Appendix 7 - Inside the Bank that ran out of money

In 2001, Frederick Goodwin became CEO of the then relatively small regional bank, Royal Bank of Scotland. His tenure at the top of the bank can only be described as eventful as RBS grew from a small Scottish bank to become the largest bank in the world in terms of assets before it all came crashing down in 2008.

Having initially expressed an interest in taking over Barclays (before being told where to go), RBS took over NatWest in 2000, which was the biggest hostile takeover in history at the time. 3 years later RBS had become the 5^th largest bank in the world as a result of investing NatWest’s savings and deposits in various areas such as an insurance company and a 2^nd hand car franchise. Despite the focus on growth, Fred proved particularly effective for shareholders as the bank delivered strong profits.

However, by 2005, RBS had acquired 25 businesses and spent nearly £30 billion and shareholders demanded an end to this. There was a perception among some that Fred was a maniac who went after size as opposed to shareholder wealth. Looking at this it seems as though Fred was motivated by dominating the industry through growth. He was more interested in controlling a bank that were the largest in the world, rather than focusing on internal controls and high shareholder returns.

Goodwin had been given the nickname of ‘Fred the Shed’ as a result of his tough approach to work and his reputation for making hard decisions. The fact that employees at Clydesdale Bank had allegedly celebrated Fred’s departure to join RBS for three days was possibly a sign of things to come. Put yourself in RBS’s employee’s shoes who had heard this, would you be excited to work for Fred?

During his time in charge of the bank, Sir Fred as he was known (before he had his knighthood removed in 2012), created an atmosphere where even senior board members were reluctant to express their views, so much so that the morning meetings had become known as ‘morning beatings’ as Fred grilled executives. Having a culture such as this has the potential to be extremely damaging as employees may not express their concerns over something in fear of being criticised. I have a feeling this may have been the case in RBS as people did not do anything about the way the bank was being run before it was too late and a bailout was required.

The takeover of Dutch bank, ABN Amro in 2007 was the final nail in RBS’s coffin. Fred decided that they should go ahead with this deal without conducting the necessary due diligence, a decision which would come back to haunt him. It seemed as though Fred himself wasn’t sure what ABN Amro were involved in, in one interview he denied that they were involved in sub-prime lending, again a sign of RBS’s failure to properly look into ABN Amro’s operations. Consequently billions were written off the value of RBS’s investments with analysts convinced they would have to ask shareholders for more cash, which Fred denied. Several weeks later, he did just that by asking for £12 billion to stay afloat. This clearly showed how Fred didn’t understand and realise the enormity of the situation. This may have been as a result of the culture he had installed as employees were reluctant to express their concerns.

The outcome of all this was that RBS came within 2 hours of running out of money, and were forced to accept a £20 billion bailout from the British Government. Could this have been avoided? Personally I feel the collapse of RBS could have been avoided if Fred had focused on shareholder wealth and not purely expansion. Although the risks taken by RBS had helped them to become a huge global player in the financial market, in the end it came back to bite them extremely hard.