Sir Fred Goodwin was on top of the world as he and his wife, Joyce, arrived at
a dinner party in a plush suburb of Edinburgh. It was October 2006, and the
Royal Bank of Scotland chief executive was finally beginning to win over
some of his critics in the City. RBS was now being spoken of in the same
breath as financial giants such as Citi-group and JP Morgan. Record
half-year profits had surpassed even the most optimistic of expectations.
To the Edinburgh social set Goodwin was a hero. While the Goodwins were never
regulars on the party circuit, they were among about 80 people who had been
invited that evening to the home of Friends Provident boss Trevor Matthews –
at the time a senior director of Edinburgh life assurer Standard Life.
Matthews and his wife Michelle had been in Edinburgh for only two years, but
the Australian couple had earned themselves a reputation as superb hosts.
That evening was no exception. As the dinner plates were cleared, a
professional pianist was unveiled as the evening’s entertainment. When he
struck up a version of Don McLean’s song American Pie, the guests started to
join in. But one voice could be heard above all others. Goodwin knew the
words of all six verses – and soon he was the only one left singing, turning
it into an impromptu solo performance.
“It was very strange, one of those moments that sticks in the head,” said one
of the dinner guests.
“Fred was word-perfect from start to finish, but he’s just not the type of guy
you expect to hear singing about ‘good old boys drinking whiskey and rye’.”
Among the directors of RBS, Goodwin was better known as “Fred the Shred”, a
fearsome cost-cutter who could strike fear into grown men with little more
than a few choice words. His usual way of relaxing revolved around stripping
down engines of old Triumph cars or shooting trips. Once a year, he shot
doves in Spain with Emilio Botin, the chairman of Spanish banking giant
Santander.
Singing talents were not the only thing that Fred was coy about. Around the
same time Goodwin was beginning to plot a deal with Botin that would see the
two of them form a consortium to bid for ABN Amro, the Dutch bank that had
been floundering in the shallows of international finance for a number of
years.
Ultimately that deal would become a key reason that forced the bank to go cap
in hand for two multi-billion pound bailouts from British taxpayers.
However, the ABN deal was not the only problem. The day the music died in
the world of high finance, it became apparent that RBS’s investment bank was
stuffed with toxic assets.
On Tuesday, Goodwin’s tale of boom and bust will be picked apart by MPs on the
Treasury committee. It will be the first opportunity to see the man now
dubbed “the world’s worst banker” defend himself in public.
Some of those closest to Goodwin insist that his greatest flaw was not his
obsession with deals or his aggressive management style. If there was a
moment when Goodwin lost control, they argue, it was when he started to let
his hair down.
During Easter 2001, the top 200 executives of RBS were sent to a management
conference at Gleneagles hotel in Perth-shire. The luxury golf resort was a
favourite with RBS. It’s also where Goodwin’s boyhood hero and friend Sir
Jackie Stewart has his clay-pigeon shooting school.
Only a year had passed since Goodwin had taken over as chief executive from
Sir George Mathewson, who was seen by staff as having saved RBS from the
brink of collapse. Goodwin’s reign had already brought change.
In between the rounds of golf, the executives were divided into small groups
and asked to identify problems within management. Every group cited a
“culture of fear” as the bank’s biggest problem.
This was fed back to Goodwin. The attendees held their breath as the chief
executive stood up on stage to address the charge, but there was no scene.
“Why is anyone frightened of little me?” he asked.
Why, indeed. Although he stands 6ft 3in, Goodwin was never physically
threatening. “He never railed and shouted at people,” said a former chief
executive of one of the bank’s subsidiaries. “He was facetious and withering
– a classical psychological bully.”
Goodwin held a meeting at 9.30 every morning for his top executives, usually
from the bank’s Edinburgh headquarters or its London office. Attendance was
mandatory – either in person or via videolink – for all the bank’s
divisional bosses.
Although Goodwin had inherited the meeting from Mathewson, under Goodwin they
soon became known as the “morning beatings”. They could last for anything
from 15 minutes to an hour – but rarely longer. Some former executives say
they were an efficient way of resolving serious issues. The mood, however,
was never pleasant.
“Those meetings were never about enlightening anyone about anything,” said one
former senior RBS executive who attended the meetings for many years. “It
was all about humiliation. It seemed that Fred was never happy until he’d
found someone to humiliate, particularly in the early days.”
Waffling was unacceptable. Answering back was dangerous. Knowing the right
answer to his questions was often impossible.
“He might ask what the takings were in one of the Glasgow branches last
Tuesday,” said a former executive. “You wouldn’t know because you look after
10,000 branches. But he would say: ‘You should know. Are you doing your job
properly? Do you know what you’re doing? Should I get someone else in to do
your job?’ His favourite phrase was ‘I think you’re asleep at the wheel’. He
would finish a grilling with the line ‘That’s life in the big city’.”
On the golf course he was more relaxed, and didn’t care much whether he won or
lost. In his charity work with The Prince’s Trust he was laid back, and
always keen to mingle with celebrities, including Prince Charles.
The morning meetings, however, were invariably described by former executives
as “unpleasant” or “hostile”. In the early years, the worst treatment was
often reserved for Johnny Cameron, the group’s chief executive of corporate
markets. As new faces appeared round the table, however, Cameron got an
easier ride.
With time, the regulars could read Goodwin’s body language. Playing with a
paper-clip was a sign of mild irritation. When he got really angry, the back
of his neck would swell up and redden, according to some former executives.
He was an obsessive micro-manager and was even known to watch the casting
videos for new adverts.
“He went down to the point of minutiae that was nonsensical,” said another
former RBS insider. “But the central problem to all of these issues was that
Fred thought he was an expert on everything, whether it was choosing the
right blue from a colour wheel or taking over ABN Amro.”
Almost nine years ago to the day, Goodwin and Mathewson sat down to a
celebratory dinner in London’s Savoy hotel.
Mathewson had just learnt that he was on the cusp of winning NatWest,
following a five-month battle with his arch-rival, Sir Peter Burt, then
chief executive of Bank of Scotland.
Mercury Asset Management and Schroders had already come out in public support
of RBS, and other large institutions were beginning to fall into line. Burt
was about to throw in the towel.
As a trusted confidant approached the table, the pair were tucking into
dessert – two large knickerbocker glory ice-creams. “They were like two
little boys who had snuck off from a school trip to spend their pocket money
on ice-cream,” said the source.
Although the deal had not quite been won, Mathewson was already in a mood to
celebrate. Goodwin, on the other hand, told him to calm down, reminding his
boss to keep a clear head for investor meetings the following day. Not many
people could talk to Mathewson like that, but Goodwin was his blue-eyed boy
and trusted deputy.
Goodwin had been wheeled in a couple of years earlier from Clydesdale Bank,
where he had been chief executive. An electrician’s son from Paisley, he
made his name in the accountancy profession after working on a number of
high-profile insolvencies, including the Bank of Credit and Commerce
International. He had been made a partner at Touche Ross, now part of
Deloitte, at the age of just 29.
Although it was Mathewson who led the NatWest deal, it was Goodwin who won it
for him. He had been the perfect opponent to Burt; if Burt knew the details
of how NatWest ran its business, Goodwin made sure he knew them better. It
was only after Goodwin was parachuted into investor meetings that the battle
swung RBS’s way.
To say that he charmed the City would be misleading, but he certainly
impressed them. The NatWest deal was the making of Goodwin. He was soon
promoted to chief executive, with Mathewson taking a back seat as chairman.
The deal was then hailed as the best banking deal of all time, as Goodwin’s
ability to rip out costs and drive through efficiencies won plaudits left,
right and centre. He was named Forbes magazine’s Businessman of the Year in
2002.
That gave him the confidence to do a string of deals in Britain and America.
His negotiating tactics became legendary.
When buying the insurance business Churchill from Credit Suisse for £1.1
billion in 2003, Goodwin became hung up on its exposure to The Accident
Group, a controversial no-win, no-fee law firm that collapsed soon after.
Oswald Grubel, Credit Suisse’s chief executive at the time, refused to
entertain Goodwin’s demand that the Swiss bank offer an indemnity against
any losses that might be suffered on the account. Weeks of negotiations
culminated in a tense lunch at the Swiss bank’s headquarters. Goodwin sat in
silence for more than an hour until Grubel cracked and backed down. The
advisers who worked on the deal are still baffled as to how he did it.
The deal binge was by no means universally popular. A Deutsche Bank research
note in 2005 argued that of the 21 acquisitions the bank had done since
1997, only a handful had matched the cost of capital. In other words, the
bank got bigger but it wasn’t necessarily getting much better. Although
shareholders grumbled about Goodwin’s megalomania they still voted through
more and more deals. By the time RBS’s involvement in the ABN takeover was
put to a shareholder vote in August 2007, the credit crunch had already
reared its head. More than 94% of the votes cast by RBS shareholders
approved the transaction. The Financial Services Authority also gave the
bank licence to erode its core tier one capital ratio to just 4.5%.
When shareholders started to complain about the deal in October, it was
already too late. There was no clause that could get the bank out of the
deal, in spite of rumours to the contrary.
Meanwhile, the financial world was going to hell in a handcart. By the
following April, RBS had launched a £12 billion rights issue to shore up
holes created in its balance sheet by the ABN deal. A whole host of other
problems were emerging in the group’s investment bank. While the NatWest
deal had been the making of Fred, one business that had been acquired as
part of the deal was quietly contributing to his eventual downfall.
Goodwin never much cared for investment bankers. He would regularly josh with
his trusted advisers from Merrill Lynch, Goldman Sachs and UBS that they
were all overpaid charlatans. After the NatWest deal, he ended up with a
sizeable investment bank of his own, that included an American bond house
called Greenwich NatWest.
All the original presentations on the NatWest deal earmarked the business for
disposal, but a buyer was never found. It then became embroiled in the Enron
scandal, thanks to the so-called NatWest Three, who eventually pleaded
guilty to charges which were related to the collapse of the US energy
company.
However, the business had also started making huge amounts of money. The boom
in selling mortgage debt to the financial markets had begun, and RBS
Greenwich, as the business was now called, was at the heart of it.
“Ten years ago I was reluctant to say I was a mortgage trader; now suddenly
it’s in vogue,” said Jay Levine, the joint chief executive of the business,
in an interview with The Banker magazine in October 2005. “We were in the
right place, we had a very significant mortgage business – we were among the
top three or four players – and the market has just expanded unbeliev-ably.”
RBS shareholders began to sit up and take notice – then started to ask why it
couldn’t grow this business quicker. “Fred was getting no end of grief from
investors about the investment-banking business,” said one source close to
Goodwin. “They all wanted to know why Barclays Capital, ostensibly a similar
business, was growing at about 30% a year under Bob Diamond and RBS’s
investment-banking business, under Johnny Cameron, was growing at about 15%
a year. So Fred told Johnny to take the brakes off. If they wanted growth
they could have growth.”
Levine grew the business at a rapid pace through 2005, 2006 and the early part
of 2007 under Cameron’s instruction. His pay packet expanded at a similar
pace. According to sources close to the bank, Levine received about $60m
(£40m) over 2005, 2006 and 2007 – about four times more than Goodwin and
close to five times more than his immediate boss, Cameron.
In December 2007 Levine left the bank. Cameron was already being grilled in
every morning meeting on the sub-prime assets held in Greenwich. Day after
day, Cameron said all of RBS’s wholesale assets were rated AAA or AA by
rating agencies, and had already been written down too far, according to
sources close to the bank. He was by no means the only banker in the world
who held such views at the time.
Goodwin seemed to agree. Just weeks after the controversial £12 billion rights
issue was announced, he told a long-stand-ing confidant over breakfast in
London’s Ritz hotel that he believed many of the bank’s credit-market
exposures could ultimately make huge profits for the bank. They had been
written down far below their true value and would ultimately come good. He
was wrong.
The bank’s loans to private-equity deals, arranged by Cameron’s deputy Leith
Robertson, were also turning sour. High-profile deals involving the likes of
Russia-focused investor Leonid Blavatnik were only the tip of the iceberg.
Morning after morning Cameron insisted that all these deals were easily
capable of withstanding a recession, sources say.
As the economic picture darkened, however, more deals became problematic. It
all culminated in the £20 billion bailout of the bank last October, and the
further cash injection announced last month which took the government’s
stake in RBS to 70%.
“If Fred changed at all over the years he became more like a classic chief
executive, who assembled a team around him and told them to get on with
running their business,” said one of Goodwin’s closest friends.
“He placed a lot of trust in Cameron. If he had still been the same ‘Fred the
Shred’ that did the NatWest deal he would have been all over the detail of
what was going on in that business.
“Potentially, the situation might not have got as bad as it did.”
