Bloomberg News

Goodwin Honor Loss a Watershed as U.K. Gets Tough on Banks

February 02, 2012

(Updates with Cameron’s spokesman, lobby group starting in seventh paragraph.)

Feb. 1 (Bloomberg) -- The British government’s decision to strip former Royal Bank of Scotland Group Plc Chief Executive Officer Fred Goodwin of his knighthood reflects a turning point for bankers as politicians and voters step up criticism of pay and performance.

Yesterday’s announcement came just two days after Goodwin’s successor at the Edinburgh-based bank, Stephen Hester, waived a 963,000-pound ($1.5 million) bonus after pressure from lawmakers and the media. Goodwin was punished for leading the 285-year-old lender into the world’s biggest bank bailout, while Hester was slammed because RBS’s share price has slumped in the past year. Voices from across the political spectrum said the behavior of bankers has to change.

“This is a watershed 48 hours which dramatizes the urgent need for financial services to re-earn legitimacy with the rest of civil society,” said Will Hutton, a former director of the Work Foundation research group and author of “The State We’re In,” the 1995 book that advocated less reliance on finance. “For three years, bankers have lived in a parallel universe,” he said in a telephone interview.

Prime Minister David Cameron’s government and the opposition Labour Party have found a common cause as they press for more restraint from banks that had to be bailed out by the taxpayer, sparking an economic downturn and a record budget deficit. As public-sector jobs are cut, pay is frozen and the economy teeters on the brink of a second recession, the finance industry is facing a backlash.

‘Huge Bonuses’

“The debate over the last few days has shown how unhappy the public are, given the sacrifices they are having to make because of the austerity program that was mostly the result of what happened in financial services, particularly when senior officials are paying themselves huge bonuses,” Andy Love, a Labour member of the House of Commons Treasury Committee, said in a telephone interview. “I hope both RBS and others respond to that mood.”

Britain’s Honors Forfeiture Committee decided that Goodwin should lose his knighthood, awarded in 2004 for “services to banking,” in the light of the 2008 collapse of RBS, the Cabinet Office said yesterday. He will no longer be entitled to use the title “Sir” before his name.

“There is a lesson to be learned for financial services generally,” Prime Minister David Cameron’s spokesman, Steve Field, told reporters in London today. “Clearly what happened in the past mustn’t happen in the future.”

Soviet Spy

Previous examples of people stripped of their knighthoods include Zimbabwean President Robert Mugabe and the art historian Anthony Blunt, revealed in 1979 to have been a Soviet spy.

Michael Fallon, deputy chairman of Cameron’s Conservative Party and a member of the Treasury Committee, said that scrutiny may be extended to honors for senior figures involved in Lloyds Banking Group Plc’s 2008 takeover of mortgage lender HBOS Plc, which led to a taxpayer bailout of more than 20 billion pounds.

“There’s going to be a report from the Financial Services Authority into the HBOS-Lloyds disintegration, and who knows what will follow from that,” Fallon said in an interview with BBC Radio 4’s “Today” show. “If you hand somebody a knighthood for services to banking, then you’ve got to make sure he continues to be a worthy recipient of that honor.”

‘That Bit Extra’

Labour will use a debate in Parliament on Feb. 7 to press home its attack on the bonus culture within financial services. The party’s business spokesman, Chuka Umunna, said last week the idea that bonuses were routine needed to change.

Outside of financial services, he told the BBC on Jan. 27, “you receive a bonus if you’ve done something out of the ordinary, you’ve done something that bit extra.”

The U.K. government has injected 45.5 billion pounds into RBS since 2008 and Goodwin, now 53, was the “dominant decision maker” at the time of its collapse, the Cabinet Office said.

A Financial Services Authority report published Dec. 12 said that as early as 2003 its supervision team had identified that Goodwin’s assertive and robust style might have created a risk. It said there was “an important question” about the quality of his judgment in the people he chose to run the investment-banking arm of the company.

Hester waived his bonus late on Jan. 29 after Labour said it would force a vote on the issue in the House of Commons. RBS Chairman Philip Hampton also abandoned his 1.4 million-pound award.

‘Good of Scotland’

Goodwin was knighted in Queen Elizabeth II’s birthday honors in June 2004 for “undertaking many projects to the benefit of his bank and the good of Scotland as a whole,” Prime Minister Tony Blair’s office said at the time.

An RBS spokeswoman declined to comment on yesterday’s announcement, as did a spokesman for Goodwin.

Barclays Plc’s Robert Diamond, Britain’s top-paid bank CEO, is the next executive likely to face scrutiny.

Diamond was awarded a 6.5 million-pound bonus for 2010 and a further 2.25 million pounds depending on the lender’s performance, London-based Barclays said in March.

Unlike RBS and Lloyds, where the U.K. taxpayer is also the biggest shareholder, the government has no stakes in Barclays, HSBC Holdings Plc or Standard Chartered Plc, making it difficult for the state to exert bonus restrictions. A spokesman for Barclays declined to comment on bonus awards this week.

‘Anti-Business Hysteria’

Simon Walker, the director general of the Institute of Directors, a business lobby group, attacked the Forfeiture Committee’s decision.

“I’m concerned about an anti-business hysteria,” Walker told the BBC. He said it was “inappropriate” to take away Goodwin’s knighthood “because you don’t approve of someone, you think they have done things that are wrong but actually there is no criminality.”

Some newspapers were also critical, with the Independent saying that if Goodwin lost his knighthood for his role in the financial crisis, then maybe the same sanction should be imposed on Bank of England Governor Mervyn King and former Lloyds Chairman Victor Blank.

“Fred Goodwin is exceptional only in his totemic value to a mob baying for vengeance,” the newspaper said in an editorial. “It sends out the profoundly off-putting signal that Britain is anti-business and anti-wealth, a culture of harbored grudges, public vindictiveness and mob rule.”

‘Convenient Scapegoat’

The Daily Telegraph said the withdrawal of the knighthood “sets a new benchmark, whereby anyone identified as a convenient scapegoat for the country’s woes can be similarly disparaged.”

Former Labour Chancellor of the Exchequer Alistair Darling said the decision to strip Goodwin of the honor, after being “summarily and quickly” judged, showed a government being “blown along on the wind.” He warned the lack of a proper process risked tarnishing the U.K.’s reputation around the world. Would others implicated in the failure of RBS also be stripped of honors, he asked.

“The government appears to be going after individuals without establishing the principles on which people are going to be judged,” Darling told the “Today” show. “We’re getting into awful trouble here if we go after people on a whim and we don’t have clear set of principles against which we can judge people.”

RBS Expansion

Goodwin, born in Paisley, Scotland, and who once worked as an accountant, became CEO in 2000 as RBS purchased National Westminster Bank Plc for 24 billion pounds, the biggest takeover in the financial-services industry at the time. The transaction more than doubled the size of the company, making it the U.K.’s biggest lender to companies as well as the second-largest consumer bank.

As CEO, Goodwin continued to expand through takeovers, buying Charter One Financial Corp. for $10.5 billion in 2004 and a 5 percent stake in Bank of China the following year. In all, he spent about $90 billion on acquisitions, and in the four years before RBS’s collapse he tripled the bank’s balance sheet to 2.4 trillion pounds, almost double the size of the British economy.

In 2008, RBS led a group that acquired ABN Amro Holding NV of the Netherlands for 72 billion euros ($94 billion) just before the credit crisis.

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 disc, according to the FSA report.

The takeover, which RBS financed with debt rather than equity, left the bank “excessively dependent” on short-term funding, according to the FSA. That dependence brought RBS down when markets seized up following the collapse of Lehman Brothers Holdings Inc. on Sept. 15, 2008.

The deal forced RBS to post the biggest loss in British corporate history and seek the taxpayer rescue the same year. Goodwin was replaced by Hester when the government took an 83 percent stake in the bank.

--With assistance from Gavin Finch, Ambereen Choudhury and Howard Mustoe in London. Editors: Eddie Buckle, Andrew Atkinson

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net; Robert Hutton in London at rhutton1@bloomberg.net; Thomas Penny in London at tpenny@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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