11 Nov 2013

I took a short holiday recently with my family over half term and the obligatory choosing of reading material commenced prior to departure, to ensure I did not get too bored on the beach.

Now my wife goes for the latest trashy novel, my son is more the Apple app guide or PlayStation magazine type, whereas I like to read things that interest me. So I selected a recently published book by Iain Martin called “Making It Happen: Fred Goodwin, RBS and the men who blew up the British economy”.

Iain Martin is a political commentator, a former editor of The Scotsman and former deputy editor of The Sunday Telegraph and, in my opinion, now a very good author.

Having lived through the RBS decline in a number of capacities I was drawn to the book, to see if it would shed any more light on just what went wrong. I bank with NatWest (RBS), always have done since I began my career with them in the mid-1980s; I am an RBS shareholder through various share ownership schemes I bought into whilst working there; and in a corporate capacity I have run businesses with significant investments in RBS as a major and highly rated UK bank (pre-crunch) that few would have doubted, without the hindsight we of course now have 5 years after the height of the UK banking crisis. Therefore this book had me hooked simply by the title.

Sad as it may be, I couldn’t put it down. It was an exciting journey that compelled me to find out what happened next. But such a journey makes you think hard about your own corporate life and make sure that you do and can look yourself in mirror and answer some basic fundamental questions.

  1. Why am I doing this?
  2. Who am I doing it for?
  3. What am I doing?
  4. Do I understand it?
  5. What could go wrong?
  6. How do I manage the risk?

Now in the case of Fred and some of the senior people at RBS, the book suggests that the answers to the above questions were as follows:

  1. For the short-term significant gains in pay!
  2. For myself!
  3. Growing to prove that I can make the biggest bank in the world!
  4. I understand the targets but not the components of them!
  5. I don’t know, we are so big what can happen?
  6. I have people that do that for me!

By way of illustration the book talks about billions of pounds' worth of CDOs (collateralised debt obligations) that contained heavy exposure to US sub-prime mortgages. Fred Goodwin had repeatedly stated that RBS had no sub-prime exposure and according to the book, just before the eventual re-capitalisation of RBS by the tax payer, when the value of the CDOs had effectively fallen away, someone had to draw him a picture to explain how a CDO worked and what it meant.

This got me thinking. Whilst I do run a bank, I have no desire to run the biggest bank in the world or anyway near. I like to get my arms round the business; I like to know who does what and how. I like to understand every aspect of the business, the funding, the lending, the risk management, the treasury etc.

So I asked myself the questions the book posed and my answers are as follows:

  1. Because I love what I do, we help people look after their hard earned savings and fund their property purchases and I like that.
  2. For our customers, our shareholders, our staff and my own reputation.
  3. Building a profitable, sustainable and customer focused business.
  4. Lending is risky. I won’t take risks that I don’t understand, so yes.
  5. Fraud, economic shock, systemic failure, market dynamics, the list is actually pretty long.
  6. I watch the risks, our board, executive team and staff watch them too. We have people and systems to detect and report risks, we have failsafes, we have stress testing, and most of all we have a good knowledge of the risk and mitigants in our business model.

Now I don’t believe anyone can hand on heart say that nothing will ever go wrong, but if it does you need to know how to respond and the torpedo should not be allowed to grow big enough to hole the boat.

According to my holiday read, RBS had a number of torpedoes that individually would certainly flood the hull, and with multiple blow ups, were more than capable of turning the biggest bank in the world into a sinking ship, and that is effectively exactly what happened.

Makes you think about the size of the UK’s biggest banks. They are too big to fail aren’t they, as the ensuing torpedo that would result from a large bank failure would certainly flood the hull of the UK economy – or worse!