A bank whose bailout costs £45 billion deserves to have more than one book written about it. In September 2013 we had Iain Martin’s Making It Happen (see my review here), and now fellow Scottish journalist Ian Fraser has published Shredded.
Fraser’s 500-page book piles on the detail as we meet a cast of hundreds, if not thousands. We encounter the ‘second most influential man in Belgium’, and a banker noted for wearing ‘brightly coloured Benetton jumpers’ at university. We are told, unnecessarily, that Fred Goodwin stayed at an Amsterdam hotel previously used by the Rolling Stones.
And yet, despite this welter of detail—or perhaps because of it—the end result is that Fraser has written the more definitive book. While Martin’s crisp narrative bounds past the big milestones in RBS’s road to disaster, Fraser lingers and digs deeper, starting with the RBS takeover of Nat West in 2000. As significant as the creation of Citigroup in 1999, this merger embedded a cartel of too-big-to-fail banks in the UK economy and entrenched the myth of Goodwin as integration wizard.
Fraser’s sources provide some telling insights. Simon Samuels, an analyst who later grew suspicious of RBS, recounts that Goodwin in his heyday was as convincing as Jamie Dimon of JPMorgan. Yet behind the polished performance was a shambolic institution: in Fraser’s account, Frances Coppola—now a well-known finance blogger—was fired as a consultant after her attempt to unify the bank’s reporting systems was blocked by RBS holdouts.
The merger also coincided with two regulatory developments: the founding of the UK’s Financial Services Authority, whose fall into disgrace would coincide with RBS, and the publication of a report into UK bank competition by Don Cruickshank which was quietly buried by Gordon Brown’s Treasury. The role of Basel capital rules and light-touch regulation in the RBS disaster has already been documented. In an interview with Fraser, Cruickshank raises the interesting question of why the FSA was not given any power to regulate competition in UK banks given their quasi-utility role in clearing and payment systems.
The result of these early regulatory missteps was a bank that metastasised like a cancer attached to the UK economy. As Fraser documents, RBS used the booty of a huge NatWest deposit base to help fund its international acquisitions until it became too big and was forced, fatally, to rely on wholesale deposits for liquidity. Meanwhile, a ‘fear culture’ of performance management systems turned RBS into a bank that systematically fleeced consumers and small businesses, mis-selling them products such as interest rate swaps that they didn’t understand or need.
Although some analysts expressed disquiet towards Goodwin, most of these developments were applauded as creating shareholder value. This cult of bank shareholders reached its apotheosis in 2007 with the breakup and takeover of ABN Amro. Fraser does readers a favour by speaking to former ABN executives and revisiting the factors that put the Dutch bank ‘in play’.
The catalyst was shareholder value, championed by Chris Hohn’s hedge fund TCI which started pushing for a breakup of ABN, in which it held a stake. Looking back on these events today, one can’t blame Hohn for acting in his financial self-interest. However, it is astonishing in hindsight how financial journalists and commentators supported his campaign, given the leverage of ABN and the banks that sought to acquire it. Why should individuals purporting to represent a few per cent of a bank’s capital base have untrammelled power over the interests of depositors and other creditors representing the vast majority of its balance sheet? Yet when Dutch central bank chief Nout Wellink dared to speak out against TCI, he was rebuked as a closet protectionist by European commissioner Charlie McCreevy.
In an interview with Fraser, former ABN CEO Rijkman Groenink defends his attempt to sell the bank to Barclays for shares rather than a higher cash offer from RBS, Santander and Fortis which he (rightly) argues was “physically impossible”. At the time, Groenink was viewed as a discredited failed acquisitionist. How ironic that short-term shareholder value dictated that his bank be carved up in the greatest value-destroying acquisition of all time.
Fraser provides good detail on the fateful takeover, providing a compelling argument that Goodwin’s obsession with completing it in the face of worsening conditions became reckless. If it happened today such behaviour might qualify Goodwin for criminal prosecution under new rules proposed by UK regulators. We also get some helpful detail on the eventual bailout in October 2008, where Fraser interviews Brown adviser Shriti Vadera.
At this point in his narrative, Iain Martin wrapped things up and ended his book with an interview with Goodwin’s immediate successor Stephen Hester. By contrast, Fraser keeps going for another 170 pages and here too he provides value to readers. Most financial journalists were kind to Hester and sympathetic to his pleas to be protected from government interference in the running of the bank, right up to the point when he was ousted last year.
In reality, Hester was always the wrong man for the job. Under his watch, RBS employees continued to mis-sell interest rate swaps and stonewall customers who sought redress. They continued to rig benchmarks such as Libor, and the bank’s now-notorious Global Restructuring Group continued to tip UK business customers into bankruptcy in order to profit from their assets. The point isn’t whether Hester knew about or condoned any wrongdoing—clearly he didn’t. The point is rather that the logic of a big international shareholder-driven bank that Hester was committed to running went hand-in-glove with such a culture.
As Fraser makes clear, the greatest mistake was when the Brown government declined to nationalise RBS and break it up, and instead adopted the pretence of managing an 80 per cent stake on an arms-length, commercial basis. Given that RBS that should never have been allowed to reach the size it did, this was a missed opportunity. Nearly six years after the bailout, Shredded reminds us how much of banking reform is still a work in progress.
