Shredded - Inside RBS, The Bank That Broke Britain

Fred Goodwin, pictured in 2003. Picture: PA

Surely now we know everything there is to know about the collapse of RBS and one of the biggest financial debacles for a century? Well, not quite.

The compelling power of this book – indeed, its monumental achievement – is to provide a definitive account, not only of the failure of what was briefly one of the world’s biggest banks, but also to set its failure in context – a failure not of one management alone, but of the political and regulatory system in which it operated.

Shredded is a definitive and unflinching 435-page account of exactly what went wrong – and few are spared. Its failures were manifold – from the bullying arrogance of its chief executive through the cowardice of its board of directors, to the feckless oversight of regulators, politicians, rating agencies, so-called independent risk assessment committees, analysts – and most of the financial press.

What it leaves in its train is a mighty set of questions about corporate governance – for the management of RBS seemed to smash through it all while being lauded at every step.

While much of the blame attaches to Fred Goodwin and his management style – the book is studded throughout with examples of his intimidating and bizarre leadership style and peccadilloes – no-one emerges unscathed. Not the chairman Tom McKillop; not George Mathewson, the man who brought Goodwin to RBS and gave him free rein; not Johnny Cameron, head of the Global Banking and Markets division; not the non-executive directors, auditors, regulators, politicians, fund managers, the International Accounting Standards Board and central bankers. All the charges against them are set out in Fraser’s final, forensic, brutal and most powerful chapter – “The Guilty Men”.

For this final chapter alone his book should be compulsory reading for bankers everywhere – along with anyone in any position of responsibility in business and especially in charge of the confusing, vacuous twaddle that passes for much corporate governance across major companies today.

While Fred Goodwin features on almost every page of this book, he declined to interviewed for it. This runs the inevitable risk that accounts such as this lack a full understanding of why he acted as he did. While Goodwin was “the one person in the driver’s seat”, and he undoubtedly had “delusions of grandeur”, Fraser wisely points out that Goodwin alone cannot be solely to blame. So is there a case for mitigation, and, if so, of what would it comprise?

First, RBS wasn’t a one-off debacle. Others that failed and needed to be rescued include HBOS and Northern Rock, Bear Stearns, Citigroup, Lehman Brothers, Merrill Lynch, Wachovia and Washington Mutual in the US, Dexia and Fortis in Belgium, Allied Irish Banks and Anglo Irish Bank and Kaupthing, Glitnir and Landsbanki in Iceland.

Nor was Goodwin alone in his pursuit of ABN. There was a fiercely promoted rival bid from Barclays, whose chief executive John Varley even volunteered to move his head office to Amsterdam. But for share price weakness in the closing weeks, Barclays would have won and Goodwin in time could have made an enormous virtue of his defeat.

What drove Goodwin to make more than 50 acquisitions for RBS before mounting the bid for AMRO – in partnership, remember, with two other major European banks? It cannot all be laid at the door of his bullying and intimidatory character.

Goodwin – together with the senior management of RBS – went in fear of being the target of a hostile takeover bid. In the febrile world of the 1990s and early 2000s, stock markets were driven by acquisition fever. RBS could not stand by and watch rival Bank of Scotland secure National Westminster Bank for fear that it, too, would become a take-over target. The relentless pursuit of other business was driven by fear, bordering on paranoia, that to stand still was to risk the bank’s independence. My one criticism of Fraser’s account is that it does not assign enough weight to this.

Not everything Goodwin did ended in chaos and disaster. He did much to make the acquisition of NatWest one of the few outstanding merger successes of that era.

As for the years leading up to the debacle, the expansion of RBS’s global markets division and its plunge into credit derivatives and collaterised debt obligations was validated by ratings agencies who continued to grade these toxic products as Triple A, and by risk committees within the bank. What were taken as standard-bearers of prudence and security turned out to be the lamplighters to catastrophe.

For almost the entire period of his chief executorship, Goodwin was feted by the Scottish establishment, the great and good in the City of London, and almost without exception, financial analysts, fund managers and the financial press. The shelves of his office at RBS buckled under the weight of all these gongs, trophies, awards consistently showered upon him. Strange that no-one rushed to point out his despotic deficiencies and peccadillos over this period.

Finally, Goodwin could be seen as the perfect archetype and model of the Harvard Business School study courses and McKinsey admonitions. Throughout this period there was barely a business conference in the Western world that did not extol the virtues of risk-taking and forceful leadership. The positive embrace of risk was the alter ego of an era that sought to reinvigorate enterprise and entrepreneurialism. This was the age of risk – and big prizes for those who rode the risk tiger. Can we heap all the blame on Goodwin – or on the runaway era and excess of the values that spawned him?

Shredded is a monument of painstaking analysis and research to Scotland’s greatest financial failure since Darien. As such it serves as a model of the journalist’s craft, Zola-esque in its broad and unsparing study of corporate hubris and nemesis and haunting in the questions it leaves in its wake.

And this story is by no means over. Not only is RBS still a long way from recovery, with a £13.6 billion toxic debt overhang and a long tail of legal actions, from LIBOR rigging to that ignominious 2008 £12bn rights issue – there is serious doubt, not just that the taxpayer will ever see a return of the £45bn committed to saving the bank but whether RBS will survive in the longer term at all.

For everyone involved in corporate governance, financial or commercial, public or private, Shredded leaves a challenge. How is order to be secured and corporate culture changed for the better?

One of the many skilful features of this book is the way that Fraser cites many incidents and events in the bank’s history that were to prove an unnerving premonition of what was to follow.

One of his many echoing ironies is his revelation that as far back as March 1819 the bank, in a bid to improve corporate governance and clean up its image, introduced “Rules, Orders and Bye-Laws for the Good Government of the Corporation of the Royal Bank of Scotland”. The 16-page document was reprinted and circulated for more than a century and was read out to the board every year immediately after directors had been elected or re-elected. The important point was not that such rules were drafted but that such care was taken in their circulation and constant repetition. It set out in clear English how the bank would ensure assets were kept safe, that its officers were honest and that the board supervised properly. When it came to corporate governance, clearly the bank knew it – and then forgot it.

Can RBS rid itself of the deep reputational scars that now mark it, and win back customer loyalty? The immediate problem is how new chief executive Ross McEwan can deliver amid yet another baleful push into asset sales, cost-cutting and staff redundancies. He wants to win back customer trust, push through culture change, introduce more honest pricing practices – and still deliver an ambitious 15 per cent return on equity.

But how can he do this, Fraser asks, without reverting to the “reckless lending, charging ‘distressed’ business borrowers extortionate fees and mis-selling useless insurance products – that caused it to become such a hated institution in the first place”?

RBS could now be on a path to oblivion. By slimming down, casting off the bulk of its investment banking and overseas operations and reverting to a small regional retail bank, it is hard to see what “back to the womb” RBS can offer that would be different to, or better than other lookalike retail banks. It is not inconceivable that within a decade RBS will merge or be taken over to achieve scaleability and cost efficiencies – the very mantra that drove it through the Goodwin years. It will look more like the bank Michael Herries left in 1983 – and the spectacular growth of the ensuing quarter of a century all but obliterated. The wisdom of “steady”, “patient” “incremental” is so quick to lose – and for a new generation now to gain. For this lesson alone, Ian Fraser has written a compelling book for Scotland, for finance and for the political and business world.