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Banker commits murder and gets away with it

A year ago, the FSA issued a short 298-word statement saying that after an extensive 17 month investigation into the collapse of the Royal Bank of Scotland (RBS), no action would be taken against Sir Fred Goodwin or others. There was a general outcry, so much so that after initially dismissing any indepth report, they decided they would write one.

It was released today – all 450 pages of it – although it doesn’t add to much more than what we knew a year ago:

(a)    the market conditions allowed it to happen; but

(b)    it was the CEO Sir Fred Goodwin and his management team that were at fault; and

(c)    the FSA messed up by not challenging them.

The report does however make clear that there is more to what happened than can be generally perceived, and provides some interesting insights about the history, issues and prevailing culture within the bank at the time.

For example and in hindsight, it’s obvious that the megalomaniacal Fred Goodwin was doing too much unchallenged.

How megalomaniacal was he?

Well, he was almost Machiavellian according to many reports.

I still remember the fact that he wanted to rename Scotland’s capital city Fredburgh, and that the corporate HQ at Gogarburn was his testament to history with its own golf course.

The fact that he would override decisions made by his management team, including those of the Chief Risk Officer, if he felt it was the right thing to do.

And the reports that have come to light that he even would go mental if the wrong sort of biscuits were served at meetings, goes to show the lengths he had reached in his boardroom seat.

Then the world collapsed for him as the disastrous ABN AMRO acquisition, plus a catalogue of other errors, meant that the bank’s capital and liquidity position had become over-exposed.

This is all in the FSA report, although not in the terms many would use.

For example, a section of the report is headed: “The ABN AMRO acquisition: an extremely risky deal”.

It was originally titled: “an extremely risky gamble”, but Fred’s lawyers forced the FSA to take out the word gamble as it could be used in a case against him, should one ever come to court.

It won’t be, as there is nothing in the legislation today that says that a bank CEO who screwed his bank can be brought to court.

This is one of the changes recommended by the FSA’s report, which elects to offer either a strict liability or clawback basis for curtailing a bank executive’s bonuses, pensions and more, if he or she causes the bank to fail.

But that’s for the future, not for the past, and hence Fred and his team get off scot-free so to speak.

What really gets me in this report is that the FSA knew he was a rogue CEO as far back as 2003.

I would rewrite it, but today’s Guardian summarises this piece well:

The FSA said that between 2003 and 2006, its supervision team highlighted "chief executive dominance" during meetings with the then RBS chairman Sir George Mathewson and that, with hindsight, more senior regulators should have been involved in a review of the bank at this stage.

The FSA sets out how it attempted to assess the risks posed by Goodwin's dominance. In October 2004 because of a "poor regulatory relationship" and lack of access to non-executive directors, its supervisory team recommended that a "section 166" review be commissioned. These reviews – named after the clause in the FSA's rules – require banks to hire independent firms to conduct a review of certain activities and report back to the FSA.

In the event, the FSA did not commission the review because its supervisors met a group of non-executives in December 2004 who were able to provide examples of where they had challenged Goodwin. One example was when Goodwin had wanted to launch an electronic bank which was rejected by the non-executive directors.

The FSA's report into what went on at RBS concludes that if a section 166 review had been commissioned, as first intended, it "would have sent a strong message to RBS, including its board, and might have provided the FSA with more information on the effectiveness of governance, particularly around the potential dominance of the chief executive".

In the event, the FSA kept reviewing the board structure of the bank until October 2006 when it concluded that the "risks associated with CEO dominance and challenge to him had been mitigated sufficiently that the issue could be closed". It was convinced that the appointment of a new chairman, Sir Tom McKillop, and new finance director would provide a new challenge to Goodwin.

But, with hindsight, it says that a "key missing element" in deciding to close the review about corporate governance was "engagement at the most senior FSA executive level".

"This reflects a more general tendency in the FSA's pre-crisis supervisory approach for key supervisory decisions and responsibilities to be delegated several layers below the FSA's CEO," the report said.

Another area of anger is that we all knew the ABN AMRO acquisition could be disastrous back when it happened.

Back then, it was obvious that a battle with Barclays over ego had taken place, and Fred just wanted to win at whatever the cost, in order to stick two fingers up to John Varley, the Barclay CEO.

He therefore not only outbid Barclays in over-valuing ABN AMRO, but ABN also sold key assets in the USA before the acquisition went through, devaluing the bank.

So the result was an overpayment for a smaller bank than the one Barclays originally bid for, just to satisfy the ego of Fred Goodwin.

This is corroborated in the report, which states that “due diligence was inadequate in scope and depth and hence was inappropriate in light of the nature and scale of the acquisition and the major risks involved”.

It asks:

  • “Whether the Board’s mode of operation, including challenge to the executive, was as effective as its composition and formal processes would suggest.
  • Whether the CEO’s management style discouraged robust and effective challenge
  • Whether RBS was overly focused on revenue, profit and earnings per share rather than on capital, liquidity and asset quality, and whether the Board designed a CEO remuneration package which made it rational to focus on the former.
  • Whether RBS’s Board received adequate information to consider the risks associated with strategy proposals, and whether it was sufficiently disciplined in questioning and challenging what was presented to it.
  • Whether risk management information enabled the Board adequately to monitor and mitigate the aggregation of risks across the group, and whether it was sufficiently forward-looking to give early warning of emerging risks.”

It’s just a shame that it cannot say that this was the case, but had to wrap it up in whethers and possibles due to the legalese issues, in the same way that it couldn’t call the ABN AMRO deal a gamble, as this is exactly what it was.

The report concludes that there were six factors predominantly at play here, on top of the poor management controls internally, namely:

  • “significant weaknesses in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework;
  • over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity;
  • concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA;
  • substantial losses in credit trading activities, which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be;
  • the ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence; and
  • an overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure. RBS was one such bank.”

Well worth the two and a half years of researching and writing such analysis, not!

Meanwhile, fyi, Fred’s back on the prowl  looking for a job in the City … and knowing his ability to avoid shit hitting his fan, he may well find a new fan to fuel for the future.

Just like several other characters I could name.

So Machiavelli is maybe a good comparison after all: “the question whether it is better to be loved rather than feared, or feared rather than loved. It might perhaps be answered that we should wish to be both: but since love and fear can hardly exist together, if we must choose between them, it is far safer to be feared than loved.”

 

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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