In-depth analysis on Credit Writedowns Pro.

The Last King of Scotland

In Scotland, one of the UK’s most venerated names, the Royal Bank of Scotland, a bank that prints its own bank notes as legal tender, has been eviscerated by the over-leveraging and risk-taking of its CEO Sir Fred Goodwin.

Sir Fred, an accountant by training, started his career at Touche Ross, a precursor to the accountants Deloitte and Touche, rising to the level of partner. Somehow, he soon found himself in banking as COO at the notorious BCCI (Bank of Credit and Commerce International aka the Bank of Crooks and Criminals International), when Deloitte was hired to liquidate the corrupt financial institution after that infamous decade of financial buccaneering and scandal in the City of London1.

Thereupon, Sir Fred had the good fortune to be whisked away to head up Clydesdale Bank (now a subsidiary of National Australia Bank) in 1995. Clydesdale was one of the three large Scottish banks along with RBS and Bank of Scotland (now part of beleaguered HBOS). This was a very plum job for a native Scot. Sir Fred earned the nickname "Fred the Shred" in the City of London for his ruthless cost-cutting (making him the British equivalent of John Mack "the Knife," CEO of Morgan Stanley).

However, Sir Fred moved on to bigger and better things in 1998 as deputy CEO of RBS, a company with roots back to 1727, later becoming CEO when George Mathewson retired.

That’s when things started to happen for Fred Goodwin. The British banking scene was consolidating in the 1990s and early this decade. Lloyds Bank merged with TSB in 1995 to form Lloyds TSB. Midland Bank (where I banked in the 1990s) was acquired by HSBC in 1992 and rebranded HSBC in 1999. This set the stage for the biggest merger to date in 2000 — the acquisition of National Westminster Bank, one of England’s big four, by the smaller RBS in a bloody takeover battle with the Bank of Scotland. (Subsequently, Bank of Scotland would form an ill-fated merger with the demutualised Building Society, the Halifax, that has ended in this company teetering on the verge of bankruptcy).

But, Sir Fred, having snatched NatWest away from his cross-town rival, went on a binge of grotesque proportions. Wikipedia says this more flatteringly:

Following the NatWest takeover, RBS made a string of further acquisitions around the world, including the purchase of Irish mortgage provider First Active and UK car insurer Churchill. It also bulked up its US Citizens Financial, Inc arm with a string of further deals. Then in May 2004, RBS said it would purchase Charter One Financial Inc. of Cleveland, Ohio for $10.5 billion. The deal, criticised by analysts for being at too high a price, spread the RBS’s banking web across the Midwest for the first time, and made its U.S. banking operations No. 7 in the United States.

Since Goodwin took over as chief executive, RBS’s assets have quadrupled, its cost-to-income ratio has improved markedly, and profits have soared. In 2006 pre-tax profits climbed 16% to £9.2 billion with most of the growth coming from its investment banking business. RBS now numbers among the top ten banks in the world.

Banking experts have claimed that Goodwin’s success in acquisitions, notably that of NatWest, lies in his disciplined approach. Before deciding to do a deal, he does an unusual amount of due diligence. In the Charter One deal, RBS claims to have spent 500 man-days (the equivalent of 100 people working for five days) examining the bank’s books. Charter boosted the amount of pre-tax profit RBS gets from the U.S. and put RBS in a position to expand further.

However, following investor unrest in the build-up to RBS’s acquisition of a minority stake in Bank of China in 2005 Goodwin was criticised by some RBS shareholders for putting global expansion ahead of short-term financial returns. This caused its share price to plateau at around £18 per share. Goodwin was accused of megalomania by some shareholders, as reported by Dresdner Kleinwort analyst James Eden (who said he thought the label was ‘unwarranted’). After the Bank of China deal, he was forced to promise RBS shareholders he would not indulge in any further big acquisitions and focus instead on growing the group organically.

However, as things started to unravel in global finance this year, RBS came to be seen as one of the weaker players and came under heavy selling pressure. It was over-leveraged and under-capitalised after a 8-year binge. Ultimately, with Lloyds TSB having agreed to takeover HBOS at the behest of the FSA and Gordon Brown and Bradford & Bingley having been nationalised, RBS was the last large British bank in big trouble. As the markets went into freefall, RBS became more and more stricken. They are an enormous company — much too big to fail. In the end, it was too much for Labour to bear and Gordon Brown and Alistair Darling stepped in last week with their sweeping recapitalisation and rescue plan — one that has since been copied by much of Europe and may be copied by the Americans.

Royal Bank of Scotland has now been effectively nationalised. With that comes new management. So, of course, despite his 10 years of service at RBS, Fred the Shred was unceremoniously forced out as the government pumped massive amounts of money into RBS.

After a glorious 18 year career in British banking, Sir Fred can now go home and count his millions.

All hail the last king of Scotland.

Related posts

Recapitalising Britain

Lehman fallout: HBOS and RBS are getting slaughtered

RBS, Fortis Ratings Cut by Moody’s

RBS couldn’t raise the money

RBS takes an enormous hit

Sources

RBS to pay price of intervention by cutting jobs – Times Online

RBS hands keys to U.K. government – National Post

RBS Cedes to U.K., Seeks $34 Billion as CEO Quits – Bloomberg

1Scandals in the go-go decade of British finance leading up to a severe recession in the UK in the early 1990s included the 1982 murder/suicide of Banco Ambrosiano’s Roberto Calvi, "God’s banker," found hanging from Blackfriar’s Bridge in London, the notorious 1986 Guinness Affair, the 1991 liquidation of BCCI, banker to international terrorist Abu Nidal amongst others, and the embezzlement and 1991 suicide of Robert Maxwell.

In the movie, "The Last King of Scotland," adapted from the book of the same name by Giles Foden, Forest Whitaker plays the role of the maniacal Idi Amin during his rise to power and fall from grace in 1970s Uganda. The movie is largely seen through the eyes of a fictional young Scottish doctor Nicholas Garrigan who serves as Amin’s personal family doctor. Amin was a larger than life figure and truly ruthless person (who my father used to curse in 30-minute tirades at the dinner table back in the 70s) who sucked the life out of his country leaving it bankrupt. It is a must-see film — Whitaker won an Oscar for best actor for playing the over-the-top paranoid dictator Amin, the Last King of Scotland.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.