Last month I met up with author Ian Fraser to discuss his must-read new book Shredded – Inside RBS, the Bank that Broke Britain.
Shredded, which documents the rise and fall of RBS, is a gripping story that every British taxpayer should read.
Fraser considers the book a lens, through which the murky dealings of the global ‘too big to fail banking system’, and the political class which enabled it, comes into sharp focus.
A few days prior to our meeting, Tom Harper wrote for the Independent that based on a review of Shredded, RBS is likely to fail within 10 years due to a £100 billion black hole in its balance sheet. The UK taxpayer to lose its entire £45bn stake in the bank.
The damages already caused by RBS’s collapse have in human terms been immense. Unemployment is still at nearly 7 per cent of the workforce or 2.24 million, and real wages have fallen more sharply than any other OECD 34 nation. We are informed that austerity (shrinking the state to pay for the bankers crisis) is here to stay.
In writing Shredded, Fraser interviewed more than 120 past and present employees of RBS. Many of the banks staff displaying extreme levels of paranoia, speaking strictly off-record, on condition of anonymity.
Ian talks openly of the mafia-like cone of silence that pervades RBS, shielding it from outside scrutiny:
“When I was writing about RBS for the Sunday Herald and Sunday Times from 1999 to 2008, I always felt that something was not quite right about the place”, he explained. The bank “trumpeted its environmental credentials yet funded environmentally disastrous activities. It presented Private Finance Initiative (PFI) projects as socially responsible, even though most were a rip-off for taxpayers. It employed 70 in-house media relations staff, yet rarely told journalists anything”.
The story of RBS is a cautionary tale of greed and hubris. A tale few establishment figures emerge from unscathed, including Gordon Brown, Ed Balls, George Osborne, or those at the helm of the ‘light touch’ Financial Services Authority.
Shredded details that Fred Goodwin, the RBS CEO was a frequent visitor to Ed Balls Westminster Office and was “eager to make sure any adverse legislation or regulation was seen off.” Even though the FSA had lowered its guard, Blair and Balls considered it “too interventionist.”
Under Fred (‘The Shred’) Goodwin, a reign of terror ensued at RBS – characterised by “rank and yank” staff performance management programs, where under-performers were publicly derided as “muppets” or “bottom feeders.”
Many ex-insiders note the RBS performance system was used as an instrument of oppression, causing staff “untold anxiety.” The results were dangerous groupthink, and the prioritisation of sales above all else.
As the banks current chairman Sir Philip Hampton would later remark to the CBI in November 2013: “We were lending to anyone with a pulse … we were lending to people other banks were rejecting”
In corporate banking, the performance management system drove managers to fleece their own customers. Loans were conditional on taking out interest rate swaps, “even though we didn’t understand those products” as one of Fraser’s anonymous interviewees disclosed.
In the retail arm of RBS, a sales culture lifted from the world of fast moving consumer goods (FMCG) marketing began to infiltrate the bank, perhaps most evident in the industrial scale mis-selling of payment protection insurance (PPI) from 2001 onwards.
None of the bank managers who oversaw failure, or designed or signed off on the perverse incentives schemes that drove mis-selling are in jail. Few (bar Johnny Cameron) suffered material or reputational damage for their actions:According to Fraser: “Unlike other counties like Nigeria or Iceland, the UK doesn’t have much of an appetite for prosecuting mainstream bankers. So what we have instead is diversionary tactics, faux outrage and political bluster.”
By April of 2007, RBS-NatWest market value had reached £64 billion, more than all other listed companies in Scotland put together.
In 2008 however, following the Northern Rock collapse, the perilous state of the RBS balance sheet began to emerge as the disastrous ABN-Amro takeover deal unwound.
Increasingly concerned, the FSA called RBS directors, forcing management action to boost liquidity via a £12.3 bn “rights issue” which the FSA demanded be signed off by the banks board the following morning (30 April).
Through internal communications, RBS staff were encouraged to re-mortgage their homes to buy into the scheme, with some committing their entire life savings to the doomed bank.
By October 2008, shares in RBS had fallen from 240p to 146p as the financial crisis intensified and speculation about UK government bailouts mounted.
As Goodwin finished a speech at the Landmark hotel in Marylebone amidst news that Iceland had agreed a bailout, a member of the audience asked Goodwin if he knew RBS shares had collapsed 35 per cent during the time he had been talking?!
At the time, an RBS executive was heard to say: “It surprises me that Robert Peston hasn’t been charged for some form of insider dealing or criminal conspiracy, he was the guy who brought RBS down.” Meanwhile, RBS was itself busy fiddling the LIBOR interest rate.
Overall, big companies pulled £35 bn out of RBS following the Lehman collapse, more than 10 times what depositors withdrew from failed Northern Rock.
By market close on 7 October, RBS shares had collapsed to just 90p, tumbling a further 39 per cent.
Chairman Tom McKillop told Chancellor Alastair Darling he “wanted to know what government was going to do” leaving Darling to fear a “financial Hiroshima.”
Darling authorised Mervyn King at the Bank of England to “put as much money into RBS as was required to keep it afloat that day” – later writing “we would stand behind RBS if it took every last penny we had.”
In retrospect, Darling and Brown’s “half-baked” bailout of RBS, which did not place any conditions upon RBS and its management (ie. on bonuses) is a failure of the highest order.
The 2008 financial crisis did not mark the end of RBS’s problems. The PPI scandal, LIBOR and Forex rigging, swaps mis-selling and the Global Restructuring Group (GRG) fiasco – involving RBS destroying viable SME businesses for profit – all continued long after RBS was rescued and 82 per cent owned by the taxpayer.
Conduct and culture at RBS declined since 2008, with CEO Hester under immense pressure from George Osborne to restore the bank to profitability at any cost, during a period of ongoing banking “enquiries” which RBS staff equated with “maximum laissez-faire.”
Pressure to re-privatise RBS from the political class contributed to the GRG and mis-selling scandals.
Shadow Business Secretary Chuka Umunna comes in for criticism for his one-eyed defence of RBS during the GRG scandal with attacks on Biz advisor Lawrence Tomlinson. Fraser argues that accounting firm PwC who fund Umunna’s parliamentary office is “up to its neck in the whole RBS/NatWest global restructuring group scandal.”
Upon taking the helm of RBS in October 2013, Fraser set out the ticking time bombs amounting to £1 trillion in potential liabilities NZ born CEO Ross McEwan must defuse.
The continued future of RBS remains far from certain. Yet if there is one constant theme from Shredded, it is that bank reform is too important to be left in the hands of bankers and politicians. As the 2015 election approaches, with Labour seeking to boost its financial credentials, it’s time to think long and hard about the sort of financial system we want. A system that serves people and planet and not just itself.