RBS Post-Mortem Spares 'Fred The Shred'

Published in Investing on 9 December 2011

Despite a £45 billion bailout of the bank, regulators will not punish ex-boss Sir Fred Goodwin.

On Monday, City regulator the Financial Services Authority (FSA) will at last release its long-awaiting report into the near-collapse in 2008 of Royal Bank of Scotland (LSE: RBS).

RBS = Reckless Bank Saved

The collapse of US investment bank Lehman Brothers in mid-September 2008 sent a financial shockwave rippling around the world. As a result, banks -- fearful of the next big bankruptcy -- simply stopped lending to each other.

With the worldwide inter-bank lending market frozen and savers rushing to withdraw their cash from banks, the entire UK banking system came under the most severe stress. In stepped Gordon Brown, pumping billions of pounds of taxpayers' cash into the banking system.

In total, the liquidity and solvency support provided by the government and the Bank of England came to an astonishing £1.5 trillion, including a £45 billion equity injection into RBS.

A Scottish time-bomb

At its peak, the RBS balance sheet was valued at around £2.5 trillion, making it the biggest bank in the world by assets. Clearly, this was a crazy concentration of risk. How did regulators allow a single Scottish bank to have liabilities two-thirds higher than the entire UK GDP (Gross Domestic Product, or total national output) of £1.5 trillion?

What's more, duped by bogus credit ratings, RBS had bought a mountain of AAA-rated assets which turned out to be nothing more than iffy US sub-prime mortgages which were defaulting at record rates. As a result of massive write-downs on toxic assets, the bank recorded the UK's largest-ever corporate loss: £24 billion in 2008.

Having repeatedly warned of reckless lending since the early Noughties, I was furious that taxpayers were forced to bail out banks engaging in such risky behaviour. So, where should we point the finger inside RBS?

Who's to blame?

Given that RBS abandoned all the rules of banking, and created a mountain of debt supported by a sliver of equity, who is to blame for this mad race for growth? Surely 20 takeovers in a single decade -- including the disastrous £49 billion acquisition of Dutch bank ABN Amro in October 2008 as the credit crunch raged -- was insanely risky?

According to the FSA's report into the rescue of RBS, due out on Monday, no single individual or group of managers at RBS is to blame. In other words, both ex-chief executive Sir Fred 'the Shred' Goodwin and ex-chairman Sir Tom McKillop have escaped blame.

What's more, after three years in the making, the FSA's report -- expected to run to between 450 and 500 pages -- will exonerate all RBS board directors and senior executives. Allegedly, the only individual to come in for direct criticism is Johnny Cameron, ex-head of investment banking.

In other words, the FSA found no evidence of fraud or dishonesty, only a string of bad decisions which culminated in the bank needing the biggest bailout in British history.

What the FSA has to say about the conduct of auditors, rating agencies and regulators (including itself) remains to be seen. Nevertheless, there was undoubtedly a massive failure to control the reckless expansion of our biggest banks in the Noughties.

Future sanctions required

Sadly, as many investors have found, incompetent and/or negligent directors are impossible to pursue through the courts. No matter how bone-headed or hare-brained their behaviour and decisions, they can escape disciplinary action if they claim to have acted 'in good faith'.

Clearly, tighter rules are required to prevent similar meltdowns in future. Indeed, it's likely that the FSA will call for new sanctions against directors of failed banks. In future, those found guilty of reckless or unprofessional behaviour could be banned from working at other financial institutions.

Also, the FSA wants new powers to veto takeovers that leave banks short of capital -- their precious lifeblood. After its successful takeover of ABN Amro, RBS had next to no capital, leaving it with no cash cushion as markets dived steeply. Hence, the FSA is sure to call for a greater focus on risk management by banks, rather than a slavish push for shareholder value.

In summary, RBS failed not because of fraud or deceit, but because of its aggressive management style, poor corporate governance and reckless, risk-taking culture. That will be no consolation to the 30 million of us that rescued it!

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Victor1Meldrew 09 Dec 2011 , 12:31pm

I don't believe it - if Fred the Shred was not to blame who was? God?
I'd say the FSA are a waste of money. It does not get worse than
what happened at RBS (or does it? but anyway the FSA are useless
and toothless)

BarrenFluffit 09 Dec 2011 , 1:58pm


piecan 09 Dec 2011 , 2:04pm

Another whitewash. Are there any rules left in this rotten world. What are
Company Directors for? Rain or shine all they do is collect sick bonuses.
They don't seem to carry any responsibility for anything. Until they start treating them like the rest of us, and make them pay for their actions nothing will change.

vinchainsaw 09 Dec 2011 , 2:29pm

Who chairs this secret society and where can I get an application form?

FoxAlphaMike 09 Dec 2011 , 3:41pm

The buck stops with all on the Board of RBS. It is they, and only they, who give direction to a bank's operations and its employees hired to carry them out.

LastChip 09 Dec 2011 , 3:51pm

"Clearly, tighter rules are required to prevent similar meltdowns in future. Indeed, it's likely that the FSA will call for new sanctions against directors of failed banks. In future, those found guilty of reckless or unprofessional behaviour could be banned from working at other financial institutions."

Would anyone like to define reckless or unprofessional? Let alone prove it in a court.

Unbelievable? Whitewash? Absolutely!

It does of course add more fuel to the fire, that if directors are not responsible, clearly they are overpaid.

I too would like a pay packet of £1m+ per year for not being responsible. I'll be happy to accept any directorships that come my way. Please form an orderly queue - thank you!

14362341 10 Dec 2011 , 12:45pm

If you get paid ...then you get the blame, ask any football ..manager (fantasy football excluded). What kind of job is it that is sacred to the extent that a person or people cannot be blamed wen things go wrong. Anywhere never mind, we all know who screwed up at RBS,so lazy to do a simple due deligence on ABN Amro,that's like getting married to a blind date on your first day out.

P.S. Am interested in any available boardroom jobs.

eccyman 10 Dec 2011 , 8:05pm

Look at the RBS takeover of ABN Amro. Barclays looked at it and said "No thanks". Fred Shreds cost cutting extends to saving on doing due diligence as Barclays had already done one - so he buys ABN!!!

Didn't thought cross his mind as to why Barclays said no?

Unbelievable how such an idiot can end up on the board of a major bank.

RobinnBanks 11 Dec 2011 , 2:55am

The FSA and Brown's Clowns let them do it, and they care SFA for us! Taxpayers have not felt the pain of investors in any of these incompetent cockups! When are we likely to get our money back, or even dividends, from Lloyds, HBOS, RBS and all other disasters, carried out, and ongoing, by grossly overpaid, greedy (rhyming slang) bankers?
I don't know how Fred has the nerve to draw £millions in his pension, or even why it was not confiscated, leaving him to manage on the OAP like millions of others! No more huge payments for failure!

phenominallady 11 Dec 2011 , 1:11pm

All the reasons this article gives for RBS's failure, 'its aggressive management style, poor corporate governance and reckless, risk-taking culture' all relates to the people. So how can the leadership/management not be held accountable?

TrafficCop 12 Dec 2011 , 1:34pm

Not a total whiteeash, but.....You might be interested in the ShareSoc analysis of the FSA report on the failure of RBS - see www.sharesoc.org/press_releases.html

Roger Lawson

magimix 12 Dec 2011 , 6:29pm

I know what the FSA are good at disciplining the little man for leaving a dot off this or not underlining that.
Ive just finished working at the bottom end of a bank (thank god) and these morons can fine people and destroy bonuses for the little man if ridiculous checks are not carried out and doors are not shut in the branches properly!!??

Just like a school bully when their faced with the big boys theyre totally toothless.

piecan 13 Dec 2011 , 2:42pm

Sad to say, but I think true, that most people in the top echelons are in the same boat, looking after each other. They won't drop one of the other "members" in it, because they might need their support if ever they are on
the rack.

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