Britain versus the banks

In a 1975 foreword to his classic study of Wall Street, The Great Crash 1929, the economist JK Galbraith cautioned readers over the dangers of forgetting. “There is merit in keeping alive the memory of those days”, he wrote. “For it is neither public regulation nor the improving moral tone of corporate promoters, brokers, customer’s men, market operators, bankers and mutual fund managers which prevents these recurrent outbreaks and their aftermath. It is the recollection of how, on some past occasion, illusion replaced reality and people got rimmed.”

By the time Galbraith died in 2006, a new age of illusion was in full swing as bankers proclaimed that risk had been conquered through financial engineering. But just as Galbraith had foreseen, reality soon set in with the onset of the crisis of 2007-08 – the old rules, it turned out, still applied. Banking literature is one way of guarding against such memory loss and three new books on the 21st-century financial crisis fulfil that role admirably.

Ian Fraser’s passionate account of the rise and fall of Royal Bank of Scotland – one of the world’s largest banks before it collapsed and had to be rescued by the British taxpayer – is the place to start. Shredded is a monumental book, well written, impeccably researched and hard to put down at any point. The tone is set in the first paragraph, in which the bank’s former chief executive, Fred “the Shred” Goodwin, is described as “a sociopathic bully whose achievements had been massively over-hyped”. The author, a Scottish-based financial journalist, seems sure of his ground (just as well, since Goodwin is described as highly litigious) and pulls no punches.
The more colourful parts of the story describe Goodwin’s acerbic management style and profligate corporate trappings. Such was the public humiliation of executives at Goodwin’s morning meetings that they apparently became known as “morning beatings”. Those brave enough to disagree with him were ignored and eased out, leaving Goodwin in an unreal world largely of his own making.

His power base was built on the transformational acquisition and integration of NatWest from 2000 but this early success rapidly spilled over into excess, the like of which I have never seen in a major public company in my 30-year career. The permanent suite at the Savoy, the fleet of fast cars in company livery, the private jets, the ostentatious new headquarters at Gogarburn near Edinburgh with mess dinners for the chosen few, the fresh fruit flown in from Paris – all contributed to the self-delusion.

The bank’s Scottish heritage was a factor in its failure. At home it was a big fish in a small pond and its senior management, many of whom were Scots, spent too much time cocooned in Gogarburn, reinforcing the insularity that Goodwin’s management style fostered. Support from Alex Salmond, Scotland’s first minister, encouraged RBS as a national champion and contributed to its overblown ambitions.

RBS became disconnected from the latest thinking in a fast-moving industry. A good example came in 2006, when it ramped up its involvement in leveraged finance, structured credit and US mortgages just as US banks such as JPMorgan and Goldman Sachs were drawing in their horns. Another came the following year, when RBS recklessly pushed ahead with the acquisition of the Dutch bank ABN Amro at a time when markets were tumbling and competitors were retrenching. This, of course, was the deal that proved the final straw.

RBS broke every rule in the governance manual and it will surely become the standard case study of how not to behave. This was not just about a bully in the C-suite, for best practice was consistently ignored, including the need for an arm’s-length relationship with the auditor, an open dialogue with shareholders, independent non-executives prepared to challenge management and a rigorous recruitment process. Had the latter been in place, Goodwin might never have been appointed, for he had apparently enhanced his CV by exaggerating his achievements at the auditing firm Deloitte. Good governance matters and the fate of RBS tells why.

Fraser spoke to 120 current and former RBS employees but the major gap is the voice of Goodwin himself. This omission means we have the case for the prosecution but not for the defence. How did the gangly boy from Paisley explain his own rise to become Forbes Magazine’s Global Businessman of the Year for 2002? What does it feel like to gain and then lose a knighthood? For a balanced account we need to know Goodwin’s recollection of conversations with politicians, regulators and central bankers.

What does he think of the self-interested advisers who egged him on to do deal after deal? Did the few who now claim to have been dissident voices within RBS really speak up? What of the shareholders? Some sold, others tried to tackle Goodwin but many reputable institutional investors held on; so what were they saying to Fred? We need to know Goodwin’s version of board meetings and hear Goodwin’s justification for the corporate excess. How did he feel when non-executive Peter Sutherland presented an independent report from investors in 2005 in which he was described as “out-of-touch” and a “megalomaniac”, treating “all shareholders like they’re idiots”? Did this contribute to the six weeks of leave he took at the end of that year, reportedly to reflect on his position? If so, how and why did he bounce back reinvigorated to push RBS into the final doomed leg of its journey? Goodwin may never give his side of the story but, if and when he does, Shredded provides the case against.

Inside the Banking Crisis was written while Hugh Pym was chief economics correspondent for BBC News before taking over as its health editor earlier this year. His focused account begins with the downfall of the Newcastle-based former building society Northern Rock in September 2007 and ends with the announcement of RBS’s £8bn losses in February 2014 but the meat of the book describes events in Whitehall and Westminster in September and October 2008. This was the time when the banks ran out of money and a small group of ministers, Treasury officials and central bankers worked round the clock to devise a rescue package. The tale is dramatic and the telling is atmospheric: late-night curries ferried in to the Treasury, a minister blundering into prime minister Gordon Brown’s sleeping quarters in the middle of the night, chancellor Alistair Darling grabbing a couple of hours sleep before appearing on Radio 4’s Today programme, bankers sneaking in to Whitehall to avoid the media, and mysterious leaks to Pym’s BBC colleague Robert Peston, whose blogs and broadcasts caused panic.

One of the most striking features about Pym’s book is the detail it reveals about the investment banks’ role in the resolution of the crisis, a point on which the author might have elaborated. It jars to learn that, having brought the country to its knees by selling high finance to gullible banks such as RBS and HBOS, the investment banks were then all over Downing Street and the Treasury advising on the clean-up. This is problematic, for however clever, charming and resourceful investment bankers might be, they all think the same way about the kind of financial system we should have.

The case for more radical reform is taken up by Alex Brummer, the City editor of the Daily Mail. He is a doyen of British financial journalism and it shows in the maturity of his judgments and breadth of his knowledge. Bad Banks builds on The Crunch, his timely account of the Northern Rock disaster that came out in 2008, the year after the bank failed. The new book moves along at an equally brisk pace, opening with a crisp account of the crisis at the Co-operative Bank and then using chapters on specific themes to cover events from 2009 through to 2014. Thus the chapter on the Libor scandal draws out the Barclays story; that on money laundering provides a way in to HSBC and Standard Chartered; that on the origins of the crash illuminates the fall of RBS and HBOS; mis-selling in the high street draws in Lloyds; and the chapter on banking culture lays bare the episode of JPMorgan and its bank-busting trader known as the London Whale.

It is all skilfully woven together by a writer who knows when to fly high and when to swoop low. His connections are impeccable and his occasional name-dropping is forgivable, for he was frequently in the right place at the right time. For example, on the day the HBOS-Lloyds merger was announced in September 2008, the author “happened to be having a sandwich lunch with Alistair Darling at the Treasury”; he interviewed the Bank of England’s Mark Carney “on his first road trip as governor”; and he had private lunches with the likes of Fred Goodwin, at one of which the later disgraced RBS chief executive “airily swept aside any views that ran counter to his own”. Brummer “found such confidence disconcerting”.

The last part of the book looks at the current state of banking. Brummer is encouraged by a change in attitudes at the Bank of England and the Prudential Regulatory Authority, as well as among new-wave bankers such as Barclays chief executive Antony Jenkins. He may or may not have a point in this but it is surely going too far to say that, while in opposition, “David Cameron and shadow chancellor George Osborne were only too aware of the failings of the country’s financial machinery and felt overhaul was required.” If they did, it was a pretty late conversion and it was well hidden from this observer at least.

However, Brummer believes that although regulators have tightened the system, more radical reform is required. He is sceptical that Europe has done enough to recapitalise its banks or tighten up its rules. He admires the Americans’ sequence of first repairing the banks and punishing them later when they could afford to pay. But he believes that the banking lobby has slowed down reform and that there, as in the UK, the banks are still too big to fail.

He poses the ultimate question for the authorities who have to decide “what sort of banking they actually want and the extent to which the market-driven requirements of high returns through risk can be balanced with society’s desire for safe banking”. A satisfactory answer may be a long time coming, given the prevalence of former bankers in senior positions in central banks, government and public service. The present direction of banking reform is merely a slightly better version of what went before, when what is required is a totally fresh way of thinking. Not leaving banking to the bankers would be a good start.

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