The Observer, Sunday 15 February 2009
Loud were the snorts from RBS staff as they watched the men who had led their bank to ruin make their excuses to MPs. Although the press described the “humiliation” of Sir Tom McKillop, the former chairman, and Sir Fred Goodwin, the former chief executive, insiders knew the pair had got away with murder over the vastly inflated price they paid for Dutch bank ABN Amro in the autumn of 2007.
Economic historians have the nice word “euphoria” to describe the mania that overcomes excited minds at the peak of a bubble. As the market soars, everyone except wise investors believes the insane valuations of assets and thinks that any debt is worth taking on if it allows them to buy into an unlosable game. To me, the euphoric credulity of the era was encapsulated by Damien Hirst charging £50m for a kitsch, diamond-encrusted skull. Others will never forget Northern Rock’s 125% mortgages or Gordon Brown’s claims to have abolished boom and bust.
I’ve no doubt, however, that economic historians of the future will see the bidding war between Barclays and RBS for the soon-to-be worthless Amro as the moment when the market cut its moorings to reason and careered into a world of make-believe. RBS admits to £10bn going down the drain. Others say it is closer to £20bn. But McKillop and Goodwin were adamant that it was only with the benefit of hindsight that their critics could damn them.
Buying Amro was not an attempt by the Napoleonic Goodwin to extend his business empire, McKillop explained to the Treasury select committee. RBS’s “strategy group and the executive team” weighed the options. The board approved every step. The Financial Services Authority gave its assent. (Although he did not add that one is hard pressed to find examples of the world’s worst regulators disapproving of anything the City wanted to do.)
Goodwin was next and harrumphed that, yes, yes, all right, the bid did look a disaster now, but at the time “it did not seem like a bad mistake”. He was a man of action and had to operate on the facts before him in 2007. The shareholders agreed with him, the regulators agreed with him, the board agreed with him, everyone agreed with him. To which senior staff at RBS in 2007 say: “Phooey!”
They suspected that their leaders were out of their minds. As one explained to me: “The figure they kept quoting was the cost-income ratio [the proportion of a bank’s income consumed by operating costs]. Ours was meant to be 47%. Amro’s was meant to be 96%. So the idea was that we move in, slash jobs, cut costs and get profits.”
You did not need to be a financial genius to see the flaw in Goodwin’s plan. If 96p in every pound was going on operating costs, it would take only a small fall in profits to turn Amro into a loss-making bank. As it was, there was a catastrophic fall and it all but collapsed. Equally, everyone who had to try to make RBS work knew its operating costs were so low because Goodwin had refused to invest in basic control systems. “The whole place was held together with bits of string,” one told me.
Why didn’t they speak out at the time? Because they would have been fired.
The picture they gave me of Goodwin was of a borderline sociopath running a cult of the personality. Everyone at RBS kept their heads downs. On the rare occasions they were asked for an opinion, they mouthed cheery slogans about the all-round brilliance of the strategy and the incontrovertible excellence of their bank.
As one source put it: “I would see some of the most senior people in the bank trembling before meeting him and saying, ‘I hope it’s not my term to be carpeted.’ If you raised doubts, you were accused of belonging to the ‘business prevention unit’ and told to shape up or get out.”
The same autocratic style dominated Sir James Crosby’s HBOS. I understand why last week’s revelations captured the imagination. They boiled down the grotesque negligence with which Labour regulated finance capital to one bite-sized story. Even though he is driving Halifax and the Bank of Scotland over a cliff, Crosby is appointed to the FSA, the body that is meant to police bankers, not provide them with a second income. He stays even when HBOS goes bust and only has to resign when Paul Moore, HBOS head of risk, reveals he warned Sir James of a looming calamity and was sacked for his pains.
Yet hardly any commentator was surprised that Crosby sacked the admirable Moore. Their indifference reflected the reality of working life. All hierarchies, public or private, have the potential to become cults. If the men and women at the top decide that argument is a species of treason, then everyone who values their career shuts up and knuckles down.
No law can change this basic fact of corporate life. You cannot legislate against arrogance. As I keep writing, a reforming centre-left government should, instead, legislate to create a financial structure where the damage the next Crosby or Goodwin can do is limited.
Perhaps I should stop writing it because how can a government led by Gordon Brown take the sensible step of turning banks into utilities, banned from playing at the tables of casino capitalism? Brown created the FSA and showered Crosby, Goodwin, McKillop and many another banker with knighthoods and peerages. He cannot go back to the world before the crash and he cannot change the system because reform would be an admission of his own failure as chancellor.
The Italian Marxist Antonio Gramsci left us the eerie sentence: “The old is dead and the new cannot be born; in this interregnum, many morbid symptoms appear.” And that’s how Britain under Brown feels: a morbid country stuck between a lost past and an unrealisable future, with a glowering leader unable to move because he is paralysed by the weight of his own history.