Bloomberg News

‘Dominant’ Goodwin Perturbed RBS’s Regulators Going Back to 2004

December 13, 2011

Dec. 13 (Bloomberg) -- Four years before Royal Bank of Scotland Group Plc collapsed, Britain’s Financial Services Authority identified then-Chief Executive Officer Fred Goodwin’s “dominant” management style as a risk.

A report into the near collapse of Edinburgh-based RBS released by the FSA yesterday said that rather than challenge Goodwin, regulators were too lenient dealing with him.

In 2005, Goodwin asked that FSA staff water down written concerns about RBS risk management after he was shown drafts of correspondence the regulator was preparing to send to the bank’s board. Acceding to Goodwin’s demands for a rewrite was “common practice” by FSA staff at the time, the report said.

“More should have been done to address concerns that the CEO was dominant and that he received insufficient challenge from the RBS board,” the report said. “Greater consideration should have been given to escalating the concern.”

When the regulator sought one-on-one meetings with the bank’s non-executive directors to seek reassurance that proper governance procedures were in place, RBS refused and complained that its employees “should not be picked off.” The FSA is being split up by the government next year as part of the May 2010 coalition accord between the Conservative and Liberal Democrat parties, which said the existing regulatory system is “fundamentally flawed and needs to be replaced.”

‘Vigor of Pushback’

“Records from 2004 suggest that RBS management, and in particular the RBS CEO, had been resistant to what they saw as unnecessary FSA interference,” the regulator said in the report. “RBS stood out among its peers in terms of the regularity and vigor of pushback against FSA policy initiatives and resistance to enquiries with which it felt uncomfortable.”

A spokesman for Norton Rose, a law firm Goodwin has employed, declined to comment.

In the four years before its collapse, Goodwin tripled the bank’s balance sheet to 2.4 trillion pounds ($3.7 trillion). The FSA also said he made the lender “excessively dependent” on short-term funding, which was exacerbated after the 72 billion- euro ($95 billion) purchase of ABN Amro Holdings NV. That dependence brought RBS down when markets seized up following the collapse of Lehman Brothers Holdings Inc. on Sept. 15, 2008.

The FSA’s study indicated RBS’s 2007 Tier 1 capital ratio, a measure of financial strength, would have been about 1.97 percent of risk-weighted assets under the more rigorous rules now in force -- less than a quarter of the ratio now required.

ABN Due Diligence

Under international Basel III rules being implemented through 2019, the lender would also have needed as much as 166 billion pounds in additional “high-quality unencumbered liquid assets,” the FSA said.

Goodwin pushed ahead with the ABN deal, the biggest-ever bank takeover, even though the due diligence gleaned from the Dutch lender amounted to little more than two binders and a compact disk, the FSA said.

The report said RBS had a misplaced sense of confidence given its success with previous acquisitions, particularly the purchase of National Westminster Bank Plc, the U.K.’s third- biggest bank, in 2000.

“After we bought NatWest, we had lots of surprises, but almost all of them were pleasant,” RBS’s former investment- banking chief, Johnny Cameron, said in an interview with the FSA. “That lulled us into a sense of complacency.”

A spokeswoman for Cameron didn’t immediately respond to an e-mail requesting comment.

‘Optimistic’ Cameron

Cameron built RBS’s global banking and markets business before 2008, entering the U.S. and expanding into credit trading. He “tended to take an optimistic view of what was likely to happen and had often in his life been proved right,” and that may have clouded his judgment over the ABN Amro takeover, the regulator said.

The FSA criticized RBS for financing the purchase of ABN mostly though debt, not equity. RBS paid 4.3 billion euros in stock and 22.6 billion euros in cash to ABN shareholders. Most of the cash consideration was funded by debt, 12.3 billion euros of which matured in under a year, the FSA said.

“Whether the acquisition of ABN Amro was the crucial factor which brought RBS down is a matter for debate,” the report said. “However, it is clear that the acquisition undoubtedly contributed significantly to RBS’s vulnerability.”

--Editors: Keith Campbell, Steve Bailey.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net Howard Mustoe in London at hmustoe@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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