Why Did Royal Bank of Scotland Suffer the Largest Reported Loss in British Corporate History in 2008 and Struggle to Recover in the Financial Crisiss Aftermath?

Dissertation Supervisor: Professor Andrew Hindmoor.

Word Count: 11,941.

Registration Number: 120161717.AbstractRoyal Bank of Scotland (RBS), formed in 1727, briefly topped the worlds largest companies by assets at 1.9 trillion in 2007. Recording the largest loss in British corporate history in 2008 of 24.1bn, this exposition seeks to espouse what went wrong as well as why it went so badly. The rise of trader banks amidst the securitisation bonanza in the past decade, allowed banks like RBS to accumulate vast realms of property and commercial estate around the world. This thesis posits a perfect storm of factors were in play at RBS, with a compounding of thin capital layers, deficiencies in proprietary trading and toxic assets involved in the merger with ABN AMRO. RBS has struggled to regain profitability whilst being owned by the government and will cease to take the shape it did before, due to UK Financial Investments intentions for RBS to scale back and focus on SME lending.

PrefaceThe purpose of this thesis is to examine why Royal Bank of Scotland (RBS) reported a loss of 24.1bn for 2008, the biggest in British corporate history (The Telegraph, 2010), and why it has struggled to return to profitability in its aftermath. Despite reporting a group operating profit before tax of 3,505m (RBS, 2014, p2) in 2014, excluding a 4.0 billion write down on Citizens (RBS, 2014, p2); RBS has been plagued not only from incurring losses on securitized assets it had accumulated during the Great Moderation (Bernanke, 2004) in the run up to the 2007-08 financial crisis, but also from redressing disparate conduct issues, including the London Interbank Offered Rate (LIBOR) rigging scandal, as well as the aggressive selling of interest rate hedging products (IRHPs) to SME business customers. Despite a no vote in the referendum on Scottish independence, the resilience of the Scottish National Party, winning 56 of the 59 seats in the 2015 general election, has given rise to renewed controversy surrounding the possibility of a second referendum as Sturgeon has said that if England voted to leave the EU but Scotland voted to stay, it could trigger another referendum on Scottish independence (Smout, 2015). Speaking before the 2014 referendum on Scottish independence, Ian Fraser posits that RBS would likely have to move its headquarters south of the border in the event of Scotland leaving the union The Scottish economy, with a GDP of 150 billion, would simply be too small to underwrite its total assets of 1.19 trillion (Fraser, 2014, p403). Concerns regarding the regulatory landscape (which will be shown to be of resounding significance), if RBS were to stay in Scotland help to exacerbate why understanding where RBS went wrong, and why it has struggled to regain strength in the aftermath of the financial crisis, is an important subject of inquiry. Literary and Conceptual OverviewRBS were the subject of intense media scrutiny in the aftermath of the financial crisis, with a particular emphasis on former CEO Fred Goodwin. Nick Cohen posits that the villains of today are not the radical union bosses of old, but Sir Fred Goodwin and his kind (Cohen, 2009); however this is a simplistic assertion, of which Fraser places particular emphasis Fred the Shred was not the sole villain of popular mythology (Fraser, 2014), making the case (Goodwin gained the moniker for the ruthless pursuit of cost savings as chief executive of Clydesdale Bank) that in his book Shredded, argues the first time that Goodwin sought to pull out of his bid for Dutch bank ABN Amro after he realised the exclusion of Chicago-based subsidiary LaSalle Bank would almost certainly be disastrous for RBS (Fraser, 2014). However, Goodwin, along with other executives including Jonny Cameron, head of Global Banking & Markets (GBM), chairman Tom McKillop, and George Mathewson, chief executive and then chairman, widely acclaimed to be Goodwins mentor; all played a crucial role in allowing RBS, once a relatively small regional bank, to very briefly become the worlds largest company by assets with 1.9 trillion (RBS, 2007, p121) in 2007. What set RBS apart from other financial institutions, and led to its downfall and difficulties in returning to profitability was, with hindsight, a perfect storm of factors, including insufficient risk management, its rise as a trader bank and toxic assets accumulated in the ABN AMRO acquisition, on the eve of crisis; driven by a culture of nationalistic triumphalism, with former SNP First Minister for Scotland Alex Salmond wishing Goodwin luck on the eve of the ABN AMRO acquisition, watching events closely, eluding that it is in the Scottish interest for RBS to be successful (Fraser, 2014, p248). The other prime example of a UK bank, who grew too quickly, with insufficient risk management, was Halifax Bank of Scotland (HBOS). By contrast, however, HBOS operated a small trading book, whose downfall was incurred primarily as a result of bad corporate lending decisions; as well excessive confidence in their understanding of UK residential mortgages and related securitisations (Parliament, 2013, p16). Characterised as a corporate bank that found it hard to say no (Parliament, 2013, p3), HBOS grew their assets significantly in British property and construction sectors, representing 59% of the net expansion in outstanding loans between 2001 and 2008 (Parliament, 2013, p10); operating under a federal model of corporate governance, with risk management eluding influence rather than authority (Parliament, 2013, p20). RBS, whose strategy was to expand assets globally (notably and crucially through its US subsidiary Citizens Financial Group), with GBMs predecessor Corporate Banking and Financial Markets, accumulating billions of dollars worth of planes, billions of dollars of ships, commercial real estate across America and Britain (Fraser, 2014, p120) in the mid-2000s; with Goodwins successor Stephen Hester, describing the UK retail bank as a cash cow (Corrigan & Winnett, 2009) to fund overseas empire building. RBSs massive growth in derivatives trading derivatives accounted for 12% of total assets in 2000 but 41% of assets in 2007 (Hindmoor & Bell, 2015, p57) led to the banks vulnerability to falling asset prices on the eve of the crisis. From 2006 onwards, RBS aggressively expanded their structured credit and leveraged finance businesses, with derivatives trading accounting fully 29% of the banks profits in 2006 and 2007 (Hindmoor & Bell, 2015, p121); along with the banks belief in ever improving market conditions (whereby they failed to effectively hedge their positions), in which Goodwin had built the bank on a wafer-thin layer of often-shaky capital (Fraser, 2014, p333).Conceptually, this exposition employs a historical institutionalist approach (using the concept of path dependency to explain RBSs resilient nationalistic self-confidence throughout its history up until the financial crisis), whilst invoking ideas of bounded rationality to explain the agency of bankers, politicians and regulators in formulating the conditions that allowed the crisis to occur, as well as why efforts to change the institutional framework within which banks operate, has been limited, whilst moving in the right direction. Bounded rationality, first theorised by Herbert A. Simon in the 1950s (theorising actors as not assessing all choice options in a fully informed way, exhibiting confirmation bias), posits that pre-analytic criteria, connoted by psychological attitude (Fiori, 2011, p601), including framing effects and status quo bias, affect actors decision making capabilities. By contrast to the rational expectations hypothesis, introduced by John Muth in 1961, which posits that rational agents efficiently digest all available information (Bausor, 1983, p1); theories of bounded rationality assert that a level of cognitive scaffolding occurs, whereby prior social processes become institutionalised in such a way that they channel choice behaviour without requiring choosers to extract the embedded content (Ross, 2014, p426). Warning signs in the run up to the financial crisis did exist. However, RBS under Goodwin was endemic of a culture that discouraged the reporting of potential bad news (Hindmoor & McConnell, 2015, p67). When director of strategy Iain Allen attempted to alert Goodwin about impending losses on super-senior tranches of Collateralized Debt Obligations (CDOs) during the crisis on the books at 100:00 and worth, say 70:00 (Fraser, 2014, p279), he was ignored, with Goodwin citing the happiness of the board and FSA, exclaiming whats your problem? (Fraser, 2014, p279). Institutional theory also provides conceptual tools to analyse the way in which RBSs distinctive culture was preeminent for two decades. Traditionally, institutionalism prescribed structure as heavily constraining agents, with only the Great Men of history (Peters, 1999, p8) capable of effecting change. The growth of sociological, rational, and historical institutionalism has expanded this definition, with historical institutionalism invoking a critical junctures hypothesis, whereby agency can affect institutions significantly during brief phases of institutional flux (Capoccia & Kelemen, 2007, p341); whilst sociological institutionalisms notion of institutional isomorphism, and related notions of normative appeal and homogenization, are useful in providing a theoretical account of how RBSs buccaneering beginnings in the Darien Scheme can be seen in parallel with RBSs expansion in the 2000s as rooted in institutional dynamics (Beckert, 2010, p151). Historical institutionalism lies in the middle ground between sociological; positing human beings as fundamentally social beings (Steinmo, 2009, p162) and rational, arguing human beings are rational individualists who calculate the costs and benefits of the choices they face (Steinmo, 2009, p162) institutionalism; instead maintaining humans can be both, with behaviour depending on the individual, the context and the rule (Steinmo, 2009, p162). John Gaddis posits that we know the future only by the past we project into it (Gaddis, 2002, p3), which infers a level of continuity in values and preferences in what was a white, male and Scottish dominated bank during its ascendancy. Path dependency, defined by Paul Pierson whereby policies and institutions are generally designed to be difficult to overturn (Pierson, 2004, p43) led to a culture of economic violence amongst the buccaneering Scottish bankers, from humble backgrounds (Goodwins father was an electrician and he was the first in his family to go to university) to build their reputation and win City backing for their disastrous expansion of RBS (NCL, 2012), as well as keep staff fearful, which is useful in explaining why the institution remained stubbornly buccaneering until the aftermath of the financial crisis, and then only changed due to far-reaching public disquiet surrounding bankers bonuses and the rise of casino capitalism. The Basel II accords, as well as the Financial Services Authoritys (FSA) light touch approach to regulation in the pre-crisis era, allowed for RBSs ambition to take on the bigger banks in England. Banks themselves exhibited influence over regulatory design, displaying instrumental power through the bank lobby, the Institute of International Finance, who engaged in continuous consultations (Baker, 2010, p650) with the Basel Committee and helped secure the inclusion of an advanced status clause for systemically important banks to use their own internal Value-at-Risk (VaR) models for assessing the risk weightings of assets on their balance sheets. However, globalization has enhanced the structural power of business (Hindmoor & McGeechan, 2013, p847), with the UK government (especially pronounced before the crisis) wanting what business wants in order to ensure tax revenues and employment. Gordon Brown eludes this in his 2006 Mansion House speech, stressing the importance of light touch regulation, a competitive tax environment and flexibility (Brown, 2006). Flexibility will be shown to have resounding importance in relation to the ABN AMRO acquisition. Laissez-faire institutional design helped promulgate perverse financial incentives for risk taking and enslaved bankers, forcing them to chase after metrics like earnings-per-share growth (EPS) and return on equity (ROE).Methodology & Explanation of ChapterisationMethodologically, this account draws particular attention to the secondary literature on RBS; namely Ian Frasers Shredded and Iain Martins Making It Happen. The reason for this methodology is largely due to both authors insider accounts of what went on at RBS over a number of years, providing illustrative and convincing accounts of the culture at the firm. For example, Shredded is the product of one-to-one interviews with about 120 current and former employees of the Royal Bank of Scotland (Fraser, 2014, p xi). Furthermore, Andrew Hindmoor and Stephen Bells Masters of the Universe: Slaves of the Market will be used, due to its detailed command of figures surrounding the performance of UK financial institutions (with the primary institutions of comparison being Lloyds Banking Group/TSB, Barclays and HBOS/Bank of Scotland, with other institutions being analysed where relevant). Along with this, Parliamentary commissions, FSA reports and third party investigations into financial institutions; along with annual reports, will be used in order to clarify and empirically validate many of the claims posited in this thesis. Other sources employed include journal articles, journalism surrounding the series of events and institutional reports into the functions of contemporary capitalism. This exposition will account of three chapters. Firstly, there will be a discussion of the events and aftermath of the 2008 financial crisis, placing RBS at the centre stage, examining why it incurred the largest loss in British corporate history, whilst some of its competitors managed to retain profitability and avoid capital injections from UKFI. The second and third chapters will provide a chronology of RBS from its roots until the financial crisis (whilst paying attention to the development of other banks, especially when relevant to RBS), exhibiting the paths that drove RBS to take the shape it did in the prelude to the financial crisis, with chapter two encompassing the period up until the NatWest acquisition, and chapter three until the aftermath of the ABN AMRO takeover.Chapter 1 RBS During and After the 2007-2008 Financial CrisisThe 2007-2008 financial crisis ensued due to a number of disparate, but inextricably linked factors, related to the growing complexity and interconnectedness of global capitalism, a combination of financial institutions structural and instrumental power during the Great Moderation, and the mismanagement and appropriation of risk, with VaR being based on internal models of risk, often estimated using relatively short periods of observation e.g. 12 months (FSA, 2009, p44), which garnered procyclicality during the bull market of the mid -2000s. The sub-prime mortgage market in the US was the root cause of the financial crisis. The growth of sub-prime was largely the result of a race to the bottom in underwriting standards amongst commercial debt originators the growth of nonprime securitization gave originators an alternate option for funding (Simkovic, 2013, p235), allowing for increases in banks exposures to subprime debt and related securities subprime private label mortgage-backed securities (PLS) issued by Wall Street increased from $87 billion in 2001 to $465 billion in 2005 (FCIC, 2011, p123). The growth in market share of sub-prime mortgages increased substantially from approximately 7-8% of the market in 2000 to 2003, to approximately 18-20% in 2004 to 2006 (Simkovic, 2013, p227). This was compounded by the Government Sponsored Enterprises Fannie Mae and Freddie Mac coming under Congressional pressure to extend home ownership in the mid-2000s, purchasing $120bn of sub-prime mortgages (Hindmoor & Bell, 2015, p103) in 2006. With house prices beginning to fall in 2006, this triggered a knock on effect what began as a credit squeeze in the subprime mortgage sector quickly spread out to other areas, particularly to conduits and leveraged buy-out transactions (Mah-Hui Lim, 2008, p4). RBS held 48bn of assets in off-balance sheet conduits to which it was forced to extend 15bn in credit in 2007 (Hindmoor & Bell, 2015, p120). Conduits and Structured Investment Vehicles (SIVs) allow banks like RBS to disperse assets off their balance sheets through extending a liquidity line to these separate entities allowing institutions to be less than transparent about their exposures to securitization products (IMF, 2009, p89). Lloyds Banking Group, reported a healthy 2.2bn profit in 2008 (Hindmoor & Bell, 2015, p125), and held substantially less assets through off balance sheet activities, with only 8 billion of asset-backed securities (Hindmoor & McConnell, 2015, p70), in its SIV Cancara, despite Lloyds being of comparable scope domestically in the UK. One can contrast RBSs buccaneering and internationally expansionist nature, maintaining as late as 2006, on the eve of crisis that they expected to benefit from benign economic conditions (RBS, 2006, p4), with that of Lloyds who maintained a focus on generating sustainable, high quality earnings growth (Lloyds, 2006, p5) across the UK.RBS was specifically highly exposed to the sub-prime mortgage sector for a British bank, due to its large-scale operations in the US, accounting for 15% (RBS, 2007, p210) of the groups revenue in 2007. US subsidiary Greenwich Capital Markets were specifically badly exposed to subprime. In the run up to the crisis, head of GBM Jonny Cameron sent an email to Brian Crowe about Greenwich Capital Markets CDO activities after GBM was only earning 15m a month (Martin, 2013, p240); asking about their sub-prime exposures in their CDOs. The reply Cameron got was CDO is all sub-prime (Martin, 2013, p244). RBS sustained huge losses on the value of its securitized assets in the crisis, holding 8bn in CDOs (95% originating in the US) (Hindmoor & Bell, 2015, p121) and by October 2007 the super-senior tranches of mezzanine CDOs that Greenwich had on their trading book were trading at between 20:00 and 50:00 (that is between 20 and 50 cents in the dollar) by late October compared to the 100:00 they had been trading at since their 2005-2006 launches (Fraser, 2014, p276). The rating of super-senior tranches securities as AAA, by credit rating agencies has been lauded as a reason contributing to the crisis. The move to an issuer-pays model from an investor-pays model in the 1970s, with the entrenchment and expansion of Moodys, Standard & Poors and Fitch, as the three main credit rating agencies, meant those issuing securities, with many investors (such as pension funds) only buying AAA-rated, gave the incentive for banks to create complex products (such as CDO-squared and other exotic instruments), in order to effect regulatory arbitrage (OECD, 2010, p7), so as to benefit from opacity (OECD, 2010, p7). The OECD report into ratings agencies makes recommendations that explicit regulatory reliance on ratings should stop altogether: it gives ratings a force of law, whereas they are only opinions (OECD, 2010, p7). This reliance on ratings espouses the way in which RBS, along with other banks, viewed the financial environment that markets valuations tended to be accurate representations of the value of underlying assets, when their susceptibility to price volatility was more pronounced during a system wide loss in confidence leading to the huge fall in value of super-senior tranches aforementioned. VaR models failed to see the end of the US housing bubble, and once the bubble bursts and the VaR increases significantly, it can actually amplify the resulting volatility by triggering further sell-offs, which force the VAR higher, creating a vicious cycle (Best, 2010, p36). Belief in these models exemplifies the bounded rationality of the regulators and financiers. Andy Haldane outlines that there was absolutely no incentive for individuals or teams to run severe stress tests and show these to management (Haldane, 2009, p7), due to the focus on aggressive growth prioritised at banks before the crisis, theorising network externalities conditional on other institutions simultaneously facing risk, increasing the median risk facing UK banks by around 40% (Haldane, 2009, p5).Myopic views differentiated RBS from other players in the CDO and mortgage backed securities markets (whereby assets were bundled into large products differentiated by tranches classed by risk, with super-senior tranches being rated AAA by credit rating agencies), whereby domestic players in the US market JPMorgan, Goldman Sachs and hedge funds like Paulson & Co. heeded warning signs that the housing bubble was reaching its peak, finding ways of making money from the coming collapse, for example by short selling subprime-related instruments (Fraser, 2014, p276). Themes of bounded rationality were again at play here. Despite being made aware of the risks, Goodwin remained ever the optimist, continuing on with the established strategy and not going short on their positions. In an analysts briefing on 6 December 2007, he sought to reassure analysts that their commercial property was sound with a loan-to-value ratio of 60 percent and only 2 per cent of total advances going toward speculative investments (Fraser, 2014, p281); despite in the end having to place 68.5 billion (Fraser, 2014, p281) of bad loans into the UK governments asset protection scheme. Other British banks had far lower levels of exposure to the US market. Despite claiming they had no direct exposure to the US sub-prime market (Hindmoor & Bell, 2015, p126), Lloyds Banking Group did hold 6bn in available-for-sale (Hindmoor & Bell, 2015, p126) Residential Mortgage Backed Securities which it held on its own balance sheet. Barclays had extensive investments in the US at the time, in which it recorded 0.5bn in market value losses on its sub-prime and Alt-A lending (Hindmoor & Bell, 2015, p128). However, Barclays BarCap division fared well from the crisis, acquiring Lehman Brothers property and trading portfolio and recording a 2.3bn write-up (Hindmoor & Bell, 2015, p128) in its value in 2008, acquiring these assets for just $250 million. Whilst Barclays experienced liquidity issues, they were offset through selling Barclays Global Investors to Blackrock for 8.2bn in 2008 and raising capital through Qatar Holdings. The loss of liquidity in the crisis and the drying up of wholesale funding, of which RBS was heavily dependent upon in the eve of the financial crisis by September 2007 RBS was borrowing 70bn from short-term wholesale funding markets, Fully 70% of this sum was being borrowed on an overnight basis (Hindmoor & Bell, 2015, p121), was due to the banks low loan to deposit ratio of 35% of balance sheet assets in 2007 (Hindmoor & Bell, 2015, p121), where by the end of 2006, the customer funding gap had widened to 500bn (FSA, 2011, p44). The contraction of wholesale markets, a result of the collapse of Lehman Brothers, and the $182 billion bailout of American International Group, meant institutional investors lost confidence, with treasurers at rival banks, unsettled by RBSs widening overnight borrowing requirement, were pulling billions out of the bank (Fraser, 2014, p310). Already operating on shaky capital, whereby the tier 1 core capital in the bank was said to have been made up of a fair amount of preference shares and other assorted rubbish (Fraser, 2014, p123); was compounded by a falling average quality of assets held on its balance sheet exhibiting asset quality below the average of its peers (FSA, 2011, p49) and due to GBMs rampant expansion in the structured credit business, RBS stood to lose vast sums of money. Due to impending insolvency, RBS was forced to take 50 billon of equity capital support, backed up by the launch of a 250 billion credit guarantee scheme and an extended 200 billion special liquidity scheme (Fraser, 2014, p323) during the financial crisis. RBSs capital adequacy before the crisis was worsened significantly by the ABN AMRO takeover (which will be discussed at length). Despite RBS having to enter a position where its capital adequacy has been deemed illegal, the FSA allowed RBS to go through with the ABN AMRO acquisition, due to their remit at the time to act as a principles based organisation, employing the ARROW framework which was characterised by a strategy of meta-regulation, in other words reliance on and review of senior managers responsibilities and internal controls (Black, 2004, p30)Stephen Hesters replacement of Fred Goodwin, and majority ownership under UKFIs remit, proved to be an essential critical juncture for RBS. Hogan redefines the concept of critical junctures, arguing that certain preconditions must be met in order for something to be classified as a critical juncture; positing that as we are dealing with critical junctures, periods of significant change, we assume that the change is not a long slow process (Hogan, 2006, p655). With this in mind, RBS changed quickly with the government insisting Goodwin be gone, as well as being changed overwhelmingly for the better in the aftermath of the financial crisis. Speaking upon taking on responsibility as chief executive, Stephen Hester outlined I have set out to drive very clearly a spirit of openness, transparency, disclosure, of blunt-speaking thoughtfulness, and empowerment and of course changing cultures takes years not months (Fraser, 2014, p342). The introduction of an internal core/non-core split, as well as the winding down of RBSs previously gargantuan balance sheet, characterised Hesters RBS. By 2012, RBS was significantly better capitalised, with a 10.3% (RBS, 2012, p2) core tier 1 equity ratio, compared to a Basel III (with more strict regulations regarding what can constitute core tier 1 capital) adjusted level of 1.97% (FSA, 2011, p40) for the year ending 2007. RBS has significantly downsized its balance sheet and exposures; with all but 28 billion of the original 258 billion of non-core assets had been disposed of (Fraser, 2014, p367) during 2014. With UKFIs remit to significantly scale back RBSs international operations, recent events, such as the Citizens Financial Group Initial Public Offering; prove to be interesting developments Citizens Financial Group soared in it return to the U.S. stock market yesterday, rising 7.4% on the first day as a publicly traded company in 26 years. Citizens shares rose $1.58 to close at $23.08 (Cornell, 2014).However, RBS has struggled to return to profitability, still bearing the brunt of many of the asset and corporate acquisitions it had accumulated on its way up. With a strategy of leveraged positions and huge trading exposures , RBS was left with a large capital hole, and on the day after George Osbourne addressed Mansion House in 2013 the PRA (Prudential Regulation Authority) identified RBS as the bank with the largest capital hole of any British bank, saying it needed to raise 13.6 billion (Fraser, 2014, p398). Conduct issues have also plagued RBS, as well as other banks such as Barclays, with the issue of aggressive SME derivative sales techniques and LIBOR rigging occurring both before, during and after the financial crisis period; the regulator found that Barclays, among other banks, had sales rewards and incentives schemes that could have exacerbated the risk of poor sales practice (Salz, 2013, p59), in relation to their aggressive selling of IRHPs, whereby RBS was the UKs biggest peddler of derivatives, which Barclays chairman Sir David Walker believes should have never been sold to small businesses (Fraser, 2014, p374). HBOS, infamous for the Reading Scandal, also found a parallel in misconduct with RBS, accused of tripping up small business in order to force them into their Global Restructuring Group, then, after charging for exorbitant business reviews, RBS would liquidate its SME customers assets, whereby property subsidiary West Register, would sometimes jump in to snap up the targeted firms property assets on the cheap, with higher offers from other bidders being ignored (Fraser, 2014, p377). Despite RBSs solicitors, Clifford Chance commissioning a report into the matter (RBS paid 1.5 million for the report), they found the restructuring groups fees difficult to understand, it suggested a massive lacuna in the report (Fraser, 2014, p385). Along with these conduct issues that have tarnished RBSs reputation in returning to profitability, RBS has faced a number of LIBOR rigging (whereby submissions to the agreed London Interbank Offered Rate are arbitrated for a financial institutions gain) fines, as well as mounting political pressure on the firm for not lending to SME customers (UKFI sees RBS as a key player in domestic lending, instead of proprietarily trading). Overall, this chapter has sought to set the scene, regarding why RBS suffered such severe losses in the financial crisis, as a result of bounded rationality amongst the management team with regard to risk factors on its trading book, which were significantly larger than other banks, being exacerbated by the scope for arbitrage of the Basel II accords that other banks successfully identified. The critical juncture of the financial crisis, with Goodwin and head of GBM, Johnny Cameron, leaving RBS, being replaced by the reformist Stephen Hester and Sir Phillip Hampton; RBS no longer personified the buccaneering institution it was during Goodwin and Mathewsons respective leaderships. This exposition will now turn, so as to chronicle how RBS, briefly, became the worlds biggest company. Chapter 2 RBS: the Darien Scheme to NatWestThere has been a lot said about RBSs history and its roots in the pre-union Company of Scotland. In the late 17th and early 18th century, the Company of Scotland sought to give Scotland a trading empire to rival those of England and Spain. Described as an audacious adventure (Martin, 2013, p29), the establishment of a trading colony in what is now Panama begun with what has been hailed as a remarkable achievement (The Scotsman, 2010), in terms of the raising of 400,000 in a relatively poor country in the period, whereby swathes of the Scottish nobility handed over portions of their fortunes in the belief that this would improve Scotlands national fervour. Martin alludes to the excitement and self confidence in this period rivals Glasgow and Edinburgh, competitive even then, both contributed 3000 (Martin, 2013, p31). Fraser, who contends the Company of Scotland failed to appreciate that the Panamanian coast was an inhospitable, malaria-ridden swamp (Fraser, 2014, p1); where 3000 lay dead (Fraser, 2014, p1) of the 3700 initial settlers and a quarter of Scotlands capital had been wasted; it became clear fairly quickly that the Darien scheme was a failure. Its aftermath paved the way for the eventual political union between England and Scotland, as well as the establishment of RBS itself. Primarily founded as a bulwark against Jacobitism (Fraser, 2014, p2), RBS, founded in 1727, was at the heart of Scotlands burgeoning Whig establishment and aimed to back the countrys pro trade and industry entrepreneurial classes (Fraser, 2014, p2). Until 1752, the bank engaged in a number of dubious practices, such as hoarding its rivals banknotes (Fraser, 2014, p3). Under a non-compete agreement, essentially, RBS and the Bank of Scotland agreed not to encroach upon each others territory, whereby rural and provincial Scotland remained under the sphere of the Old Bank. RBS was buccaneering from the start, inventing the overdraft which enabled trusted Scottish merchants to punch above their financial weight (Fraser, 2014, p3). Up until the end of the 18th century, lavish, even reckless, lending to Glasgow merchants (Fraser, 2014, p4), helped lead up to the eventual bailout of the institution through 200,000 of exchequer bills (Fraser, 2014, p4) in 1793. It was not to be the first time (Fraser, 2014, p4). Normatively, the idea of going overdrawn (and the fact it was RBS who invented the facility), helps substantiate claims of institutional (in a figurative sense) homogeneity, between RBS in the Great Moderation (where in a sense one could and its time during early union Britain (post-1707), with powerful influences directing institutional change toward greater homogeneity (Beckert, 2010, p163), with RBS characterised as generally loyal to Scotland, exemplified by its building of its 350m Gogaburn headquarters near Edinburgh, as well as ritual pie eating amongst senior staff (instead of the haute cuisine preeminent among more metropolitan financiers); whereby growth was hastened by a desire to take on the big boys In London; for his part, Goodwin hates Barclays (Martin, 2013, p23).During 1986, Margaret Thatcher implemented what became known as the Big Bang series of reforms that heavily deregulated British finance (important as the starting point in terms of the ability for a firm like RBS to become a trader bank). In doing so, she helped to alter the course of democratic capitalism in the developed world substantially. Keyness fundamental theoretical position that drove the post-war consensus, whereby human decisions affecting the future cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist (Keynes, 1957, p163), was refuted on the premise of promoting responsible capitalism (Fraser, 2014, p11), and a more meritocratic society. Financial deregulation was largely driven by a lawsuit challenging the anti-competitive practices at the Exchange in Britain (Clemons & Weber, 1990, p42). Screen trading (moving it away from the physical exchange) meant multiple traders were vying for each trade. Fixed commissions and the distinction between jobbers and brokers disappeared, allowing new dual capacity firms (Fraser, 2014, p11) to promulgate. RBS responded. Acquiring Liverpool based stockbrokers Tilney in 1986; RBS diversified their sphere of operations. Clearing banks including RBS were given a wider scope through which to conduct profitable business being allowed to sell mortgages in large numbers (Martin, 2013, p51), with building societies being allowed to mutualise and themselves conduct banking activities. Barclays followed suit and established Barclays de Zoete Wedd (BZW) in 1985, in a merger between Barclays Merchant Bank, stockbroker Zoete & Bevan and jobbing firm Wedd Durlacher. RBS saw an opportunity to capitalise on these reforms, whereby the deals aforementioned meant the bank was well on the road to becoming a financial services supermarket, offering a broad range of services under one roof (Fraser, 2014, p11). Amidst this novel opportunity, the world of finance was swept up into frenzy and as the boom headed towards its peak, bids sometimes seemed to owe more to the Citys desire to do deals than to industrial logic (Laurence & Milner, 1990, p26). These new and large institutional investors set the scene for a more adversarial capitalism, whereby competition meant smaller players were incentivised in taking ever increasing risks in order to compete. Paul Pierson posits that outcomes in the early stages of a sequence feed on themselves (Pierson, 2004, p21). In this sense, commercial banks, amalgamating with jobbers and brokers, sowed the seeds for the growth in financial services, and eventual consumer reliance on debt; whereby levels of household debt as a share of GDP increased from 1997 at 75% (Hindmoor & Bell, 2015, p28) in the UK, to 110% (Hindmoor & Bell, 2015, p28) in 2007 denoted as privatised Keynesianism by Colin Crouch (Crouch, 2009); I.E. demand is increased through debt, whilst wages have remained relatively stagnant.Announced as RBSs director of strategy and development in October 1987, George Mathewson represented the beginning of RBSs shift from a relatively small regional clearing bank into one of the worlds largest companies. Charles Winters dream to create an international bank run from Edinburgh (Martin, 2013, p55). Early on, Mathewson was responsible for encouraging Winter in the acquisition of Citizens Financial Group in the USA. The $440 million deal in 1988, in which the Royal Bank would get new access to American expertise and markets (Martin, 2013, p55); was a crucial point in the trajectory of RBS. Pierson posits that those with property rights over a firm are generally in a strong position to remake their organizations as they choose (Pierson, 2004, p42-43) and this was certainly the case with Citizens, expanding from Rhode Island across the North East of America. Going against the norm, former Lloyds Bank chief executive Sir Brian Pitman focused on Lloyds domestic business and emphasised long-term shareholder value, in favour of short terms financial gains eschewing international adventures and extravagant Big Bang investments in securities businesses favoured by other high-street banks in the mid-1980s (The Telegraph, 2010), with this business model meaning by the mid-1990s, Lloyds' only significant overseas branch network was in New Zealand (The Telegraph, 2010).Throughout 1990 Mathewson met in secret under the codename Nova Reda in order to effect a complete overhaul (Fraser, 2014, p18) in the way RBS was run. In streamlining RBS, corporate lending was removed from the branches under the remit of a new Corporate and Institutional Banking Division (CIPD), with back office operations being consolidated under a new Operations Division. Mathewson believed that this would be imperative in giving the Bank of Scotland a run for its money and help it compete with the big boys in London (Fraser, 2014, p20). Mathewsons revolutionary rhetoric at the bank had worked and by 1992 he had been appointed chief executive. Under Project Columbus he wanted to increase the retail banks profit by 200 million, achieve a return on equity of 32% and reduce headcount by 3500 (Fraser, 2014, p27). Meanwhile in the US, RBS were successfully consolidating their position in the market, with Citizens acquiring Neworld Bancorp in 1993 for $144 million. Under Mathewsons strategy, RBS thought that at least 10% of earnings should come from the US (Wilson, 1990). Redundancy amongst employees in the UK operation became a real part of everyday working life at RBS, with the assertion that those who did not perform adequately or who raised concerns about risk were usually ostracised or sacked (Hindmoor & Bell, 2015, p42), being a reality of life amongst efficiency drives in financial institutions. RBS in the early 1990s epitomized this sentiment, and in some Manchester branches staff who missed sales targets were given furry toy monkeys which they had to put on their desks as a badge of shame (Fraser, 2014, p29). At the heart of Mathewsons Columbus project was the decision to centralise and computerise credit decisions (Fraser, 2014, p29). As part of a new credit department based at Drummond House in South Gyle, management could gauge different types of borrower, both reducing the time spent by staff at branches, as well as enabling RBSs management to reduce costs as they could employ less skilled staff at the branches. Older managers were seen to be coasting along (Fraser, 2014, p31), and the restructure helped lead to RBS becoming the first Scottish business to be capitalized at over 1 billion (Fraser 2014, p32); with inept lending policies causing falling profits in 1992 it just about scraped a profit of 20.9m, which the following year marked down and shown to have been only 12.6m (Martin, 2013, p60). Despite these reforms to the way RBS was run as a commercial bank, other large UK based banks, for example Barclays, were more adept at providing complex financial products to corporate customers. In the aftermath of the 1983 Parkinson-Goodison deal, Barclays had already planned out its strategy to buy in the necessary skilled people (Royal, 2003, p243). The aforementioned mergers proved to be a crucial move in helping Barclays become a contender in the market going from being ranked 23rd in 1986 to 8th in 1988. In the early 1990s, through sourcing hires externally at the junior level and honing their skills through internal development and performance related pay helped to overcome the short vacancy chains that existed in the bank as a result of a flat organisational structure (Royal, 2003, p254). Delegating tasks to professionals with expertise illustrated that knowledge and skills were too complex and job specific to be nested (Royal, 2003, p254) and demonstrated that organisations such as BZW with successful internal labour market practices performed better than those without these practices in respect of the quality and development of their products and services, attracting and retaining essential employees, and market performance (Royal, 2003, p254). Appointing Iain Robertson as head of CIBD in 1991, RBS tried to respond to competitors successes in financial engineering by hiring additional talent to spearhead its growth in specific market niches (Fraser, 2014, p39). In doing so RBS broke with centuries old tradition and hired Leith Robertson from Bank of Scotland a high flyer in the growth market of funding private equity and management buyouts (Fraser, 2014, p39). RBS also recruited former 3i executive Derek Sach, tasked with heading up Specialised Lending Services, in which RBS insolvency services were put out to tender. Ian Fraser said this constituted a moral hazard (Fraser, 2012), with commentary focusing on the low-balling this encouraged, where firms which were keenest for the work would quote ruinously low fees (Wilcock, 1997). The growing competitiveness of corporate banking at this time shaped and gave contemporary historical precedent to the competitiveness that characterised RBS later on in the series of events, which would eventually entail Fred Goodwins predilection to metrics like earnings-per-share growth and return on equity. The corporate restructuring that RBS implemented Mathewsons leadership was possible thanks largely to one of RBSs forays into the insurance market. Direct Line, established by Peter Wood in 1985 rewrote the rulebook for motor insurance (Fraser, 2014, p33), with RBS fully acquiring the insurer in 1988. Through a targeted advertising campaign featuring the now famous red telephone, Direct Line was innovative in that its branchless and low-cost model enabled Direct Line to offer low premiums and have the lowest costs-to-premiums ratio in the sector (Fraser, 2014, p33). Direct Line strongly outperformed other areas of RBS in the early 1990s and saw profits as high as 50 million in 1993 (Fraser, 2014, p33). This meant that without Direct Line, RBS would have had less breathing space to implement Columbus (Fraser, 2014, p34). Amidst Columbus, Mathewson was inspired by John Kays book Foundations of Corporate Success, Mathewson wanted to turn RBS into a financial supermarket in its own right (Fraser, 2014, p35). In a bid to outdo the Bank of Scotland, RBS launched Tesco Personal Finance in 1997; along with a whole host of brand names introduced in the 1990s such as RoyScot, RBS Advanta and Linea Directa. Profits soared in the years following Columbus, with CIBD contributing at least 250 million of the wider groups pre-tax profits of 602 million (Fraser, 2014, p42) in 1996. Despite this, Direct Lines profitability fell and as soon as rates came off and claims went up, the P&L crunched from 126 million to 26 million in a year (Fraser, 2014, p34). Mathewson and the directors were said to have viewed investors criticisms with disdain (Fraser, 2014, p34). Attempts to disguise the damage by diversifying into other types of insurance, including life and home insurance (Fraser, 2014, p34), exemplified convictions that their approach and business model was right (through cutting out the middleman). Other financial institutions were not exposed to such a diverse range of consumers in the 1990s. Lloyds for example, only forayed into the insurance industry after the millennium, acquiring Scottish Widows for 7 billion in 2000. Unlike Direct Line, which was built from the ground up, Scottish Widows was regarded as having one of the strongest brand names in the industry (BBC, 1999). Whilst Lloyds were accused of paying above the odds, the acquisition proved useful as Scottish Widows has a strong presence in the growing independent financial advice market, where Lloyds is relatively weak (BBC, 1999).The arrival of New Labour in 1997 sparked the beginning of RBSs ascendancy. Mathewson was more determined than ever, with the failure of Hongkong and Shanghai Banking Corporations (HSBC) 1996 takeover bid; in which HSBC made concessions including relocating to Edinburgh (Fraser, 2014, p52) showed RBSs resilience as an independent Scottish bank. Mathewson held firm, insisting that he should be chief executive of the merged group (Fraser, 2014, p52), which put off the larger and substantially more internationally exposed HSBC. RBS was still considered vulnerable in banking circles (Fraser, 2014, p52) at this point in time, with criticism focused upon the way Mathewson ran the company analysts complained that he ran the bank like a venture capital company (Merrell, 2003). In an attempt to entrench their position in the financial sector, RBS made a move on Birmingham and Midshires building society in 1997 Mathewsons team offered 630 million (Martin, 2013, p91). Halifax (later HBOS) responded with a larger offer of 780 million (Martin, 2013, p91) and eventually succeeded in outbidding RBS. Many former RBS employees saw the bid as an influential moment, where RBSs multi-brand approach came to the fore; Mathewson declared the Birmingham Midshires name would stay (Fraser, 2014, p53). Around this time, Mathewson had a brainwave (Fraser, 2014, p61). Fred Goodwin, whose influence would play a large role in leading RBS to record the largest loss in British corporate history, had been chief executive of Clydesdale Bank for just over a year. Mathewson wanted to appoint Fred as finance director, but early on Freds character was apparent; wanting a guarantee that he was his anointed successor (Fraser, 2014, p62). A compromise was reached, with Goodwin being given the title deputy chief executive from day one (implying he was to succeed Mathewson). Pierson asserts that Options that gain a head start will often reinforce themselves over time, even if they have serious shortcomings (Pierson, 2004, p40). Goodwins pursuit of cost savings and minutiae were understood from the beginning, and his personality and assertive leadership style (when he does become chief executive), are paramount to the character of the firm, and why events played out as they did.Goodwins ambition for RBS to become a global player in the banking sector was apparent early on as deputy chief executive. Essentially in 1999, RBS was considered a Scottish upstart (Wilson & Aldrick & Ahmed, 2011) amongst the business elite in the City of London. NatWest, one of Britains major banks, under the leadership of Sir Derek Wanless was a beached whale of an institution (Fraser, 2014, p78) by 1999. NatWests investment banking arm, NatWest Markets had been a disaster for Wanless, losing 706 million in 1997, as well as suffering under dubious practices including firing six senior traders and managers after covering up 92 million of losses resulting from bad debts on interest-rate options (Fraser, 2014, p78). NatWests culture was generally acclaimed to be a shambles, with one senior manager espousing the ostentatious tastes of executives before the RBS takeover after board meetings, the directors sat down to a formal dinner with a liveried waiter behind each chair (Fraser, 2014, p78). NatWest was desperate to improve its standing and announced a 10.7 million takeover bid for Legal & General, as part of their plan to sell insurance and investment products to their 6 million customers, attempting to create an all-encompassing bancassurance model for the firm. Accepted wisdom was preeminent, with the NatWest share price down 26% as shareholders are unhappy over the L&G deal (BBC, 2000), due to an overestimation of investors enthusiasm for a bancassurance model. This misjudgement had effectively put the bank into play (Fraser, 2014, p79) and given NatWests extensive infrastructure it had assets of 186bn, 64400 staff and 1730 branches (Martin, 2013, p92), it gave RBS; along with Bank of Scotland the impetus to move in. The difference in scope between NatWest and those vying for takeover was huge. RBS was marginally over a third of the size of NatWest with 75 billion in assets; with Bank of Scotland being even smaller, with 60bn in assets, 21,000 staff and just 325 branches (Martin, 2013, p92).Bank of Scotland shocked the industry when it first made its bid for NatWest (BBC, 2000), tabling an offer of 21 billion. Bank of Scotland tried to make the offer appealing, as they wished to keep the NatWest brand, along with aiming to cut costs by 1 billion over three years (Fraser, 2014, p80). RBS eluded early signs of their ruthless zest for growth here. This met with anguish from those at NatWest. Specifically, Sir David Rowland saw the Bank of Scotland (BoS) bid as unwelcome and ill thought out (Fraser, 2014, p81); with Ed Sweeney of the banking union Unifi proclaiming branch closures and job losses running into thousands, not hundreds (BBC, 1999). Furthermore, BoS said it would sell off non-core NatWest businesses (BBC, 1999). This would prove to be crucial in RBS clinching NatWest, with Goodwin advising Mathewson that their offer would endeavour to persuade shareholders that, thanks to its scale, a merged company could expand a lot more than either could on their own (Martin, 2013,p98). Cost savings mainly focused upon streamlining processes across both institutions 600m could be saved by de-duplication in seventy-two areas (Martin 2013, p99). However, again Rowland saw the bid as based on overestimates of the benefits of a merger (Martin, 2013, p99). Despite overcoming competition concerns, both banks continued to vie it out over the merger. Due to the amount of time taken in the proceedings, there were concerns that Lloyds TSB might make an offer if RBSs bid fell through. Despite the fact that Lloyds TSB issued a statement denying the claims (Martin, 2013, p101), there continued to be a level of ambiguity over who would eventually seal the deal. This played to NatWests strengths Rowland had a vested interest in allowing the two Scottish banks to slug it out for as long as possible (Fraser, 2014, p85). Goodwin and Mathewsons determination to succeed was compounded by a triumphalist anti-English sentiment they thought Royal Bank was streets ahead of any of the English banks and wanted to prove it (Fraser, 2014, p82). As the deadline for either bank to make a final offer loomed and the vote must take place within 15 days of the final offer (BBC, 2000), competition between the 2 rivals was fierce. Goodwin and Mathewson were not averse to the use of bullying to get their own way (Fraser, 2014, p91) and when Commerzbank analyst Alex Potter published a note expressing scepticism about RBSs proposals, Mathewson was furious. RBS sought to get the note withdrawn and even to get Potter fired (Fraser, 2014, p91). Despite the Financial Times Lex column endorsing support for Bank of Scotland and Phillips & Drew Fund Management Backing BoS all was not lost for Royal Bank of Scotland (Fraser, 2014, p92). Deutsche Asset Management, who owned 1.4% of NatWest, endorsed RBS. With the share price of RBS increasing and BoS falling, the so-called conditional acceptances came flooding in (Fraser, 2014, p92). Schroeders and Mercury Asset Management eventually came on side with the RBS bid. On the 10th February 2000, the BBC proclaimed Bank admits defeat over NatWest, with Phillips & Drew Fund Management, who formerly supported Bank of Scotlands bid called on the NatWest board to lay down its defences and accept the RBS offer (BBC, 2000), with any notion of NatWests enduring independence laying in tatters. RBS had sacrificed and awful lot of shareholder value in the pursuit of NatWest, with RBSs share price falling 29% (Fraser, 2014, p94) between the beginning of BoSs bid and the eventual RBS merger. In Scotland, Mathewson and Goodwin were seen as heroic figures who had slain a giant, come back with sacks of booty and put two fingers up at the Sassenachs in the process (Fraser, 2014, p94). On 6 March 2000, the Royal Bank announced that Goodwin would become chief executive with immediate effect (Martin, 2013, p127), thanks largely to Mathewsons opinion that winning the takeover wouldnt have been possible without Fred (Martin, 2013, p127). The NatWest takeover proved a defining moment on the path to RBSs disastrous loss in value in 2008; doubling the branch network and taking on almost three times their own assets, which allowed for bigger deals, fancier assets and riskier securitisations.Chapter 3 NatWest to ABN AMRO: Empire Building on the Back of an Initially Small Balance SheetIn the aftermath of the 21 billion NatWest takeover, RBS had transformed itself from a relatively insignificant provincial player to the seventh largest bank in Europe (Fraser, 2014, p96); and became the UKs third largest bank after HSBC and Lloyds TSB (Fraser, 2014, p96). Around the same time, Barclays had bought Woolwich for 5.4 billion and displayed similar rhetoric in the aftermath of the deal the financial success of the deal will depend upon vigorous cost-cutting, and therefore redundancies (BBC, 2000). In a similar vein to RBS, Barclays success in the aftermath of the deal depended upon the back offices of both institutions being amalgamated, with around 1000 jobs lost. Redundancies amongst RBS and NatWest, however, were more far-reaching (with 18000 job losses), with Chairman George Younger concluding that the NatWest board was useless (Fraser, 2014, p99). Axing the majority of the old NatWest board, Goodwin wanted to appoint former Arthur Anderson partner Richard Delbridge as finance director. Goodwins moniker was well known, thanks largely to the events in the run up to the NatWest takeover and a former colleague of Delbridge proclaimed Goodwin is a risk taker who is also really pernickety about the stupidest things (Fraser, 2014, p100). RBS, who were keen on applying spin to Delbridge turning down the offer, proclaimed that he was too old to provide long term leadership (Fraser, 2014, p100). Merging the IT systems of the two companies proved an uphill struggle, Mark Fisher, the other preeminent executive left from NatWest in the aftermath of the takeover, headed up the manufacturing division of RBS. Described as a superbly efficient integrator but also as a ruthless techno geek (Fraser, 2009), his role at NatWest in processing 10 million transactions a day was compared to changing all four tyres on a car while doing 70mph in the outside lane of a motorway (Fraser, 2014, p102). The guiding philosophy of the merger was that with a merged back room the bank could create and market financial products which could then be sold under the banner of different brands in the group (Martin, 2013, p129). John White, head of IT and a veteran of IBMs plant in Greenock, where Mathewson had drawn staff whilst at the Scottish Development Agency, was tasked by Goodwin that the systems for managing accounts of NatWest and its subsidiary Ulster Bank be bolted on to those of the Royal Bank in Edinburgh (Martin, 2013, p130). This proved successful, with manufacturing amalgamating the IT systems ahead of schedule, as even though RBSs IBM-based information technology platform was smaller than NatWests, it had the advantage of being more flexible, in terms of scalability it could handle more transactions and adaptability it could be adapted to handle additional types of transaction (Fraser, 2014, p107). The success of the integration lead Goodwin to be hailed as Businessman of The Year as a result Forbes Global said Mr Goodwin carefully constructed an integration plan, which won the support of institutional investors (Dunne, 2002), with sources close to the then 44-year-old believe the award played a big part in inflating his ego, conceit and lust for power (Fraser, 2014, p150). Despite being hailed as Masters of Integration by Harvard Business School, aspects of the IT integration were seen to be a botch job, with an example highlighting the lacklustre nature of this being you couldnt pay in an RBS cheque in at NatWest branches (Fraser, 2014, p109). This proved to be a defining moment in terms of the paths that led to RBSs downfall. Goodwin felt he could do no wrong; after being the architect of the acquisition of the millennium, niggles over aspects of the IT integration were the least of RBSs concerns. In April 2000, Goodwin and Mathewson exclaimed there were good surprises and bad surprises arising out of the takeover (Fraser, 2014, p104). In a move against RBSs planned strategy, Greenwich Capital Markets (GCM), a Connecticut based bond trading house and one of 37 primary dealers authorised to trade in Treasuries government bonds issued by Washington D.C. (Fraser, 2014, p104), was seen to be a resounding success, with strengths in structured finance a way of repackaging debt to sell on to third party investors. Amalgamated under the Corporate Banking and Financial Markets division (CBFM), RBS had become the largest corporate bank in the UK serving some 200 of the FTSE-250 companies (Fraser, 2014, p105). However, these assumed strengths would contribute to RBSs fall from grace spectacularly. Goodwin always sought to downplay RBSs role in investment banking (Fraser, 2014, p119); through bundling the results for the investment banking arm with those of the UK corporate lending arm (Fraser, 2014, p120). Head of investment banking Johnny Cameron encapsulate this agenda under RBSs advertising slogan make it happen. To contrast RBSs reporting, with the actuality of GCMs activities it is useful to note that under By 2006, RBSs Global Banking and Markets division had become the world leader in underwriting asset back securities.. By 2002, the share price reached a high of 2040p, thanks largely to the success of the NatWest deal. However, by 2003, investors were beginning to see flaws in the way the bank was being run. Fox-Pitt Keltons Mark Thomas and SG Securities John Tyce sought to raise the alarm about the rapid growth in RBSs commercial property lending (Fraser, 2014, p124); with Fred shrugging it off as merely paranoia; other financial institutions attitudes to risk at the time were more prudent, with Lloyds for example, stating that, the business environment within which we operate is characterized by increasing levels of competition, volatile equity markets and increasing government regulation of the financial services industry. Against this backdrop, Lloyds TSB will continue to focus on its long standing principles of prudent and sustainable revenue growth from the creation of value for customers, tight management of its cost base and strong credit risk management (Lloyds TSB, 2003). Pierson, positing path-dependence asserts that a focus on self-reinforcing, path-dependant dynamics turns out to be an essential building block for exploring a wide range of issues related to temporal processes (Pierson, 2004, p22). With this in mind, it is interesting to note that the rampant growth of RBS through project Columbus and the NatWest acquisition, outshone banks like Lloyds in the early 2000s. However, this would prove to be their undoing later in the series of events.What allowed for such expansionist growth has often been alluded to the dissemination of a culture of fear that promulgated widely as RBS gained momentum into the 2000s. During an executive conference at Gleneagles in 2001, Goodwin asked the executive team at RBS to jot down what they thought were the biggest problems facing the bank (Fraser, 2014, p125). With near unanimity (Fraser, 2014, p125) the biggest problem seen to be facing RBS was its culture of fear (Fraser, 2014, p125). Goodwin responded dont tell me youre frightened of little old me (Fraser, 2014, p125). In the aftermath, one of the executives then present proclaimed you could have heard a pin drop after that (Fraser, 2014, p125). This summates the zeitgeist amongst those at RBS under Goodwins leadership. Goodwin cared about peoples feelings, but only how the felt about RBS. Essentially, he wanted his employees to believe in RBS as much as he did (Fraser, 2014, p125); which helped to legitimise the introduction of a rank-and-yank HR system. Under the Performance Evaluation Framework, employees scored from one to five, with positive factors including qualities like Burning Drive for Results (Fraser, 2014, p128). Goodwins persistence to overcome HBOSs leading position in Scotland meant managers were bending over backwards for their business customers, with one former business banking manager alluding If HBOS were offering a business customer 3 per cent over base; wed cut our margins and offer 2.5 per cent over base. Quite a lot of the customers we took over in this way I suspect have gone bust (Fraser, 2014, p129). Whilst HBOS set a strategy for aggressive, asset-led growth across divisions over a sustained period (Parliament, 2011, p8); RBS were poised to gain market share in native Scotland (seeing as HBOS was now constituent of the Halifax), exhibiting the nationalistic flair aforementioned.RBSs operations in North America in the early to mid-2000s were going from strength to strength. Citizens Financial Group was described as having an iron-fist-in-a-velvet-glove sales ethos (Fraser, 2014, p192). The bank marketed itself as offering a simpler, more personable option for banking; with their branches being famous for handing out dog biscuits to customers, as well as reputedly being on a first name basis with more than 1000 of the companys 15000 employees (Engen, 2003). Larry Fish, Citizens chief executive developed bad habits (Fraser, 2014, p195); with a number of analysts concluding that Citizens had paid over the odds for a number of its acquisitions, in keeping with RBSs agenda to gain market share in the US. The 2001 acquisition of Mellon Financial, proved to be a turning point for Citizens fortunes, Citizens Financial Group agreed to buy the retail-banking business of Mellon Financial Corp. for slightly more than $2 billion in a transaction that will expand Citizens reach beyond New England (Sidel, 2001). Desperate for market share, and with RBS on a high in the aftermath of the NatWest merger, deals like this and the takeover of State Street in 1999 proved to two of the most expensive acquisitions in terms of price-to-book value, in the five years to 2003 (Fraser, 2014, p195). With the success of these acquisitions, RBS sought to acquire a bigger player across the Atlantic. Setting their sights on Charter One, Citizens vied with KeyCorp (in talks over a $6-8 billion deal) for ownership; eventually reaching an agreement to buy Charter One Financial Inc. for $44.50 a share in cash, or about $10.5 billion (Berman & Hallinan &Raghavan, 2004), which put Citizens as the fifteenth largest bank in the US, also being the second largest bank merger that year behind the $59 billion JP Morgan-Chase Bank One deal. This deal helped to fuel divisions between Goodwin and Mathewson, George basically fell out with Fred soon after Charter One. George started publically criticising Fred for having done the deal he was telling analysts and investors he understood why they were unhappy with it he understood why RBS share price had gone down the toilet (Fraser, 2014, p201). To add to this, in the aftermath of the crisis, in the footnotes to Royal Bank of Scotlands Annual Report 2008, the bank said it had taken a 4.382-billion goodwill write down on Charter One (Fraser, 2014, p202) and so, with the benefit of hindsight, a bank for which RBS had paid 5.8 billion was perhaps worth only 1.4 billion (Fraser, 2014, p202). This really espouses where RBS really went wrong in the prelude to the crisis. They were hungry, for asset based growth and a strongly desired a large market share in any country within which they operated. Still fuelled by a desire for expansion and growth, as well as wishing to mask the weaknesses at Charter One (Fraser, 2014, p232); Goodwin set his sights on an even bigger player in global finance, ABN AMRO (ABN). Similar to NatWest, ABN has been described as a national icon that lost its way (Fraser, 2014, p232). The Dutch bank, led by Rijkman Groenik had become dysfunctional it was fat, overweight, lazy, blind, arrogant, and consistently under-performing. It was like a wounded elephant that was bleeding from behind. It was the perfect prey (Smit, 2010). Despite mismanagement, ABN owned Chicago based LaSalle bank, which Goodwin saw as key to enhancing Citizens position in the US, and was the only reason that RBS ever had the impetus to make an offer. However, upon meeting Rijkman Groenik in 2005, he admitted that his capital ratios were too stretched and his shareholders too small minded (Fraser, 2014, p232) in order to go it alone in bidding for ABN, then worth 24 billion. Over a year later, in October 2006, Goodwin wrote to Groenik asking to meet again. This led to those in the City to buy ABN as they predicted a surge in share price amongst a contested takeover battle. Merrill Lynch Mergers & Acquisitions executive Andrea Orcel had a brainwave (Fraser, 2014, p233), as Groenik flat out refused to offer RBS the LaSalle subsidiary alone. Santanders Emilio Botin, interested in making acquisitions in South America, as well as being a non-executive director of RBS, had his eyes set on Italy and Brazil, where Botin had also done his homework and he told Goodwin that, for Real and Antonveneta, Santander should pay 17 billion Euros (Fraser, 2014, p234).As discussions continued, the hedge funds got involved. Unamenable to the idea of cosy and shareholder-unfriendly (Fraser, 2014, p235) deals, such as the one ING Groep were in deep (Fraser, 2014, p234) talks with ABN over; owner of The Childrens Investment Fund (TCI), Chris Hohn, was said to have amassed a reported 2 per cent stake (Fraser, 2014, p235) in ABN. TCI issued a letter to Groenik demanding ABN push ahead with a spin off, sale or merger of its various businesses (Fraser, 2014, p236). At RBSs results presentation on 1st March 2007, Goodwin was asked whether he was out of the sin bin, he responded yes, which was a bit on an understatement considering he was in talks with ABN. Announcing pre-tax profits of 6.5 billion (Fraser, 2014, p237) most of the growth was coming from Camerons investment bank and Goodwin admitted that, during 2006, gathering deposits had been a difficult gig for Citizens (Fraser, 2014, p237). At this point in time, rival Barclays were also in talks with ABN about an acquisition, whereby Barclays boss John Varley had developed a good relationship with the Dutch banker (Wilson & Aldrick & Ahmed, 2011). By this time ING Groeps bid was becoming increasingly uncompetitive, with hedge funds driving up the share price, and INGs chief executive, Michel Talmant unwilling to offer more than 31 euros per ABN share (Fraser, 2014, p238). This was the era when everything was about rapid growth and domination (Wilson & Aldrick & Ahmed, 2011). Desperate to avoid RBS and Santander mounting a takeover bid, Groenik met Barclays chairman had already sketched out a five-point plan which would see Barclays make a string of concessions to assuage Dutch pride (Fraser, 2014, p238). Barclays saw ABN as key to expanding their European operation, harbouring a dream of tuning Barclays into a European version of Citigroup (Fraser, 2014, p238) and helping meet John Varley (chief executives) goal of more than doubling the share of earnings outside the banks British home market, where lenders have been hit by increasing loan losses (Werdiger, 2007). Ahead of preliminary talks, the Sunday Times hailed Barclays in 80-billion offer to ABN AMRO, which sparked Goodwins deepest fears. Goodwin believed that RBS or Barclays (one or the other) were susceptible to take over from one of the US giants Citigroup or JPMorgan Chase. This characterised the competitive pressures that markets placed upon executives in the prelude to the crisis. No matter how large you were by total assets, the laissez-faire regulatory structures allowed for consortiums and leveraged buyouts, which could make even the most assertive CEO, like Goodwin, conscientious of the wider market environment. At this point, deciding attack was the best form of defence Goodwin activated plans for a carve-up takeover of ABN AMRO (Fraser, 2014, p239). Unhappy with the idea of having to take on ABNs Benelux branch network, Orcel had another brainwave, Fortis. Fortis, whos chief executive, Jean-Paul-Votron, a Belgian aristocrat had been previously working with Citigroup on a joint bid for ABN, had long been interested in the Benelux branch network. Barclays, had announced that it would effectively be acquiring ABN for 67 billion or a higher than expected 36.25 per share (Fraser, 2014, p243). Even worse, ABN had announced that it was going to sell LaSalle to Bank of America. On 3rd May 2007, however, the sale of LaSalle was halted, with the need for Bank of America to obtain shareholder approval if it wanted to sell the division (Fraser, 2014, p245).To Goodwin, this was good news, smiling when he came out of the office after he had hear the news. However for others it was in a different way. They thought it was over due to the lack of a sale of LaSalle and could get back to their day jobs of running the bank (where there were some important issues to attend to including subprime exposure in the US) (Fraser, 2014, p246). Goodwin felt that ABN were still a prime target for takeover, but Moodys placed RBS on negative watch (Fraser, 2014, p247), due to RBSs capital levels and position on taking over ABN. ABN had tried to warn RBS about what lay beneath its integration plans for ABN were ambitious and did not take into account the banks complex matrix structure (Wilson & Aldrick, 2011), but Goodwin chose not to heed, instead truly believing in the deal. By this time the Dutch Supreme Court overturned the decision by the Amsterdam Appellate Courts decision to block LaSalle, allowing it to be sold to Bank of America. At this time, the credit crisis and financial crisis was already in swing. Northern Rock, based in Newcastle which had lent at crazy multiples into the UKs house price bubble and whose balance sheet was massively over leveraged (Fraser, 2014, p258), had to go to the Bank of England for liquidity support after a merger with Lloyds TSB failed. On the 17th September 2007 RBSs board took ABNs trading statement as gospel (Fraser, 2007, p258), inspiring Goodwins confidence. Overseen by ABNs finance director Huibert Boumeester, ABN claimed they are on track to deliver earnings per share of approximately 2.30 on an adjusted basis (Fraser, 2014, p258). At this time Barclays share price was falling with Groenik stating the price is too low in relation to Barclays, despite ABNs previous position was that Barclays offer was more consistent with its own strategy and history event though the RBS-led consortiums offer was worth more (BBC, 2007). Barclays finally threw in the towel on Friday 5 October, having secured only 0.2 per cent of acceptances, which meant the consortium had ABN AMRO in the bag (Fraser, 2014, p260), due to the share based nature of Barclays offer. The eventual acceptance of an offer, when about 86% of ABN AMROs shareholders have accepted a 71bn euro ($98.5bn; 49bn) offer to clinch Europes biggest ever banking takeover (BBC, 2007). In the deals aftermath, blood was drawn amongst the former three musketeers consortium. In a victory presentation to their chief executive Alfredo Saenz gloated we have got the best bits of ABN AMRO; we got the best meat from the kill (Fraser, 2014, p261) and despite avoiding the point in a press conference (instead eluding ABNs strengths in risk management) one of the things we recognise is that ABN AMRO has a world-class-risk-management function and, as the world becomes an increasingly complex place, this is critically important (Fraser, 2014, p261). The almost non-existent due diligence; which was carried out on the basis of just two lever arch files and a CD (Bowers & Treanor, 2001); by contrast to Barclays had done a thorough run-through and were pressing ahead then it must be fine (Martin, 2013, p237) , helps to signify a number of factors Fraser espouses that lead to such a bad deal the hubris of Fred Goodwin ; the financial power of the hedge funds; the stupidity and vengefulness of the Fortis people; the extraordinary liquidity in the market; the whole perception especially in the EU that shareholders rights were paramount (Fraser, 2014, p262). The Economist lamented the deal as a spectacularly cack-handed (The Economist, 2010) attempt at RBS growing their investment bank and expanding its sphere of influence internationally. The ABN merger was effectively RBSs undoing. Their exposures to more diversified asset portfolios (due to its position as a long standing mid-tier investment bank), hidden through its complex fraternal network (based on wholly inadequate due diligence) all contribute to the fact that, to this day, RBS operate at a loss, for 2014 this being attributable 3,470m (RBS, 2014, p2). ConclusionOverall, the reason why RBS recorded the worst loss in British corporate history was due to the perfect storm of factors including poor risk management, a nationalistic expansionist corporate culture and the failure of management actors such as Fred Goodwin to heed warning signals that existed in the prelude to the financial crisis. Other financial institutions displayed levels of hubris at the upper echelons also, but RBS was of a level that was not experienced elsewhere. The failure to heed warning signs on the part of former CEO Fred Goodwin about impending losses in values of securitized assets (whereby a change, or hedging of positions may have been enough to affect change), served to increase the scale of losses exponentially. Concepts of bounded rationality and path dependency have been employed throughout this inquiry, so as to show how financial agents acted on what they thought to be truths about the future value of assets, even amongst growing market uncertainty, such as during the ABN AMRO merger, whereby RBS continued to go through with the acquisition, despite Northern Rock already having turned to the Bank of England for liquidity support, mainly due to path dependent processes that affected the self-worth of actors like Fred Goodwin and Johnny Cameron (notably after Goodwin had won global business leader of the year in Forbes), thought their business methods were innovative, predicated on age-old notions of risk-reward. Sociological institutionalist concepts of institutional homogenization help espouse how the inventor of the overdraft, who had been bailed out during the 18th century became the most prolific debtor in British history, owing their survival to the capital injections introduced by the UK government during the financial crisis. The critical juncture of the financial crisis, served to shift RBSs focus away from derivatives trading lead growth, and back towards the realm it was comfortable in, before George Mathewsons arrival at the firm, and the ensuing Project Columbus.

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