RBS Royal Bank of Scotland
Inside the Bank that Ran Out of Money
Sir Fred Goodwin
Sir Fred Goodwin, Knight of the Realm for services to banking was the
Chief Executive of The Royal Bank of Scotland when it ran up the biggest
corporate loss in British history. A loss of 24.1 billion pounds. In the
goodtimes the Royal Bank of Scotland grew faster than any other British
bank. It pulled off record-breaking deals, made billions of pounds in
investment banking .
Its top executives drove the bank forward to become, at one point,
the world's biggest bank and collected fabulous bonuses along the way.
Then in October 2008, RBS came within hours of running out of money
and had to be bailed out by the British taxpayer.
RBS wasn't the only
bank to be tescued but by the time of the financial crash it was the
most toxic bank in Britain. And that's something that didn't need to
Twice a year RBS held presentations to announce their results and
forecast their future. Since 2000, Sir Fred Goodwin has led these
presentations. This one, in August 2008, would be his last.
It had all started out so sell.
Jeremy Peat RBS Chief Economist (1993-2005) "It was certainly
seen as a Scottish bank with a Scottish identity , but one that was
looking to do things somewhat differently"
Sir George Mathewson
The Royal Bank of Scotland was a Scottish institution. Prudent,
effective and ambitious. In 1998m its dynamic and successful Chief
Executive Sir George Mathewson CBE was looking for new blood to lead the
bank forward. "I was actually looking for a Finance Director but,
one with potential to become Chief Executive. Fred Goodwin struck me as
someone who could lead and had a lot to offer."
Fred was the rising star of Scottish banking, a chartered accountant
in charge of The Clydesdale Bank before he was 40. There he had
earned a reputation for cost-cutting and acquired his enduring nickname
Fred the Shred
Cameron McPhail RBS Internationl Chief Executive (1995-2000) "My
first hearing of Fred Goodwin coming on board was a call from the
Clydesdale Bank where they'd been celebrating his departure for 3
With George and Fred at the helm, Scotland was no longer big enough
to contain RBS' ambitions. They aimed to grow RBS into an international
banking force, but they weren't the only ambitious Scottish bank. Their
Edinburgh rival The Bank of Scotland was also hungry for growth and both
banks face the same obstacle. Gordon Pell RBS Retail Markets Executive
Director (2000-2008) "Both Bank of Scotland and Royal Bank had the
same problem, they were anchored in a quite small economy in a home
market. They both took the view that they had to jump to something
bigger to avoid dependence on the Scottish economy."
The quickest and the boldest way to achieve this would be by carrying
out a take-over. Traditionally,in banking, takeovers involve bigger
banks buting up smaller ones, but that's not what RBS had in mind. First
RBS, audaciously, sniffed around Barclays, but they were warned off by
Sir Peter Burt
Then they both began looking at another venerable City institution
NatWest - a bank more than twice their size. Sir Peter Burt Bank of
Scoland Chief Executive (1996-2001) "They say that when a company
builds a new head office, gets a corporate jet and gets a fountain and a
flag-pole, its time to sell the shares. NatWest built the NatWest
NatWest was huge but ailing, its share price was low and it was Bank
of Scotland that moved first. A few weeks later, RBS joined the takeover
battle, promising bigger savings
Gordon Pell "I think there was incredulity that two small banks
could have the nerve to go for this bastion of the British banking
industry and I know that some of the management felt let down by The
City that it took seriously a bid of this nature."
After a hard-fought takeover battle NatWests shareholders had to decide
where their bank's future lay. At the last moment the decision went with
RBS, Fred and George had arrived on the big stage. As the savings,
including 18,000 job cuts, and integrations were made it became clear
that they had not only done the biggest hostile takeover in UK history
but, they had done it brilliantly. Fred got a bonus of £800,000 and
George almost £750.000which he insisted would barely give him bragging
rights in the Soho wine bar. The bank's share price dipped a little and
then shot up.
They went on to buy another insurance company a credit card operation
in Germany and s second hand car franchise. Goodwin picked up a
knighthood and was named businessman of the year by Forbes magazine. The
place that made most sense for RBS to do acquisitions was the USA, the
biggest market in the world, where thousands of little banks were
waiting to be gobbled up.
RBS already had a US ARM IN Citizens Bank run prudently by Larry Fish
"We're very proud of our credit record over a long period of time.
So we've avoided unsecured lending to both the consumer and the
corporate sector." Larry ent on the acquisition trail buyinga
number of banks including Mellon,
Just three years on from the NatWest deal, RBS was, by some measures,
the fifth biggest bank in the world. And, Edinburgh was the headquarters
of an international banking group. But, there was a price to all this
growth. The culture inside the bank had changed.
David Appleton Head of RBS Group Media Relations (1996-2003)
"Fred had a very impressive intellect, but he used that to bully
those around him. People were intimidated from speaking their own mind
because they feared Fred's reaction and this created an atmosphere
around him which inhibited even the most senior people in the bank from
expressing their views."
Fred proved to be particularly effective for RBS shareholders despite
or pehaps because of his robust management style, Fred got results. In
other words he delivered profits, year after year.
In May 2004, the moment RBS had been waiting for had arrived. A deal
that would transform Citizens from a regional bank into one of the
biggest banks in America. The target was a bank called Charter One.
Charter One would expand Larry Fish's empire and RBS into the huge
Chicago market with millions of households and potential customers. RBS
made an offer of 10.5 billion dollars to become the 7th biggest bank in
the USA. Next stop was the Bank of China.
While RBS bosses were opening the new headquarters building in
Edinburgh, City Analysts were concerned and wondering if the time had
come to sell RBS Shares. The bank's share price wasn't performing as
well as had been expected, the problem was Charter One. RBS was
struggling to make its usual savings and grow its usual profits and The
City thought Fred and his bank paid far too much.
By 2005, Fred's RBS had acquired 25 assorted businesses . It had
spent nearly 30 billion pounds but, its shareholders now demanded an end
to deals and takeovers.
Greenwich Capital, from the NatWest deal, made money as a trader it
bought huge bundles of ordinary domestic mortgages, safe prime loans
from banks and other lenders across the USA, then it packaged these up,
sliced, diced and sold them on to investors who profited from the
Sir Tom McKillop
In the early years the American housing market was booming and
mortgage trading was where the big money could be made. As new borrowers
became harder to find banks started to lend to sub-prime.
In 2006, the success story continued and with Sir George Mathewson
retired as Chairman it was down to bew boy Sir Tom McKillop to
deliver the good news. Over half of the profits that year came from
Greenwich Capital. Following these results, the share price recovered
somewhat and RBS allowed itself another glitzy pat on the back.
Just as everything was looking rosy for RBS, the engine driving the
growth in the entire banking industry ran out of steam. In late 2006 the
American housing bubble well and truly burst. As interest rates went up,
many with sub-prime loans could not afford repayments. Anxiety spread
through markets and across continents. RBS assured The City that they
weren't in sub-prime lending. But all that slicing and dicing of mortgage
debt meant there was no escape.
Five weeks after assuring analysts that no acquisitions were pending,
Sir Fred Goodwin announced the biggest banking takeover in history. The
target was a Dutch bank, one of Europe's largest, called ABN Amro.
ABN Amro contained and American bank, a Brazilian bank, banks in
Italy, in Holland, in India, an investment bank that sprawled across the
globe. It was big, unwieldy and badly run. For the second time in less
than a decade RBS entered a huge, hostile takeover battle, after a
competitor moved first.
This time it was Barclays Bank that announced a friendly takeover
with ABN Amro. So Fred and his advisors put together a consortium of
three banks to launch a not so friendly takeover. The consorteum
comprised RBS. Santander anf Fortis. They all wanted parts and they
wanted to tear it up.. RBS pressed on without the necessary due
diligence. So confident wre they that they offered 27 billion Euros for
their slice of the pie.
Meanwhile, the sub-prime problem wasn't going away. In fact, it was
getting worse. At the next RBS results meeting, optimism prevailed
In September the sub-prime crisis finally spread to Britain's high
street. Northern Rock experienced the first run on a bank in nearly 150
years. The markets went into turmoil. and to its dismay, RBS was able to
discover just what ABN Amro had on its books. It contained hundreds of
millions of pounds of sub-prime related investment, which were turning
toxic. RBS could assure The City no longer.
Its cash reserves, drained by the purchase of ABN Amro were
struggling to take the strain. One vital measure of its financial
health, its so-called Core Equity Tier One Ratio was getting dangerously
low. Analysts wanted to know just how low.
The government bailout is now only a few months away.
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