3 December 2010 (update 3)
THE Financial Services Authority’s obsession with “light touch”, laissez-faire regulation in 1997-2008 did more than anything to transform London into the “Wild West” of finance.
US investment banks dramatically built up their presences in the UK capital in the period: they knew they could rely on the FSA to turn a blind eye to fraud, insider trading, deceptive accounting, over-leverage and other misdemeanours that were unlikely to be tolerated back home. That’s why they called London the “Guantanamo Bay of finance“.
The policy — whose principle cheerleaders included Tony Blair, Gordon Brown, Peter Mandelson, Ed Balls, and the neoliberals at places like the Institute of Economic Affairs and the CBI — has done more than anything else to pollute the business and financial climate and culture in the UK, at the same time ensuring that Britain has suffered a far worse and more enduring hangover from the global credit and fraud binge than virtually any other state — with the possible exceptions of the US, Spain, Greece, Ireland, Iceland and Dubai.
Given the UK regulator’s shocking track record — see my earlier articles on Vavasseur/HBOS, Cameron Farley, HBOS Reading and building societies — (in at least three of these cases, there is clear evidence that the FSA colluded with ‘white collar’ criminals to cover up wrongdoing), I wasn’t surprised it has declared its inquiry into the Royal Bank of Scotland “closed”.
The regulator said it had exonerated the bank’s entire board including its former chief executive Sir Fred Goodwin. The regulator said all Goodwin and his boardroom colleagues had done wrong was make a few “bad decisions” and that there had no corporate governance failures or fraud.
After a 17-month long inquiry into RBS — orchestrated by the wholly unconflicted accountancy firm PricewaterhouseCoopers — the regulator declared in a press release:
“In May 2009 the FSA launched a supervisory investigation into RBS … This work considered if regulatory rules had been broken and what, if any, action was appropriate. The review was necessarily extensive and looked specifically at the conduct of senior individuals at the bank, the acquisition of ABN Amro in 2007 and the 2008 capital-raisings. The FSA conducted the review with assistance from PwC.
“The review confirmed that RBS made a series of bad decisions … most significantly the acquisition of ABN Amro and the decision to aggressively expand its investment banking business. However, the review concluded that these bad decisions were not the result of a lack of integrity by any individual and we did not identify any instances of fraud or dishonest activity by RBS senior individuals or a failure of governance on the part of the Board.”
Yes. That’s it folks. A 141-word statement. Which suggests the FSA believes its job is done and that it can waltz off into the sunset. I suspect it has another thing coming. There is currently less direct evidence of criminality at RBS than at certain other UK banks. And, for all I know, Fred the Shred may well have been well intentioned despite his monumental hubris.
However within hours of the news that the RBS board had been “cleared”, British politicians, media and the digerati were baying for blood. Some suggested the FSA should go back to the drawing board and do a more thorough and less partial “review”. At the very least, it was suggested the FSA should make its “review” public (it currently intends to keep it secret!).
Damian Reece, business editor of the Daily Telegraph summed up the mood: “The review highlights the impotency of FSA-style regulation … There was quite clearly a colossal failure in corporate governance … I’m completely stunned by the FSA’s finding that “we did not identify… a failure of governance on the part of the Board”. If RBS circa 2007 wasn’t a failure of corporate governance then I really don’t know what is.”
Leading British politicians were no less aghast. In his blog Michael Meacher MP wrote: “The FSA appears not just toothless, but gumless and jawless. Mismanagement on this gigantic scale cannot simply be written off with such Olympian insouciance. Either it must be severely punished or top executives should be personally tied into the consequences of their decisions — carrying a proportion of liability and if they can’t meet that from their own assets, then they should be sent to prison like any other debtor.
The Liberal Democrat peer Lord Oakeshott said: “This just won’t wash … You can’t refuse to publish the report – redacted, if legally necessary – on the worst train-crash in British company history! How can we learn the lessons if we can’t read the evidence?”
There are reasons to doubt the veracity of the FSA and PwC’s conclusions. One is the powerful evidence that Goodwin and colleagues routinely squandered the bank’s cash on lavish and extravagant lifestyles for themselves, with parallels to Lord Conrad Black’s plundering of Hollinger shareholders’ cash. Business secretary Vince Cable has described this behaviour, which included the ripping out of carpets and wallpaper that were the wrong shade or had minor stains, and having fresh fruit flown in daily from Paris, as “sickening greed at savers’ and shareholders’ expense”.
Another example of either fraudulence or negligence is that Fred and the RBS board misled its investors in April 2008, encouraging them to pump a further £12 billion into a bank even though it was probably by then already insolvent.
At the time it was clear to many external observers, analysts and commentators that RBS might be holed below the water line. This was the result of the bank’s decision to feast on subprime-linked derivatives in the US market, where it became the number one player ahead of the uber-reckless Lehman Brothers and Bear Stearns in 2007.
Then RBS more than doubled its exposure to the asset class through its €71bn acquisition of ABN Amro in October 2007. Neither of these moves would normally be considered to fit into the category “good corporate governance” (I suspect there’s still a lot to come out in the wash about the activities of RBS’s Connecticut-based CDO factory, RBS Greenwich, and its global banking and markets leveraged finance unit in the UK and continental Europe).
Yet RBS’s board of directors produced a rights issue prospectus (dated April 30, 2008), signed off by advisors including Merrill lynch, Goldman Sachs, UBS, Deloitte and Linklaters, that downplayed the parlous state of the bank’s loan book and balance sheet and gave investors the clear impression — taking into account the £12bn the bank expected to raise — that RBS had sufficient working capital to survive for at least another year.
(In a recent House of Lords hearing, leaders of the ‘big four’ audit firms including PWC boss Ian Powell, admitted that they deliberately misrepresented the solvency of UK client banks from December 2007 onwards, apparently because Gordon Brown’s government had told them it would be okay to fudge this, since the government might make bailout money available to banks that failed).
Elsewhere in the prospectus the RBS directors — who included Goldman Sachs International chairman and former EU commissioner Peter Sutherland, former AstraZeneca boss Sir Tom McKillop and former Treasury mandarin Sir Steve Robson — claimed their working capital statement was “unqualified by risk factors”.
Five and half months later RBS was bust, its shareholders (especially those who subscribed to the rights issue, including the tens of thousands of staff who were bullied and coerced into doing so) had lost their shirts, and the Edinburgh-based had to be bailed out with a £45.5bn capital injection from the UK government, plus government-provided liquidity support, as part of a £1.3 trillion taxpayer-funded rescue package of the UK banking sector.
As one of my senior corporate lawyer friends puts it, the veracity of the working capital was “unequivocally disproved by the banks’ own subsequent actions”.
So let’s be clear: the RBS board must have either been negligent or fraudulent and the FSA’s very own UK Listing Authority rubber stamped what appears to have been a tissue of lies. Perhaps its not surprising that FSA would have us believe there was no failure of corporate governance! (see my earlier blog post The curious incident of the dog in the night time).
But why did the FSA think we’d fall for this transparent attempt at a whitewash?
Irrespective of the Listings Authority decision to greenlight the dodgy April 2008 rights issue prospectus, is the failed regulator a prisoner of its past incompetence and its own former lenience towards the finance sector (especially the larger institutions)? After all, the regulator played what can best be described as a starring role in causing RBS’s collapse. Under leaders Sir Howard Davies, John Tiner, Sir Callum McCarthy and Hector Sants, the Canary Wharf-based regulator was very much a creature of the UK’s failed over-leveraged and out-of-control “big bank” model.
During the credit bubble, it seems that all that arrogant and domineering bank chiefs like Fred Goodwin had to do was click their fingers, and UK politicians like Gordon Brown and Ed Balls and regulators like John Tiner and Sir Callum McCarthy jumped.
This must explain why the FSA approved the bank’s April 2008 rights issue prospectus; why it sat idly by while RBS became horrendously over-leveraged; why it sanctioned the NatWest takeover in February 2000; why it sanctioned 27 other deals, many of which were value destructive and exposed the bank’s UK depositors and shareholders to unnecessary risk; and why it greenlighted the insane €72bn takeover of ABN Amro in October 2007 (months after the credit crisis had set in and by which time the Dutch bank had a negative value following its proclivity for feasting on toxic crap that had been dumped by savvier Wall Street institutions).
Perhaps , by issuing its press release last Thursday, the FSA imagined that it might be able to cover its tracks and lay the matter to rest. If so, the regulator is deluding itself.
The British people are gradually waking up to the fact that they have been scammed on a massive scale. A cosy cabal including auditors, bankers, regulators and the government has become so successful at bilking the British public, shareholders, customers and taxpayers, at the same time trampling over truth and justice, they must have thought they could remain above the law ad infinitum.
They don’t seem to realise that sooner or later their whole noxious charade is going to be blown apart.
(Note to Hector: second time around, might you consider taking a slightly closer look at the behaviour of some of Fred’s executive colleagues on the RBS board?) The second part of this blog examines why the PWC was the wrong choice to conduct the FSA’s £7.7m investigation into RBS. see: The FSA wanted someone to whitewash RBS and, sure enoug,h PWC obliged