It has been a stunning 12 months for banking disasters. And yet for its combination of ineptitude, arrogance and hubris, the demise of Royal Bank of Scotland Group Plc will be hard to beat.
RBS was one of the largest banks in the world. Under the leadership of chief executive officer Fred Goodwin, it swaggered about the place, spending a fortune on acquisitions.
And now? After a second rescue, it is majority-owned by the UK government. Full nationalisation is inevitable. Goodwin has been ousted, and the shares, which once traded as high as 600 pence, were valued yesterday at 12.5 pence. The bank has said it may post a loss of 28 billion pounds ($39 billion) for last year.
As the scale of the financial crisis became clear, UK stocks and the pound took a hit with investors starting to fret about the country turning into another Iceland. A whole economy slumped because of the fevered ambition of a few bankers. RBS's downfall is the 1982 Bordeaux of financial calamities: the finest vintage of recent times. In retirement, Goodwin should pen a management tome titled "How Not to Run a Bank." It certainly looks like the only subject he would be qualified to lecture on, and the RBS story deserves to be studied in the business schools for years to come.
Here are five lessons he could draw from the basket case that RBS turned into.
1. Keep the power of the CEO on a tight rein
During his years at the helm of the Edinburgh-based lender, Goodwin became ever more self-important. He started out as a skilled dealmaker and cost-cutter. He could acquire a bank, move in new management, get costs under control, and make the deal pay.
Then he spent 350 million pounds on a lavish new headquarters and devoted more time to puffing up the brand rather than its products. When your CEO has a nickname that is used by the popular media (Goodwin's was "Fred the Shred"), you know he has become infatuated with his own myth-making. Find a way of cutting back on his power before he does something stupid.
2. Don't forget your roots.
RBS had been around for almost three centuries before Goodwin took charge. For most of that time, it was happy to be a predominantly Scottish bank. There was nothing wrong with wanting to develop from that base into a global brand.
Yet it should have stayed true to the culture from which it emerged. Edinburgh's financial industry is closer to Zurich's than to that of any other European center. It stands for thrift, caution, discretion, respect for the value of capital, and long- term planning: There is always a market for them. And yet, in its breakneck expansion, RBS forgot all of that. It is good to expand, but you should do so by building on what you are best at.
Buying spree
3. Don't go places you don't understand
For the past five years, RBS had been expanding in so many different directions that there was no way it could understand all of them. Goodwin spent more than $70 billion on acquisitions. Buying National Westminster Bank Plc wasn't a bad move. Then RBS went on to buy stakes in US and Chinese banks. Most global banks have expanded over decades and their management has built up the experience to handle different markets and cultures. RBS was lending in places it didn't know enough about. It is hardly surprising it came unstuck.
4. Don't be too proud to admit a mistake
At what we now know was the top of the market, RBS paid 14.3 billion euros ($18.6 billion) for ABN Amro NV's investment- banking and Asian units as part of a wider group taking control of the Dutch bank. As soon as the deal was struck in April 2007, it looked like a ludicrously over-the-top price.
Admit mistakes
It would have been embarrassing to pull out of the deal. No doubt, the lawyers would have been flinging writs about like confetti. That still would have been a better outcome than sliding into state ownership.
5. Be honest with yourself.
Ostriches can get away with sticking their heads in the sand. For bankers, it is invariably fatal. As the credit crunch unfolded, RBS showed no willingness to face up to the scale of its problems. In February 2008, Goodwin was still telling investors he had no plans to sell new shares.
It is hard to believe that he, or anyone else on the board, had taken a good look at its liabilities and wondered how they were going to work out if the world slipped into a recession. If you can't be realistic, you won't survive.
If a few bankers learn the lessons of the RBS debacle and decide not to repeat its mistakes for a few years at least then some good will come out of the whole sorry episode. It is hard to say anything else positive about it.
Source: By Matthew Lynn
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