Alex Massie

RBS: All fur coat and no knickers

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Such is the disrepute into which Scotland's once all-conquering bankers have fallen that the favoured put down at Edinburgh dinner parties these days is "My husband pays your husband's salary". A period of silence on the part of these erstwhile Masters of the Universe would be most welcome. This injunction, it seems, also applies to their spouses. That sound you hear is the noise of a righteous middle-class populism. These are disconcerting, humiliating times to be a Scottish banker.

Nowhere is this more keenly felt than at the Royal Bank of Scotland's headquarters at Gogarburn on the western outskirts of Edinburgh. RBS's downfall and subsequent nationalisation-in-all-but-formal-name has made it open season on bankers in Scotland's capital. At dinner parties in the Georgian New Town or leafy Morningside they've been stripped of even their right to have a strongly-held opinion. Truly, the mighty have been humbled.

Today's AGM in Edinburgh is unlikely to do much to ease the pain felt in the Scottish capital after a debacle that has become all too illustrative of our times. Once upon a time, and not so very long ago either, RBS was used as a model case study by the Harvard Business School; now it seems more likely to be held up as a cautionary example, warning businesses of the twin dangers of pride and greed and the havoc they can wreak. As the poster bank for financial irresponsibility, it was entirely predictable that protestors at the G20 this week would attack a branch of RBS.

RBS's downfall has been an astonishing, chastening sight. If taxpayers in England are furious, their Scottish counterparts are simply appalled. It wasn't supposed to be like this. We were supposed to be good at financial services. The idea of the reassuring Scottish bank manager had become a Great British Cliche. Scottish financial institutions were happy to trade upon this stereotype, reassuring clients that their physical distance from the City of London's hothouse made them less susceptible to the whims and fevers of the City.

And in truth there was something to this. Once. The telecommunications and computing revolutions may not have caused the Scottish banking bubble, but it is hard to see how it might have happened without it. But if distance no longer mattered that meant that while a little provincial bank could become a major international player it was also, thanks to the telescopic impact of new technology, just as liable to fall foul of the very forces it once prided itself on being immune to. That is, it helped increase risk and reward in equal measure. RBS's ceiling became higher, but so too did its floor.

In Edinburgh RBS bankers are struggling to come to terms with the demands of their new government-appointed paymasters. A long-term vision of corporate expansion has been replaced expediency. Public anger has necessarily required that RBS trim its sails to the prevailing wind, but inside RBS HQ there is a mood that is alternately resigned and resentful. The bankers know that this mess is of their own doing but that doesn't mean they need be happy about a firesale of RBS assets. They have a point: for instance, disposing of RBS's stake in the Bank of China seems a desperately near-sighted move that adds only pennies to a short-term balance sheet at the expense of real long-term value.

Embattled as they are, it's no wonder that some RBS employees find themselves cheered by Goodwin's vigorous defence of his generous pension provision. Were it another bailed-out company's Chief Executive trousering a £703,000 annual pension they might view the matter as just the sort of corporate fecklessness Fred the Shred inveighed against when he lined up fresh victims for RBS's takeover machine. But that was then and, in any case, other companies. these days there's a residual loyalty that sees RBS workers admire Fred for his determination to stick it to his critics. As the old football chant had it, "No-one likes us. We don't care." And yet they do, you know. If you prick a banker it turns out they bleed too.

Goodwin has become the Ally MacLeod of bankers. In 1978 MacLeod led a talented Scottish football team to the World Cup in Argentina. The voyage was made especially piquant by England's failure to qualify for the finals. At one point, after the team had held a raucous send-off rally at Hampden Park, MacLeod was asked what Scotland intended to do once the World Cup was finished: "Retain it" he quipped. Such confidence! Such hubris! As every Scottish football fan knows, all that awaited the team in Argentina was farce and humiliation.

Goodwin is cut from a different tartan cloth but, like MacLeod, he was a risk taker. Few thought MacLeod a fool before the Argentine debacle; similarly, few considered Goodwin a menace to his company and country before it all began to unravel at horrifying speed.

There are differences between the men, of course: where McLeod courted the press, Goodwin shunned them, but they shared a certain confidence in their own abilities and a belief that all difficulties were, in the end, minor and bound to be overcome. In fact, Goodwin's reluctance to speak to the media only served to increase the awe in which he was held. In its own way this too was a form of arrogance, but for years it seemed a strength, not a weakness.

And hubris is a quality that must be earned. Icarus fell, but he flew too close to the sun because he could. Ability mixed with pride proved fatal but each was vital to his downfall. As with Icarus so with Fred the Shred.

When governments talk of encouraging "risk-taking" this is what they mean. Granted, failure rarely requires such exceptional benevolence from the public purse, but the fact remains that no matter how comfortable it is to heap scorn upon our benighted bankers, they were hailed as corporate and, especially in Scotland, national champions for years. Perhaps they should not have succumbed to the hype - and the glossy reports issued by their own press machines -  but ask yourself this: if you were to enjoy 15 years of startling success and if you were to feel that this success was a reflection of the wisdom of the decisions you had made, might you not be tempted to think you had, not to put to fine a point upon matters, cracked it?

And RBS did seem to have cracked it. In 1998 the bank reported a net profit of just £700m. By 2007 the group's net profits had swelled to £6.8 billion pounds. In fact, from 1998-2007 RBS delivered net profits worth a total of £37bn. Not bad for a wee provincial bank from Scotland.

No-one could be left behind. Just as the the First World War took on a remorseless, terrifying logic of its own, so did banking in the boom years. The greater the losses on the Western Front the more important it was to press on for victory, at whatever cost, so that those who had already died might not have perished in vain. In a frightful fashion, then, the losses became the justification for further casualties. For losses on the battlefield read profits in the banking sector. Making money was not enough; each year the bank needed to post better profits than it had the year before. If that entailed greater risk then so be it; the remorseless logic of the market - that is, shareholders - demanded nothing less. The greater the profit in Year One, the greater the profit needed to be in Year Two and so on. Standing still equalled failure.

Does that excuse the mistakes made? No it does not. But I'm less interested in screaming "They shouldn't have done that!" than in trying to understand how and why that was what they did. That is, there's little point in burying Fred Goodwin, but plenty in trying to understand him.

In fact the bank's expansion dates back to the 1980s. In 1988 it made its first transatlantic raid, buying the Rhode Island-based Citizens' bank. At the same time RBS diversified into insurance, establishing the Direct Line brand. Slow and steady growth continued for the next decade but it wasn't until RBS defeated its great rival, the Bank of Scotland, in a hostile takeover battle for control of Natwest that RBS moved into the big leagues.

At £21bn, the Natwest adventure was the biggest deal in British banking history and an improbable reverse takeover as RBS swallowed a bank three times its own size and proved, to itself and the city, that it was ready to play on a bigger, international stage. The Pirates of the North had made their first raid. Goodwin's arrival as Chief Executive in 2000 set the stage for yet more expansion. There were seven deals in 2003 alone and each year RBS promised to consolidate only to be distracted, as though it were some kind of banking magpie, by a new glittering prize ready for the taking.

But RBS was acutely aware - or convinced itself of this anyway - that it could only guarantee its own safety if it continued to grow. Like a shark, it had no reverse gear. If RBS could mount a series of improbable takeovers, devouring unsuspecting competitors, then it too could be vulnerable to a surprise attack. Even at the height of its powers senior RBS executives fretted that they too could be the target of a hostile takeover. RBS had to become too big to swallow.

Expansion in North America - most notably when buying Charter One - plus a series of insurance deals, joint ventures and international expansion (most notably, perhaps, a 5% stake in the Bank of China) made RBS the fifth biggest bank in the world at one point (as measured by market capitalisation). Yet even this wasn't enough.

Tragedy is an over-used word. So is Shakespearian. Yet each seem applicable to RBS's self-imposed destruction. Tragedy requires that the hero deserve their downfall. Like Macbeth, the bank's rise was rapid and its decline was even more precipitous. And like Macbeth, RBS's fatal flaws were pride and ambition which, when mixed, produced a toxic cocktail of greed. (Indeed, you might say that ambition is a form of greed and vice versa.)

Hindsight tells us that much of it was avoidable. But hindsight is a witness notably lacking in charity. She tends to be on the prosecution's side.  Some voices did urge caution. As far back as 2005 one analyst was asking "what went wrong with RBS", noting that the group's shares were underperforming the rest of the banking sector. For RBS employees, of course, this provided opportunity: many invested much of their annual profit-share bonus in RBS stock. Most of these investors were bank tellers and other low-level employees, far removed from the stereotype of fat-cat city bankers.

We already know that the £49bn takeover of ABN-Amro will be recorded as one of the worst deals in British business history. But it's actually even more appalling than is generally realised. Again, pride begat greed which begat a terrible, entirely avoidable, misjudgment.

Goodwin was becoming, it seems, obsessed with Barclay's who were emerging, he felt, as RBS's chief competitor. When Barclay's began exploring a merger with ABN-Amro, Goodwin saw an opportunity to spike his rival's guns and complete yet another dramatic coup that would confirm RBS as the Bank That Always Won. In doing so, he'd send a message to the rest of the banking world that there was no upside in messing with the Edinburgh bankers.

True, this meant reneging on a promise that there'd be no more deals and that RBS would finally slow down and properly digest the businesses it had acquired in recent years - exactly the advice the bank would have given other businesses who'd enjoyed such rapid growth - but Goodwin and the board convinced themselves that one more drink wouldn't hurt them. After all, every other deal had been a success, why should this one be any different?  The bank's operational and advertising slogan, "Make it Happen", would be the spur for one final cavalry charge.

Goodwin put together a consortium with Banco Santander and the Belgian group Fortis to launch a $98bn counter-offer for the beleaguered Dutch bank. At the time this raised eyebrows in the city and no wonder. It was the biggest banking deal in history, launched, as events would subsequently demonstrate, at the top of the market.

Worse still, from RBS's point of view, was that in July 2007 the Dutch Supreme Court ruled that ABN-Amro's sale of it's Chicago-based subsidiary LaSalle to Bank of America should go ahead. Since LaSalle was the part of ABN-Amro that RBS most wanted  - expanding its American operations further into the midwest - the court's ruling could - or should - have warned RBS off the deal. 

But that's where pride comes in. RBS felt itself committed and believed that even if it couldn't get the parts of ABN-Amro it had initially wanted (the parts that made obvious commercial sense) it would press ahead anyway and make the best of the matter. That meant settling for ABN-Amro's investment-banking division and its Asian operations. RBS, swelled with its own conceit of itself, was confident that these were mere, if unfortunate, details and that, again, it would just "Make it Happen."

Except it didn't happen and they couldn't make it happen. RBS employees despatched to Amsterdam couldn't believe what they saw when they opened the books. Nor could they believe that their own company had made such a monumental blunder.

At today's AGM the bank's new chairman Sir Philip Hampton told shareholders that without the ABN-Amro fiasco, RBS would have made an operational profit before tax and goodwill impairments. Perhaps it would have. But with ABN-Amro on the balance sheet, RBS posted a record corporate loss of £24bn. As Hampton puts it, with some understatement, "With the benefit of hindsight it can now be seen as the wrong price, the wrong way to pay, at the wrong time and the wrong deal."

RBS's entirely avoidable collapse has stunned Scotland. Politically, it has had an impact too. Financial services were the long-awaited replacement for ship-building and heavy industry and were key to Edinburgh's transformation from douce dowager to one of the more dynamic cities in europe.

At RBS HQ there's a kind of stunned defensiveness as employees accustom themselves to their reduced status. The swashbuckling pirates of the north have been downgraded to galley slaves, toiling for the taxpayer. That most of them were blameless for the excesses that destroyed the greatest brand in Scottish business is scant, in fact no, consolation.

For the country as a whole, the nationalisation of RBS and HBOS has dented confidence. The banks were vital components of a new national self-confidence. So much so in fact that there was some reason to suppose that their success might trickle down into support for independence. That prospect has receded as the scale of the banks' failures has been revealed. Confidence has been dented. The cry is no longer "wha's like us" but a sour lament of "Can we no do anything right?" Chastened is the word.

Aye, well, that's another song ended. And as another old Edinburgh phrase has it, RBS has been revealed to be "all fur coat and nae knickers". 

Written byAlex Massie

Alex Massie is Scotland Editor of The Spectator. He also writes a column for The Times and is a regular contributor to the Scottish Daily Mail, The Scotsman and other publications.

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