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Uncertain legacy of the man who broke Royal Bank of Scotland

By Ian Fraser

Published: The Mail on Sunday

Date: October 19th, 2008

AS the Royal Bank of Scotland announces that the reign of chief executive Sir Fred Goodwin will officially end on January 31, the nation’s flagship bank takes an uneasy step toward an uncertain future. Here, Ian Fraser, a leading financial commentator who has followed Sir Fred’s career reveals how RBS was taken to the brink of disaster by his imperious ambition.

IT was the day City traders dubbed ‘Black Monday’ — but Sir Fred Goodwin, chief executive of the Royal Bank of Scotland, could not have appeared more relaxed as he hosted a champagne reception in Edinburgh’s exclusive St Andrew Square.

Earlier that day, January 21, 2008, Sir Fred had watched RBS shares plunge 8 per cent — but was clearly taking the setback in his stride. But then, he was used to taking risks — and had no reason to believe his rise to the top of world finance was soon to come crashing back to Earth.

Having spent the previous eight years growing RBS from a midsized provincial player into one of the world’s largest financial institutions, Sir Fred had always displayed an unshakeable belief in his bank’s prospects.

Only weeks later, he unveiled profits of £10.3 billion and claimed RBS was far less exposed to the sub-prime crisis than many had feared. Investors were cheered by his bullish demeanour and some were persuaded to invest more heavily in the company.

Now that RBS has effectively collapsed and been nationalised, commentators are wondering where Sir Fred’s ostentatious self-confidence came from.

Even though he has little time for small talk, I always found Sir Fred, whom I first met about nine years ago, engaging. Occasionally, his intense focus would be betrayed by a facial twitch. In person, however, he comes across as cool and witty. Yet a caustic streak lurks just below the surface.

But many were prepared to go along with his vision of building a global bank from an Edinburgh base able to compete with such giants as Citigroup and HSBC on equal terms. Nobody seemed to question if it was built on sand.

Some accuse the father-of-two of instituting a reign of terror at RBS when he took over from his mentor Sir George Mathewson following the NatWest acquisition in 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.’

THE son of an electrical engineer, Sir Fred was born in Paisley, Renfrewshire. After attending the local grammar school and studying law at Glasgow University, he qualified as a chartered accountant. He became a partner in Touche Ross at 29 and earned his stripes three years later, overseeing the liquidation of collapsed Middle Eastern bank BCCI in 1990.

Charged with unravelling one of the biggest and most complex financial frauds in history, he managed to rescue about half of creditors’ cash.

Despite the accusations of being too dominant at RBS, Sir Fred was respected both inside and outside the bank due to the operational efficiencies he introduced.

Former boss Sir George said in 2006: ‘Fred’s more hands-on, detail-orientated and younger — these are important qualities.’ Sir Fred was named global business leader of the year by Forbes magazine in 2002 and knighted for services to banking in 2004.

Some say these accolades, coupled with his own vaulting ambition, were what prompted him to take more and bigger risks with investors’ cash.

Sir Fred’s vindictiveness is said to have come to the fore during the battle for ABN Amro last year. In April 2007, he flew to Amsterdam to present his takeover proposals to Rijkman Groenink, chief executive of ABN Amro. But Groenink snubbed him.

Sir Fred made light of the matter at the time, but there have been suggestions he was, in reality, fuming. Some claim he became determined to pursue the Dutch giant at any cost to prevent Barclays, which had already entered an agreed merger, from securing the prize and leapfrogging RBS.

Whatever the truth, the deal would become a poisoned chalice. Wiser heads on the RBS board should have reined in Sir Fred.

But the board, led by former AstraZeneca boss Sir Tom McKillop, seemed happy to go along with him – as, indeed, did most of the shareholders.

In the end, Sir Fred pursued his quarry to the bitter end — and the results, when coupled with the bank’s enormous presence in the increasingly toxic derivatives market, were catastrophic.

SIMON Maughan, an analyst at MF Global Securities, said: “RBS played the acquisition game, but they played it harder than everybody else and no consideration was given to how deals were funded. They thought they could keep paying for deals through cost savings.” In April, Sir Fred admitted things were going pear-shaped.

The RBS board revealed its exposure to the sub-prime disaster was substantially higher than had previously been suggested. Sir Fred was forced to go cap-in-hand to shareholders for a £12 billion rights issue — the biggest in UK corporate history to patch up his tattered balance sheet. Investors were stunned by the volte face.

The past few days must have been a gruelling and deeply painful time for Sir Fred. Ousted on Monday, he complained to City Minister Paul Myners that what Gordon Brown, Alistair Darling and their apparatchiks had done to the banks was “more like a drive-by shooting than negotiation”.

Some still feel sympathy for Sir Fred, casting him as the fall guy.

“If you hit an iceberg, the captain gets blamed,” said Bryan Johnston, a director of Edinburgh based investment managers Bell Lawrie. “Fred ran his bank successfully, but RBS was caught up in a maelstrom of events that aren’t unique to any one bank in the UK.”

But Sir Fred’s legacy is now set to be dismantled by new chief executive Stephen Hester, on the instructions of the Government.

In five years, the Royal Bank of Scotland will probably have ceased to exist in any meaningful way. Along with it will have gone Sir Fred Goodwin’s dreams of becoming a global banking emperor.

  • This article was published on the op-ed page of The Mail on Sunday (Scotland edition) on 19th October, 2008.
  • To read a longer version of this article titled “Fred’s downfall: Hubris followed by nemesis”, click here

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