RBS – My Part In Its Downfall…

Actually, I don’t think I had much part in the downfall of RBS, although I did work there for twelve years from 1994.

I am about to read an account of the bank’s collapse – Making It Happen, by Iain Martin (I also want to read Shredded: Inside RBS, the Bank That Broke Britain by Ian Fraser, but it wasn’t out in paperback when I was buying) – and I thought it would be a good idea to jot down my thoughts about RBS and its fall before I did so.

I don’t believe I have any special insight into RBS, and I don’t think I will have anything to say that isn’t already in the public domain. My job was far too lowly for that. My redundancy settlement, eight years ago, also had a clause about not bringing the bank into disrepute, but I think RBS has done a pretty good job of that without any assistance from me since I left.

DSCN5129
RBS flagship branch in St Andrew Sq, Edinburgh.

I joined RBS over twenty years ago as an analyst within a large change programme called Project Columbus, which, after a couple of bad years for the bank, was established to rethink the way the bank worked. It was Columbus which put RBS back on track and gave it the muscle and discipline to acquire NatWest in 2000, after a bidding war with local rival Bank of Scotland. (How many firms contain the name of their main rival within their own? People always confused RBS and BoS.)

Columbus refocused RBS on its customers. It brought in much better costing of its products and services – before, the bank hadn’t been able to tell how much it made or lost on each customer; it split (“segmented”) its customers into specific types, depending on the type of business (individuals – retail – and three different types of enterprises); and it established different types of specialist customer managers to meet the needs of those different types of customers, and in doing so it removed the generalist bank managers from branches.

Goodwin joined RBS in 1998, after Columbus was completed, as deputy CEO to George Mathewson. Goodwin masterminded the NatWest takeover.

By chance, I was one of the first RBS staff into NatWest. I had been at meetings in London the day before RBS took control, and, looking for people who could act as a presence, I was told to stay down in London. Three Jaguars drove a small raiding party from our midmarket hotel – there had always been a focus on cost management at RBS – to NatWest’s headquarters in Lothbury, in the shadow of both the Stock Exchange and the Bank of England. Fred Goodwin, the chief executive; Graeme Whitehead, the FD; Neil Roden, the HR director; Tony Williams, head of HR operations and systems (or something like that). And me.

(Actually, there were one or two other guys, too – I think we were six in total. All men.)

It was a symbolic occasion. Whitehead was wearing a kilt. There was little for me to do; I was secreted away in a small room, twiddling my thumbs, whilst the board directors established what there rules were.

At lunch, though, we all sat in the staff canteen, in a prominent spot; making a point. Jocks in kilts. This was a change. This bank was under new management.

* * *

Up until the NatWest takeover, RBS has been a medium sized regional bank. After it, it was (or saw itself) as a global. Before, it owned Direct Line, an insurance company, Citizens, a similar sized regional bank in north east USA, and a few other businesses. (The one that I always remember was Angel Trains, a train finance house that was spun off a few years later.) NatWest gave RBS global clout.

I believe the NatWest takeover was successful, though it probably lay the seeds for many of the problems that beset the bank later on.

RBS was a lean operation, with costs tightly controlled, and the same ethos. Fred Goodwin had earned the nickname “Fred the Shed” whilst at Clydesdale fire the way he shed costs – largely people (or alternatively, “Fred the Shred” – “shredded”). There was little fat at RBS, and there was much fat to be shed from NatWest. There were extensive wine cellars, an art collection, and lots of business units. And lots of efficiency savings to be made. RBS had a low cost/income ratio, one of the key measures city analysts and investors use to measure bank performance, and shifting NatWest’s operations to a similar C:I ratio would generate lots of profits.

The purchase of NatWest was based on cost cutting and removing duplicated services – essentially, economies of scale. NatWest, for instance, had something like twenty seven different versions of PeopleSoft (the database system used by HR departments) – which didn’t talk to each other. It was similar across other systems – there were multiple tax and accounting systems, all of which needed reconciling. Trimming the fat wasn’t difficult. (Bear in mind that there were many redundancies, too – a lot of people lost their jobs, from both NatWest and RBS.)

But relatively quickly RBS started to become as bloated as NatWest. When I joined RBS, the emphasis has been on servicing the customer-facing parts of the operation: I worked in a head office department which had cobbled together, second hand furniture in a building above a bus station; if you opened a window, you got a whiff of diesel fumes. True, this was somewhat the exception, but it made the point that we were an overhead, and what we were doing was working to make the customer-facing, revenue-generating parts of the organisation more successful.

RBS had central departments scattered throughout Edinburgh, many of them in somewhat dilapidated buildings, and it had been planned to redevelop a city centre site to house them all. After the NatWest takeover, Fred Goodwin apparently decided that something else was needed. Something out by the airport.

When Gogarburn was opened in 2005 – by the Queen – it seemed very opulent. There is an old investing adage – maybe from Jim Slater – that when a business starts investing in sparkly new headquarters, it is time to short the company. It would have been a very effective sell signal for RBS.

Gogarburn was very self contained. It had very good restaurants, a health club (with a full length swimming pool), a social club and bar, several shops, and a couple of Starbucks franchises. It had a nursery and a management school, delivering courses for the large numbers of executives it now had. It had a separate directors’ wing. There was no reason to leave.

Whereas RBS had been part of the city, after Gogarburn opened it was apart from the city. Gogarburn was isolated, and RBS became very insular. Being in Gogarburn felt like being part of the “Truman Show”. Everyone there worked for RBS. There were no more serendipitous meetings with contacts from other firms. You only saw people from outside RBS at Gogarburn if they were there for a specific meeting. Whilst communications within RBS undoubtedly improved, a broader understanding of and communication with those outside plummeted.

It was as if RBS saw itself above all that.

(I don’t think I lasted a year at Gogarburn, taking the opportunity to leave when I was offered a redundancy package during yet another internal reorganisation, in 2006.)

* * *

There were stories that Goodwin was intricately involved in the design of Gogarburn. Many may have been apocryphal – such as one saying he had personally been responsible for sending a shipment of marble back because it was the wrong shade, or that he personally spoke to the CEO of Vodafone to get a mast put on the roof to ensure adequate mobile coverage (under threat of removing the RBS contract). Either way, it was apparent that he was involved in details of RBS, rather than delegating and letting others get on with it.

He apparently held early morning meetings – “prayers” – add which he would grill his direct reportees. Failure was not an option. Some described his approach as bullying. It certainly don’t seem to have been particularly collegiate or collaborative. I don’t imagine he was easy to work for. The watchword was JFDI – “just ffffing do it!”

This permeated the firm, I would say. People were not happy making mistakes or getting things wrong. Success at any price. Thinking too much – or at all – was seen as a weakness. Decisions were made quickly and, once made, that was that.

Success at any cost is what probably broke the firm. When Barclays bid for ABN Amro (a year or two after I had gratefully left RBS), it was seen as a risk to RBS’s dominance – it’s claim to be the biggest bank in Britain – and, as a part of consortium of other firms (Santander, which had a long standing relationship with RBS, and a Belgian insurance firm), a counter bid was made. ABN Amro would be broken up and each member of the consortium would get the bits they wanted. RBS wanted the US retail business, which fitted well with Citizens, and some of the investment banking bits.

I’m sure the figures stacked up, at first: the deal would have made sense. But then as part of its defence ABN sold its US retail arm. And more importantly, the downturn started, and kept going. Barclays had dropped out. RBS continued. And ended up paying a lot of money for lots of toxic assets. And effectively going bust, and relying on a UK government bail out.

Between 1994 and 2007, RBS made accounting profits of £55bn before tax, and £39bn after tax. In 2008, it wrote off about £47bn according to Robert Peston on BBC Radio4’s “Today Programme”. In the seven financial years 2008 to 2014, RBS has has reported total losses attributed to shareholders of, by my calculation, £49bn. Basically, RBS hasn’t made any money since 1994, despite paying billions to the government in tax and to shareholders as dividends.

* * *

Personally, whilst I believe Fred Goodwin was the driving force both of the bank and the sour deal, I don’t believe all blame for the collapse of RBS lies with him. A lot does – it was his strategy – and his hubris which pushed forward with the ABN takeover.

Wanted Poster at Holburn Station (London, UK)
From takomabibelot on flickr, used under Creative Commons licence.

But many other people need to share some – or even much – of the responsibility:

  • other executive directors – the management team – should have been up to challenging Goodwin’s behaviour, including the more bullying, trampling aspects of it. I don’t know if any doubts were expressed by other members of the management team, but they probably should have been. Except that they would probably see their jobs and salaries get bigger as a result of the takeover. Could they be objective, even if they could stand up to Goodwin? Groupthink might also have played a role: it might have been hard to break rank. No one loves a naysayer
  • the board – particularly the non-executive board members. It should have been their role to make Goodwin and the management team accountable. Perhaps they did, though they all left under a cloud following the collapse of RBS
  • other employees. It is hard to tell the boss he’s wrong. It’s harder when the response is “jfdi!” But someone must have had doubts – all those people poring over the figures in finance; all those providing management training in the brand new management school
  • shareholders. Under market capitalism as practiced in the UK, shareholders are more likely to sell a firms shares than try to engage with management about corporate strategy that isn’t liked
  • regulators. They could easily have put an end to the folly. Following the crash and the collapse of RBS, the role if regulators had been greatly changed. (Until the next crash …)

I must point out that I fall into two of those categories – though as a fairly insignificant employee and a very small investor, I believe I had little influence (but lost a lot of money!).

I believe the real issue – the blame – lies with the board, both execs and non execs. They had oversight of the strategy and the deal. When the crash came, they should have pulled the plug. RBS would have looked weak – it might even have become a takeover target itself – but it would have survived the deal. Instead, they pushed on, buying illusory assets which quickly turned to dust, taking much of the UK economy with it.

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