headquarters to Amsterdam in order to placate Dutch national pride.
Goodwin made light of the matter at the time, but is known to have been seething with rage at having been stood up in this way. The three amigos were also seeing red because, on the same day, ABN Amro rubbed salt into their wounds by announcing it was selling Chicago-based subsidiary LaSalle (the part of ABN Amro that Sir Fred wanted to get his hands on the most) to Bank of America for $21bn. However the Dutch bank did say it would consider higher offers for the US bank, as long as these were received within the next ten days.
The poison pill was not enough to deter the consortium, which came back with a higher, $24bn offer for LaSalle on the final day, May 5. However this offer was immediately rejected by Groenink and the ABN board since it was contingent on a takeover of the whole of ABN Amro going through. At the time, the Dutchman considered such a deal unlikely to occur and, given his nuptials with Barclays and the UK bank’s more conciliatory approach to an ABN Amro takeover, plumped for the lower BoA offer. The decision sparked a number of lawsuits, including one from the Dutch shareholders’ association VEB, intended to block the sale to BoA. In early July, the Dutch supreme court ruled that the sale of LaSalle to BoA could proceed.
Observers believe Sir Fred should have taken his cue and walked away in a dignified manner at this stage. However he did nothing of the sort. Instead he declared that the three-bank consortium would rebid for ABN Amro — even though LaSalle was no longer on the table — and for the same price and with a higher cash component. The revised offer document was published on July 20.
Around this time Groenink and Goodwin spoke on the telephone. During the conference call, reliable sources say that Groenink asked Sir Fred: “What are your plans for the ABN Amro and how are you going to fund the deal [which his consortium had undertaken to pay mainly in cash]”. Sir Fred’s memorable response was to say: “That’s none of your business.” According to Peter de Vink the response encapsulates the problem with Sir Fred. Not only was it incredibly discourteous — Groenink had a right to know. It was also petulant and extremely arrogant.
In August 2007, RBS held a shareholders’ meeting to approve the deal. The credit crunch was already in full flow and markets were starting to behave skittishly. US mortgage lenders were already in difficulty and this was beginning to take its toll on European markets. Within weeks British mortgage bank Northern Rock would collapse, since like both RBS and ABN Amro, it was massively dependent on short-term wholesale funding to keep afloat.
The day before the meeting, the European Central Bank injected $130 billion of emergency liquidity into the financial system. Yet neither Goodwin, nor the RBS board, nor the regulators, nor the shareholders — 94.5% of whom voted in favour of the deal — had any reservations about the ABN Amro deal.
If RBS struggled to raise the cash, Goodwin told investors, “then there would be much bigger difficulties and more things for people to worry about.”
Throughout the protracted and arcane takeover “battle” for ABN Amro, Goodwin appears to have become increasingly obsessed with pursuing his quarry to the bitter end. He seemed oblivious to the ominous changes that were going on in the wider financial markets. He failed to recognise that ABN Amro would become poisoned chalice for whoever took it over, since its heavy involvement in the most exotic types of derivatives would make it extremely vulnerable to the worst effects of the credit crisis.
Most people on Wall Street and in the City were well aware a major crash was coming by July 2007, if not before. Goldman Sachs had started short-selling CDOs containing the mortgages of subprime borrowers in December 2006. Yet Fred was so obsessed with the takeover, he seems to have blanked out the ominous signs all around. Despite the shifting landscape, the due diligence that was carried out on ABN Amro in April 2007 was still being relied upon by RBS’s board in October!
A second consequence was that Fred took his eye off the ball internally. Structured finance, where RBS had become a major player thanks to its ownership of Greenwich NatWest and where it was was ratcheting up its presence at precisely the worst point in the cycle, was about to implode. As I’ve said, this was abundantly clear to most senior people in finance at the time. Yet highly paid individuals like Sir Fred, auditors Deloitte, the RBS audit committee led by the former KPMG accountant Archie Hunter, and indeed the entire RBS board failed even to notice.
One would have thought that someone on the RBS board would have warned his colleagues what almost everyone else in the world of finance knew, and reined Goodwin in, stopping him from squandering billions of pounds on buying the essentially worthless ABN Amro and around $30bn of essentially worthless CDOs through RBS Greenwich. However it seems the board, led since 2006 by former AstraZeneca boss Sir Tom McKillop, was peopled by a bunch of “patsies” who remained so in awe of Sir Fred they were willing to suspend their disbelief. McKillop in particularly appears to have been totally out of his depth and has alot to answer for.
In the end, Goodwin pursued his prey to the bitter end. The results -– when coupled with RBS’s massive exposure to the increasingly toxic derivatives and credit default swap markets — were disastrous. In his impatience to transform the Edinburgh-based bank into a global financial powerhouse, he had taken a risk too far.
In some ways Fred, his co-directors, the bank, and indeed its shareholders had become totally delusional. “RBS played the acquisition game but they played it harder than everybody else and no consideration was given to how deals were funded,” said Simon Maughan, an analyst at MF Global Securities. “They didn’t see the cycle. They thought they could keep paying for deals through cost savings.” Peter Hahn, a fellow at Cass Business School, said ABN is “probably was the worst bank acquisition of all time.”
By April 2008 and despite the ostentatious self-confidence that he displayed in January and February that year, Goodwin was finally forced to admit that things had gone pear-shaped at RBS. In a notable U-turn, the bank’s board revealed that its exposure to sub-prime was far higher than previously reported, and Goodwin was forced to go cap in hand to shareholders with a £12bn rights issue -– the biggest in UK corporate history.
The Emperor had been revealed t be naked. A few voices praised Sir Fred for having the gumption to acknowledge that RBS was in trouble and for taking early steps to sort out the mess. However there were also louder calls for Fred’s head. Most investors, including those who had bought RBS shares because of the positive vibes emanating from Fred and the bank in January and February 2008, were stunned by the volte face. Some are considering legal action against Sir Fred and other members of RBS’s board.
The last few days must have been a gruelling and deeply painful time for Sir Fred. Officially ousted last Monday, he later complained to City minister Paul Myners that what Gordon Brown, Alistair Darling and their apparatchiks in the Treasury, Bank of England and FSA had done to the banks (which included the insistence that the banks required much bigger capital cushions than the banks themselves believed were necessary) was “more like a drive-by shooting than a negotiation.”
Fred the Shred’s legacy is now in tatters and is to be dismantled by incoming chief executive, the fox-hunting and gardening afficionado Stephen Hester, on the instructions of the UK government. There is a distinct possibility that in five years time RBS will have ceased to exist in any meaningful way. De Vink says: “Not only did Sir Fred destroy one bank. He actually destroyed three — RBS, ABN Amro and Fortis as well. That’s quite some achievement!”
However, former boardroom colleague Sir Angus Grossart is kinder to Sir Fred. He believes that the Scot is being unfairly blamed for a wider culture of credit-fuelled growth that permeated British society and indeed global business for many years. He said: “I’m always worried when those who don’t like the music want to shoot the pianist.”
- An edited version of this article was published in the Mail on Sunday (Scottish edition) under the headline “Uncertain legacy of the man who broke Royal Bank of Scotland” on October 19th 2008.