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.”

The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund by Anita Raghavan

Forgive me for being thick: after reading Anita Raghavan’s book I had to think a moment in order to name the billionaire’s apprentice. The apprentice has to be Rajat Gupta -- himself a humble multi-millionaire -- who services the only billionaire in view: Raj Rajaratnam, founder of the Galleon hedge fund. Raghavan recalls Goethe’s Sorcerer’s Apprentice in her title to capture Gupta’s doomed adventure. But it is the sorcerer Rajaratnam, and not his apprentice, who brings Galleon crashing down; Gupta is destroyed in the process.

So what did Gupta do? The government taped a compromising phone call by Gupta to Rajaratnam where
Gupta reports the confidential discussions of the Goldman Sachs board (Gupta was then a Goldman director). Gupta was only one of Rajaratnam’s many sources, and it is not clear that his information was that useful. (Rajaratnam argued that he traded on a ‘mosaic’ of information; no one item served as the basis for his actions).

It is hard to dispute that Rajaratnam regularly traded on inside information.  But was all (or most) of Galleon’s fortune built on inside information? I asked the same question in my review of The Buy Side, a tell-all by Galleon-insider Tyler Duff. My question is scientific in spirit, not legal.

European Parliament Approves Implementation of Basel III

On April 16, the European Parliament approved the packet of legislation known as CRD IV, which largely implements the Basel III banking reforms. This completes the political phase of the European legislative process -- formal adoption of CRD IV by the Council of Ministers is expected to occur in June. Assuming the schedule is met, CRD IV will become law effective January 1, 2014. Consultations on the form of detailed regulations ('technical standards') have now been launched.

CRD IV implements Basel III -- and does more. The term 'CRD IV' signals that this is the fourth generation of the EU's Capital Requirements Directive. The name is no longer precise: CRD IV is comprised of a Regulation (law that is uniformly applied throughout Europe) and a Directive (which requires national implementation and admits a certain degree of variation).

CRD IV increases the quantity and quality of regulatory capital a financial institution must hold. In most cases, transitioning to CRD IV requirements will place pressure on European banks to retain earnings, raise additional equity capital, dispose of assets or change their respective asset mixes. Under the existing version of the Capital Requirements Directive (which were adopted immediately prior to the onset of the 2007/2008 financial crisis), many European banks reduced their capital to extremely low levels. Reportedly some European banks had leverage ratios of over 40 to 1 -- that is, maintaining less than 2 percent of effective capital. Many of these same banks remain in crisis now -- a problem that in turn has infected the balance sheets of several EU Member States. CRD IV acknowledges the insufficiency of bank capital during the financial crisis. The new requirements are complex -- and involve a stack of charges and buffers. A minimum of 8 percent capital will now be mandated, computed with regard to a bank's risk-adjusted assets. Left undetermined for the time being is the overall leverage cap -- it is this simple metric that may prove to be the most meaningful limit on a bank's level of debt.