Tuesday, October 22, 2013

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy by Iain Martin

Making It Happen is the story of the crash of RBS (née Royal Bank of Scotland), momentarily Britain’s largest bank. Iain Martin tells a peculiarly Scottish story in Making It Happen (Martin himself is a Scot): the expansion of RBS was driven by a blend of Scottish pride and insecurity. He takes us through the life history of the Royal Bank (though RBS, as of this writing, is not yet dead). The bank is founded in 1727 in the aftermath of an earlier Scottish financial misadventure, the Darien enterprise: a failed outpost located in present-day Panama. Chastened by this experience, the early masters of the Royal Bank of Scotland exercised prudence of a Presbyterian kind (caution and care) in growing the bank, yet remained open to innovation (such as the use of the joint-stock company) that the English ignored. RBS quietly prospered in Edinburgh, and then the financial world shifted. In short: the Scottish economy was too small to support independent Scottish banks, and so, for RBS to survive, it would need to vault itself to a much larger scale (first UK-wide and then global). Two absolutes are then fixed for RBS: the bank must remain independent and it must be directed from Edinburgh. And this is where the Fred Goodwin story starts.

Fred Goodwin is (if nothing else) devoted to Scotland and hence to building RBS as a Scottish national champion. Goodwin did this is a fairly straightforward way -- he bought other banks (including quite large banks) and proceeded to meld them into the RBS structure. Gains to RBS shareholders -- prototypical raider profits -- resulted from the ensuing ‘rationalizations.’ Goodwin’s fame at slashing employment earned him the nickname ‘Fred the Shred.’ Those who were lucky to remain employed remained exposed to Goodwin’s brutal management style -- such as the daily “morning beatings.”

Fred Goodwin is not a nice guy; virtually everyone who figures in the book agrees to this estimation. He is a control freak, one who would cruelly berate a manager for the smallest overlooked detail. And Goodwin knew very little about banking -- again on this most all agree. Operating a bank was the least of Goodwin’s concerns; his focus was on growth, shattering earnings targets and -- like Mel Gibson’s Braveheart -- winning glory for Scotland. He banished the core banking functions of RBS to the ‘manufacturing’ unit and then dismissed them from his attention.

The United States proved to be the grounds for Goodwin’s (and RBS’s) undoing. RBS operated (and continues to operate) a regional bank headquartered in Rhode Island called Citizens -- but its deepest troubles arose within Greenwich Capital, a mortgage and government-bond unit, which RBS picked up in its 2000 acquisition of NatWest. The managers of Greenwich Capital (based in hedge-fund crazy Greenwich, Connecticut) got caught up in the mortgage securitization boom, and Goodwin and RBS went along for the ride. The securitization business threw off staggering profits (for a while) -- and this in turn permitted RBS to tackle grander takeovers, including the fatal ABN-Amro deal. Goodwin orchestrated a joint purchase of ABN-Amro (together with Fortis and Santander); and RBS kept ABN-Amro’s securitization line, which turned out to be just as rotten as Greenwich Capital’s business. Once mortgage-backed securities began to fail, the implosion of RBS was inevitable.

Of course it wasn’t all Goodwin’s fault -- other ambitious bankers were crushed by the collapse of mortgage-backed securities. One wonders if Martin’s focus on Goodwin in Making It Happen is more due to the perverse appeal of Goodwin’s absolutely disagreeable personality. I’ve noted before (see my review of Walter Isaacson’s Steve Jobs) the regrettable tendency by business writers to overpersonalize the successes and failures of large business concerns; I am dubious about the ‘value’ of any particular CEO, for good or bad. But this is where Martin’s interest lies: as his subtitle suggests, this book is as much or more the Fred Goodwin story than it is the RBS story (or indeed the story of ‘blowing up’ the British economy).

To the extent RBS sandbagged the British economy, it did so when UK politicians decided that RBS was too big to fail. The resultant nationalization of RBS is fait accompli; the lingering question is whether RBS should be broken up. Imagine a smaller RBS, headquartered in Edinburgh and focused on Scottish lending. It is British pride (centered around maintaining London as the global financial center) and not Scottish pride that now drives the determination to maintain RBS as a mega-bank.

Making it Happen is shortlisted for the 2013 Financial Times and Goldman Sachs Business Book of the Year Award.
See my reviews of these other shortlisted books for the 2013 FT/Goldman Sachs Award:

Neil Irwin, The Alchemists
Viktor Mayer-Schönberger and Kenneth Cukier, Big Data
Anita Raghavan, The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund 
Sheryl Sandberg, Lean In: Women, Work, and the Will to Lead

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