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Making it Happen: the staggering story of the RBS downfall

28 September 2013

9:33 PM

28 September 2013

9:33 PM

For political junkies, autumn is bringing a fix of three big books. Damian McBride’s expose of Gordon Brown has come out, Matthew d’Ancona’s inside story of the Cameron government will be serialised tomorrow. But I’ve just finished the other biggie: Iain Martin lifting the lid on RBS. Finally, Britain has an answer to Andrew Ross Sorkin’s  Too Big To Fail – except it’s set in Edinburgh rather than Manhattan, and the story is if anything even more mind-boggling. You have as much greed, ego and testosterone as there were in Wall St. But you have, thrown into the mix, the no-less-maniacal ambitions of Gordon Brown whose greed for tax revenues was as great as any banker’s greed for bonuses. And to top it off, this bizarre backdrop of Braveheart-style nationalism which spurred on Scots who thought they would show that Scotland could take on the world by creating what was, briefly, the world’s biggest bank.

The crash changed  our understanding of recent economic history. Those bankers who were ennobled under Labour? Crooks. Those bold mergers? Reckless insanity. But Martin’s story goes deeper, right back to the transformation of RBS from a sleepy flagship of the Edinburgh establishment into what its new masters wanted to be a world-beating predator. Iain Martin was my editor at The Scotsman and knows the Edinburgh establishment as well as he knows Westminster’s games.  I opened the book with some trepidation: he’s a friend, and had undertaken a hideous task. The world of banking is notoriously difficult to prize open – but he has pieced the RBS story together to spectacular effect.

The story starts not with Fred ‘The Shred’ Goodwin but an engineer named George Mathewson, who groomed Goodwin and was his chairman for half of his time in the job. Mathewson was not a banker but an engineer, who once ran the Scottish Development Agency. At that quango he had dealings with Sir George Younger, Scotland’s man in Thatcher’s Cabinet who later sought a berth in RBS. Younger and Mathewson struck up an alliance at RBS, believing radical change was needed (which it was — the bank was near-bust).

Mathewson was (and remains) a committed Scottish nationalist and loved the idea of Scotland doing it better than anyone. He set up Project Columbus, a team of people who would go on to reinvent RBS. It was successful, but an English member of that team, Steve Rick, did worry about the optimism mutating into hubris. He is quoted as saying:

‘I blame Braveheart, I really do. I think it had a lot to answer for when it came out. Braveheart gave those guys in the Scottish banks too much confidence.’

Phase One of the RBS transformation was complete by 1996 but even the architect of the ‘Project Columbus’ makeover, Cameron McPhail, worried that they had gone too far. The book says:

‘A ‘sales culture’ had been created, with many employees in the bank now measured according to rigorous targets dictating how much they must sell in the way of products to customers. ‘We created a monster,’ McPhail told friends.’

But it was, at first, a profitable monster. Mathewson was credited with saving RBS and knighted. He went on the hunt for a like-minded successor.


Iain Martin is a Paisley boy, and so knows Goodwin’s type: dry, workaholic, unremarkable, culturally unadventurous. (Andrew Neil comes from Paisley too, so there are exceptions to this rule.) But Goodwin somehow mixed being monotonous with being maniacal. As Martin puts it: ‘the public-spirited thing for Goodwin to do would be to donate himself to the psychology department of a decent university in order that academics could run years of detailed tests.’

Goodwin studied law, only to become an accountant. In that role, he helped the National Australia Bank buy Clydesdale Bank in 1987. The Aussies liked him so much that they hired him to run the bank. He did so well there that he was poached by Mathewson to work at RBS. ‘The two contrasting types, Mathewson restless and mercurial, and Goodwin disciplined, endlessly logical and somewhat shy, were forming a strong bond.’

All this happened when the mood in Edinburgh (home of the new Scottish Parliament) was quite something. When Harvey Nichols had just opened its second store outside London right next to RBS head office, it seemed to be a symbol that the city was taking on London again. As Iain Martin says:

‘It felt as though Edinburgh, already one of the most agreeable places to live in Britain, might be on the cusp of another exciting golden age, underwritten by its banks. It wasn’t quite a second Enlightenment, but the city did seem poised to benefit from a boom based on financial services, shopping and rocketing house prices.’

You can add to the mix the new vibe of Scottish chauvinism which absorbed Mathewson – who wanted RBS to be the ‘best in the world’ and wanted to see the momentum of his own takeover extended on a global basis. They wanted to eat up English banks, in the same way that Wallace wanted to invade York. When rival Bank of Scotland tried to size up NatWest, Goodwin outbid. And when he went to the NatWest HQ to inspect his prize, he found a lavish headquarters with a

‘…wine cellar stocked with the best vintages from Bordeaux and Burgundy… Like a Scottish medieval monarch, leading a successful raiding party over the border, Mathewson ordered the wine to be shipped to the Royal Bank’s headquarters in Edinburgh…. Goodwin had enjoyed an astonishing rise. Just five years previously he hadn’t even been a banker. Now he was about to become chief executive and one of the most powerful financiers in Europe sitting astride a banking colossus.’

Flattered by Forbes Magazine who named him ‘Global Businessman of the Year‘  and a Harvard study (RBS — ‘Masters of Integration’) Goodwin began to hunger for more. Banking seemed to be about acquisitions, and the number-crunching Fred believed he was better at banking deals than any man alive. A sprawling new RBS head office  was planned outside the City, dubbed ‘Fredtown’ with its own seafood kitchen. When Lord Younger was shown the plans on his deathbed, he told his daughter ‘Maybe it’s time to sell shares in RBS’. The signs of hubris were there – for those with an eye to see them. Jackie Stewart and Jack Nicklaus, childhood heroes of Goodwin’s, were signed as a ‘brand ambassadors’ as part of a £200m promotions budget.

Gordon Brown is introduced in his own chapter, which he richly deserves. He fractures the regulation system and ignores the Cruickshank Report which warned against banks becoming too big. One of Brown’s ministerial colleagues is quoted as saying:

 ‘here in the banks you had the rise of these great national champions, something which, a few big manufacturing businesses aside, we had for a while lacked in this country. I suppose Gordon thought, why knock it?’

As consumer debt smashed through £1 trillion, the banks were growing rich dispensing it – and Brown’s government collected its share. Bankers were hired to review government policy. Government officials were hired to be bankers. Brown was, in effect, governing in coalition with the banks. When RBS bought ABN Amro, its due diligence on the deal consisted of two CDs and one lever arch file – Brown’s regulatory system allowed this kind of insanity. Alex Salmond sent Goodwin a note offering any help he may need with the deal – the same deal that would go on to sink the bank.

But to blame the RBS downfall on its failure to digest ABN is to miss the real story. Stephen Hester, the recently-departed RBS chief, is quoted saying the worst loss was in bad mortgages. It suits politicians and pundits to blame complex investment bets, he says, but the RBS bubble was a reflection of another bubble. An asset bubble, which, according to Hester…

‘…policymakers allowed to develop and banks financed, the worst of which was in real estate. And it’s no coincidence that the countries that suffered the most economically and the banks that suffered the most are ones that were in countries that were allowed to have big real estate booms – Ireland, Spain, United States, Britain.’

For this reason, I disagree with the subtitle of the book: “the men who blew up the British economy”. If no banker had screwed up, we’d still have had (what we now know to be) the worst economic overheating in postwar UK history. I’d say that Fred was a symptom, not the cause.  Everyone, not just RBS, was getting drunk at this party. It was a party run on cheap debt, which suited politicians because rising property prices give the illusion of prosperity.

Making It Happen is that rare thing: a financial book that reads like a thriller. It uncovers the personalities behind the banks, brings in political actors and is choc full of insider quotes, gossip and detail. After every chapter, you’re left thinking: can that craziness really have happened? And then you remember that RBS collapsed with debt several times the size of UK economic output, so it probably did. Making It Happen is for my money, the best book on the crash to have come out this side of the Atlantic.

It is also a reminder why we should be deeply nervous of George Osborne’s Funding-for-Lending, Help-to-Buy and other gizmos that allow government to subsidise mortgages for people who could not otherwise afford them. Britain survived one banking crash – just. It’s far from clear that we could survive another.


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