Review: The puzzle of Fred Goodwin’s rise and fall

September 27, 2013

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Early in 2009, the British government was preparing to bail out Royal Bank of Scotland for the second time in four months. An emergency injection of capital in October 2008 had failed to shore up confidence. Now taxpayers were being asked to cover potential losses on almost 300 billion pounds of toxic RBS assets. Yet as the details of the rescue were finalised, British public opinion was in uproar over a much, much smaller sum: the 700,000 pound a year pension being paid to Fred Goodwin, the bank’s former chief executive.

For many Britons, Goodwin personifies the financial crisis. To them, he is the ruthless cost-cutter whose greedy ambition pushed the country to the edge of the financial abyss, and then slunk into retirement refusing to admit he had done anything wrong. While Goodwin has not been charged with any crime, Britain has been unforgiving. His financial arrangements and private life have been subjected to extensive scrutiny. In Scotland, where he was once something of a hero, he is now a pariah. He has even been stripped of his knighthood – a punishment the British establishment normally reserves for traitors or murderous dictators.

Iain Martin’s “Making It Happen” is a fast-paced and entertaining account of Goodwin’s rise and fall. It also explores a mystery. As Martin puts it, Goodwin “did not rise each morning looking for ways in which to ruin the bank he ran and destroy his own reputation, while inflicting epoch-defining damage on the UK economy. So what on earth did he think he was doing?”

Martin is not an obvious person to answer the question. An experienced political journalist, he admits to having only a limited grasp of banking before embarking on the book. His encounters with Goodwin are limited to a few social encounters in Edinburgh – and the book’s central character did not tell his side of the story. Yet the lack of prior knowledge allows Martin to approach the subject with fresh perspective. He ably decodes financial jargon while sympathising with the public’s head-shaking incredulity at the size and fragility of the financial system. His Scottish background allows him to explain RBS’s social context and Goodwin’s truly remarkable ascent. Raised in a Glasgow suburb and trained as an accountant, Goodwin moved to Clydesdale Bank where his efficiency drives earned him the “Fred the Shred” nickname. Within a few years, he was in charge of RBS.

Martin portrays Goodwin as obsessive, instilling fear in his underlings while fixating on details such as the colour of the bank’s executive cars – they had to be RBS blue. He was equally relentless in his pursuit of sports sponsorship: former racing driver Jackie Stewart was paid 1 million pounds a year as a consultant. And who else but the Queen would be good enough to open the bank’s new headquarters building on the outskirts of Edinburgh?

Yet for a supposed micro-manager, Goodwin had a surprising lack of interest in the investment banking business that accounted for a large chunk of RBS’s growth during the boom. And he showed little understanding of the basic tenets of sound banking, such as conserving capital and keeping liquidity reserves.

“Learn something about banking, Fred,” a subordinate snapped in October 2008. But this only serves to underscore the reader’s bewilderment. How did an executive with such a sketchy grasp of the business end up in charge of an institution which, at its peak, had assets worth almost 2 trillion pounds? How was he allowed to charge ahead with RBS’s fatal break-up bid for ABN Amro, the Dutch lender, even as the global financial system was creaking?

Martin’s explanation is that Goodwin’s rise matched that of Britain’s financial sector, spurred on by the widespread belief among policymakers in rational, self-correcting markets and the Labour government’s desire for the tax receipts the industry brought in. The two factors combined to ensure a soft-touch regulatory regime for banks. After the crash, Goodwin became a convenient scapegoat who helped to divert attention from the shortcomings of others.

For Martin, the RBS saga evokes eerie reminders of a much earlier financial mania. In the late 17th century, Scotland poured a vast proportion of its wealth into an audacious scheme to move goods from the Caribbean to the Pacific Ocean by transporting them across Panama. The failure of the Company of Scotland, as it was known, contributed to the nation’s subsequent union with England. The fund that was used to compensate investors formed the foundations of RBS.

The modern-day mania described in “Making it Happen” serves as a cautionary tale. The true motivations of the man at the centre of the story, however, remain elusive.
(Full disclosure: Martin consulted Peter Thal Larsen, among many others, as he was researching the book.)

 

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