Shredded: Inside RBS: The Bank That Broke Britain

SHREDDED

Ian Fraser is an award-winning journalist, author and broadcaster whose work has been published by, among others, The Economist, Financial Times, Sunday Times, Independent on Sunday, The Guardian, The Observer, Mail on Sunday, The Herald, Sunday Herald, Thomson Reuters, Huffington Post, economia and QFINANCE. He has taught at the University of Stirling, and his BBC documentary RBS: The Bank That Ran Out of Money was short-listed for a Bafta. He is a graduate of St Andrews University and lives in Scotland.

Praise for Shredded

‘Shredded is a monumental book, well written, impeccably researched and hard to put down at any point. The tone is set in the first paragraph, in which the bank’s former chief executive, Fred the Shred Goodwin, is described as a sociopathic bully whose achievements had been massively over-hyped.’

Philip Augar, Financial Times

‘The compelling power of this book – indeed, its monumental achievement – is to provide a definitive account, not only of the failure of what was briefly one of the world’s biggest banks, but also to set its failure in context, a failure not of one management alone, but of the political and regulatory system in which it operated. Shredded is a definitive and unflinching account of exactly what went wrong and few are spared. Its failures were manifold – from the bullying arrogance of its chief executive through the cowardice of its board of directors, to the feckless oversight of regulators, politicians, rating agencies, so-called independent risk assessment committees, analysts – and most of the financial press . . . Shredded is a monument of painstaking analysis and research to Scotland’s greatest financial failure since Darien. As such it serves as a model of the journalist’s craft, Zola-esque in its broad and unsparing study of corporate hubris and nemesis and haunting in the questions it leaves in its wake.’

Bill Jamieson, The Scotsman

‘If you ever want to know about the trail of greed, incompetence and lies that led to the collapse of the Royal Bank of Scotland then you must read Shredded by Ian Fraser . . .The first few hundred pages are replete with tales of the sinister capriciousness of Fred Goodwin, the CEO of RBS. They also detail the sycophancy of his senior directors, which prevented any of them doing their duty and questioning his vain recklessness. But it’s only as you near the end of this tumultuous book that you become aware of something genuinely and profoundly shocking: that this was an institution that had chosen long before to repudiate the human factor in its crazy obsession with becoming one of the world’s top four financial institutions’

Kevin McKenna, The Observer

‘RBS, briefly the biggest bank in the world, was a rogue bank. In this gripping account, Fraser explains how this was allowed to happen. Evidently, the management – above all chief executive Fred Goodwin – bears immediate responsibility for the grotesque hubris and incompetence displayed but so, too, do the regulators and politicians. RBS was a rogue business, operating in what had become a rogue industry, with the connivance of government. Read it and weep.’

Martin Wolf, Financial Times

‘We meet shocking recklessness in Shredded . . . The extent of greed and broken governance is fascinating and highly disturbing. The book raises critical questions about how and why RBS practices persisted and whether much if anything has changed to prevent such institutions from harming society.’

Prof. Anat Admati, Bloomberg

‘The truth about finance is that 40 years of technological change, globalisation and deregulation have conspired to create a system where bankers do not even have to be break the law to bring the world economy to its knees . . . While the outside world concentrates on greed as the motive for bankers, Fraser demonstrates in this immaculate reconstruction how incompetence and hubris also played their part. A riveting read that made me almost grateful for not being British and therefore not on the hook for the debts that RBS saddled this country with’

Joris Luyendijk, The Guardian

‘Of two excellent recent books about the implosion of Royal Bank of Scotland, Fraser’s is the darker, deeper and ultimately more satisfying version. It is given added weight by the author’s evident, and justified, anger at the way in which one bank brought the British financial system to the brink of catastrophe.’

Andrew Hill, Financial Times

‘It is always invidious to describe any work as definitive, but I do not see how Shredded: Inside RBS, The Bank That Broke Britain is going to be outdone . . . For the fullest survey we are ever going to have, then, we need to read Fraser . . . Fraser offers us plenty of narrative excitement . . . The hero with the fatal flaw defies the gods and at the end the gods wreak their revenge, in the greatest corporate failure of British history. More to the point, though, there is a kind of moral force that keeps Fraser’s narrative going and makes the reader want to turn the page. He is scrupulously fair to the characters he puts before us, for instance to Mathewson, a good man who acquires a sort of tragic stature as he sees his dream turn to nightmare, even to Tom McKillop, the next chairman, who is pitied for his miserable inadequacy. Fraser understands and can even sympathise with human beings caught up in the events that overwhelm them. Yet in a final chapter, drawing up a balance-sheet of blame, he is quite unsparing in his judgments. This, amid an immense mass of detail, remains an extremely clear-sighted book: a great achievement.’

Michael Fry, Scottish Review of Books

‘Ian Fraser’s magisterial Shredded has an Oh My God moment on practically every page. None ends happily for customers. It is the most detailed catalogue to date of the errors and misdemeanours leading up to the financial Hiroshima of RBS’s £45.5 billion collapse in 2008, and the failure, as Fraser sees it, to reform the bank in its aftermath . . . Fraser places the smoke and mirrors that sustained this artifice in the context of Scots financial tradition, of which he offers a startlingly revisionist version . . . His obsessive immersion enables him elegantly to re-enact in slow-motion the car crash that followed RBS’s triumphant 2002 NatWest takeover . . . Combining detailed research with the dry-mouthed, heart-thumping human drama of Britain brought to the brink of social meltdown, Shredded has a place on the top shelf of financial investigative journalism. Its afterlife will be as a what-not-to-do textbook of management science, but it would also make a cracking film, if toned down for the sake of realism. Too bad Apocalypse Now has already bagged the most appropriate last lines of this movie: The horror. The horror.

Colin Donald, The Herald

‘My book of the year . . . amazing stuff. It is very readable, a magnum opus of research and perspective . . . Moral hazard is well explained. Basically it means bankers can bet the ranch. Lose. And we taxpayers buy them a new one. And let them pay themselves millions because they’re so amazing and important to the economy.’

Douglas Mills, The Firm Magazine

‘Shredded is compulsory reading for everybody interested in finding out important truths about the political and financial worlds we live in . . . to learn about these links [between politics and finance], the arrogance and impudence of the people involved in an explicit, straightforward, illuminating, and often humorous way is a wonderful experience for the reader and proof of the author’s exceptional achievement. This is simply a masterpiece.’

Klaus-Peter Müller, Scottish Studies

‘The definitive account of the Royal Bank of Scotland fiasco . . . an engaging tale of how self-serving bank executives systematically broke the rules, lent with astonishing recklessness, abused customers and got suckered by Wall Street – before dumping their mess on the taxpayers.’

Yves Smith, Naked Capitalism

‘Shredded is the definitive account of degenerate financial capitalism.’

Iain Macwhirter. The Herald

‘Magnificent . . . one of the best investigative books of the past decade. It’s also a book that, uniquely, makes us reflect on the past but the future too. And for me the best part is that – in finest investigative journalism tradition – it names the guilty men. It provides chapter and verse in forensic detail on their crimes and misdemeanours. These include the people we are already familiar with and some that seem to have crept back into public life via broadcasters who should know better. I cannot praise Ian Fraser and this work highly enough.’

Eamonn O’Neill, Edinburgh Napier University

‘We need more journalists of Fraser’s calibre, who are able to delve into the often arcane world of high finance and to take a strong, independent viewpoint.’

Robert Alstead, The Edinburgh Guide

‘I don’t think I have ever read such a perfect morality tale for our times.’

Iona Bain, FT Adviser

‘Engrossing, fascinating and appalling . . . a fast-paced and sickeningly-depressing exposition of what can go wrong when corporate governance fails.’

Ruth Bender, Cranfield University

‘Ian Fraser’s Shredded should be required reading for every civil servant at HM Treasury, for every apparatchik in the FCA, and for every politician whose brief engages with the City. [It] leaves a wide variety of players badly bruised and with reputations seriously diminished . . . It is an important piece of work because it throws down a heavy gauntlet to the financial establishment and challenges them to pick it up and answer the charges it contains.’

Rowan Bosworth-Davies

‘You should absolutely read Ian Fraser’s Shredded. It is probably the definitive work on the British and Irish banks in the Great Bubble and the ensuing Great Financial Crisis.’

Alexander Harrowell, The Yorkshire Ranter

‘The definitive text. I’m thinking of Barbarians at the Gate about Kohlberg Kravis Roberts and RJR Nabisco. An instant classic.’

Max Keiser, The Keiser Report

‘Ian Fraser has produced a genuine page-turner from material that is, on the face of it, pretty dry. [Shredded] raises important questions about the extent to which the political system has been captured by financial interests.’

Alex Marsh, Pieria

‘This book should be posted through the letterbox of every taxpayer in Britain.’

David Mellor, former chief secretary to the Treasury, LBC

‘Shredded is an exhaustive, no-holds-barred account of a seismic implosion by a writer with a forensic understanding of his subject.’

Tom Mooney, The Echo

‘Not just the definitive book on the collapse of RBS but one of the best five books on the great financial collapse which changed the history of the 21st century. Ian pulls no punches in his conclusions.’

Russell Napier, Library of Mistakes

‘Combines Greek tragedy with real-life events that have affected us all. It’s hard to put down.’

Devraj Ray, Mortgage Strategy

‘The best single company book I have read – not just post-crisis, but at any time. Better written and better sourced [than Iain Martin’s Making It Happen], Shredded achieves a much better understanding of what went wrong.’

Simon Samuels, former managing director, Barclays

‘Shredded should be compulsory reading for every MP and financial regulator in the country.’

Nick Wallis, BBC Television

‘Want to understand banking and finance and the depth of the continuing RBS scandal? Ian Fraser’s Shredded is indispensably excellent.’

Simon Barrow, Ekklesia

‘Ian Fraser’s Shredded, the story of how RBS broke Britain, is a rattling good read. Hubris, nemesis. Truly shocking.’

Paul Rogerson, Law Society Gazette

SHREDDED

Inside RBS, the Bank That Broke Britain

Ian Fraser

This edition first published in 2019 by

Birlinn Limited

West Newington House

10 Newington Road

Edinburgh

EH9 1QS

www.birlinn.co.uk

Copyright © Ian Fraser 2014, 2015, 2019

First published in hardback in 2014

The moral right of Ian Fraser to be identified as

the author of this work has been asserted by him in accordance

with the Copyright, Designs and Patents Act 1988.

All rights reserved.

No part of this publication may be reproduced, stored

or transmitted in any form without the express written

permission of the publisher.

ISBN: 978 1 78027 604 5

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Typeset by Iolaire Typography, Newtonmore

Printed and bound by Clays Ltd, Elcograf S.P.A.

To Gail, Eleanor, John and Flora

Contents

List of Illustrations

Acknowledgements

Introduction

Preface

1   The battle Royal

2   Mathewson to the rescue

3   Rebuilding the Royal

4   Hanging on the telephone

5   Financial engineering

6   Wings spread

7   George’s big ambition

8   The Fred and Johnny show

9   Bagging NatWest

10   Anglo-Scottish blend

11   The wrong kind of growth

12   The fear culture

13   Wall of silence

14   Riding the Tiger

15   Royal Bank of Fred

16   Laird of Gogarburn

17   Enter the pharmacist

18   Fundamentally supine

19   Three pillars of ignorance

20   All-American boy

21   No more deals

22   Failed alchemists

23   Bad leveraged bets

24   I’m a-shattered, shattered!

25   That Border Collie feeling

26   Explosions at ABN

27   Drink the Kool-Aid

28   The crash

29   Death’s Head

30   Fred found out

31   Defibrillation and despair

32   False dawn

33   Hester’s ledger

34   Et tu, George?

35   McEwan’s uncertain remedy

36   Normalisation of sorts

37   Komodo dragon

38   Largest theft anywhere, ever

39   The guilty men

Epilogue: Flight of fancy?

Glossary

Endnotes

Bibliography

Index

List of Illustrations

RBS’s head office at St Andrew Square, 1828 to 1969.

RBS’s ‘world headquarters’ at Gogarburn, near Edinburgh, 2005 to date.

Fred Goodwin speaking at an anti-fraud conference in Beijing.

Santander and RBS directors unveil RBS’s £26.4 billion takeover offer for NatWest.

Fred Watt, Sir George Mathewson, George Younger and Fred Goodwin in RBS’s Waterhouse Square London HQ.

Sir George Mathewson, Fred Watt and Fred Goodwin unveil record pre-tax profits.

Barclays chief executive John Varley.

The ‘three amigos’ – Fortis’s Jean-Paul Votron, RBS’s Goodwin and Santander’s Emilio Botín – unveil plans for a bid for ABN AMRO.

Rijkman Groenink of ABN AMRO on his way to an Amsterdam courtroom.

Sir Tom McKillop gives evidence to the Treasury committee in Portcullis House.

Sir Tom McKillop and Fred Goodwin leave a session of the Treasury committee.

Sir Philip Hampton is driven away from RBS’s annual general meeting in Edinburgh.

Gordon Brown, Alistair Darling and Mervyn King at a meeting of G20 finance ministers in London.

RBS chief executive Stephen Hester speaking at a session of the Treasury committee.

Bob Diamond emerges from Portcullis House after being grilled by the Treasury committee.

New Zealander Ross McEwan, who became RBS’s CEO.

Acknowledgements

Shredded is the product of one-to-one interviews with about 120 current and former employees of the Royal Bank of Scotland and related companies. Most, but not all, had left the bank by the time I interviewed them. In the face of a system of corporate secrecy, underpinned by non-disclosure agreements and a fear of retribution, all but a handful preferred to remain anonymous. Many of the people I interviewed have been severely impoverished as a result of the bank’s collapse, given the number of shares they had accumulated over the years. Some have been psychologically scarred.

I am also grateful to numerous former senior advisors to the bank – including investment bankers, accountants and consultants – institutional investors in the bank, former chief executives of rival banks, senior politicians, regulators, financial journalists and corporate ‘victims’ of the bank. In most cases, they too preferred to remain anonymous. I would like to offer special thanks to RBS’s former chief executive and former chairman, Sir George Mathewson, who agreed to be interviewed on several occasions and provided me with all his speeches and a selection of related correspondence ranging from 1987 to 2006. Others who were willing to speak on the record for the purposes of this book included: Mathewson’s former colleague Iain Robertson, who was with the bank from 1992 until March 2005 and was latterly non-executive chairman of its corporate banking and financial markets division; the former chairman of the management board of ABN AMRO, Rijkman Groenink; Killian Wawoe, a former human resources head at ABN; the former UK regulator and author of the March 2000 report ‘A Review of Banking Services in the UK’, Don Cruickshank; Simon Samuels, head of European banks research at Barclays; and the Edinburgh-based financier Peter de Vink.

In terms of direct assistance with the research and writing of this book, I am indebted to Jamie Mann and Frances Coppola who helped me to write specific chapters, as well as to Professor Stewart Hamilton, Richard Smith, Mike Parker, Colin Donald, Michael Campbell, Michael Moss and Nick Kochan who reviewed various chapters, provided moral support and made some valuable suggestions for improvement. Other writers and journalists who have provided insights and assistance include Shanny Basar, Chris Baur, Iain Dey, Simon English, Sean Farrell, Daniel Gross, Marc Hochstein, Patrick Hosking, Bill Jamieson, Kenny Kemp, Peter Thal Larsen, Joris Luyendijk, Richard C. Morais, Ray Perman, Nils Pratley, David Rothnie, Jeroen Smit, Yves Smith, David Torrance, Steven Vass, Siddharth Verma, Harry Wilson, William Wright and Alf Young. The team at Birlinn – Hugh Andrew, Andrew Simmons and Tom Johnstone – have been incredibly supportive throughout and Patricia Marshall has been meticulous in her copy-editing. Finally, I’d like to thank my daughter Eleanor for her sterling work transcribing some of the interviews.

All unattributed quotes come from people, including ex-Royal Bank of Scotland insiders, who wished to remain anonymous.

Any errors are, of course, my own.

Introduction

When I was reporting on the Royal Bank of Scotland for newspapers including the Sunday Herald and the Sunday Times from 1999 to 2008, I always felt there was something not quite right about the place. It was a company that didn’t actually make anything but which had a ‘manufacturing’ division. It trumpeted its environmental credentials, yet funded some environmentally disastrous activities. It presented its Private Finance Initiative projects as socially responsible, even though most were a rip-off for taxpayers. It employed at least 70 in-house media relations staff, yet rarely told journalists anything. It had a ‘dignity at work’ policy, yet treated many of its staff abysmally. It claimed that its marketing was responsible, but sent a pre-approved £10,000 credit card to a dog named Monty. It claimed to treat customers who were having trouble repaying their debts fairly and responsibly, but it hounded some of them to within an inch of their lives. Its CEO Fred Goodwin was lionised in the media and by analysts and showered with awards, although he was a sociopathic bully whose achievements had been over-hyped.

Most striking of all was RBS’s market value. At times, this seemed to be detached from reality. On the way up, the bank used to boast that, by market capitalisation, it was worth more than Coca-Cola and more than Sony and Apple combined. In April 2007, its market value reached £64 billion – more than all the other listed companies in Scotland put together and about 4.6 per cent of the FTSE-100. Its persistent triumphalism and the greed of its top brass grated with me. And yet, as a Scot living mainly in Edinburgh, part of me was proud to have a seemingly successful global giant on my doorstep. So many other Scottish firms had succumbed to takeover. At least here was one that was bucking the trend, acquiring overseas firms, building a global brand and creating jobs locally.

But RBS is a case study in how not to manage and regulate a bank. Soon after Fred Goodwin became the chief executive on 6 March 2000, things started to go awry. And the most serious problem was foolhardy and excessive lending. For several years, the problems were masked by the gains that came with the acquisition of National Westminster Bank. Sir Philip Hampton, who took over as chairman in February 2009, explained the nature of the problem when speaking to the CBI conference on 4 November 2013. Hampton said, ‘We were lending to anyone with a pulse . . . We were taking on clients that other banks were rejecting.’1 Speaking to the Scottish Parliament in November 2009, Stephen Hester, Goodwin’s successor, said, ‘RBS was the poster child of excess in the banking industry. That is why we are all having to pick up the pieces.’2

There were some shocking governance failures, including that the board was so in awe of Goodwin they let him run the bank as a personal fiefdom, but with some dangerous cult-like characteristics (at least until their somewhat half-hearted attempt to rein him in in June 2005). Institutional shareholders also have a lot to answer for. Having backed Fred Goodwin in the NatWest takeover battle, they egged him on over the next two or three years and 94.5 per cent of them voted in favour of the disastrous ABN AMRO takeover. And, where regulation and banking supervision are concerned, the RBS saga is extraordinary. Why, for example, did the Labour governments of Tony Blair and Gordon Brown allow the bank to grow to a scale that far exceeded anyone’s ability to manage it? Why was the bank allowed to leverage itself 70 times, putting itself and the wider UK economy at risk? Why did the Blair and Brown governments invariably side with the bank in its disputes with the regulator, hobbling the FSA’s ability to regulate it? Why has nobody been properly held to account for its collapse? I try to answer these questions in the book.

A lot of people are astonished that no one has been prosecuted for destroying RBS. And there is the view that, if the UK state had been so minded, it could readily have prosecuted a number of RBS executives for alleged crimes including fraud, conspiracy to defraud, fraudulent trading, false accounting and regulatory offences under the Companies Act 2006.

Unfortunately, however, prosecuting high-level financial crimes is notoriously difficult, especially if hard evidence like emails and secret recordings are not available. Another reason is that, unlike countries like Iceland and Nigeria, the UK doesn’t have much appetite for the prosecution of mainstream bankers. So what we have had instead are diversionary tactics, faux outrage and political bluster.

The damage caused by RBS’s collapse and the wider banking crisis have, in terms of human suffering, been immense. As a direct result, we had a deep recession in the UK, with GDP shrinking by 4.2 per cent in 2009 and unemployment that peaked at 8.1 per cent in 2011. Real wages in the UK have fallen more sharply than in any other member of the OECD group of 34 countries, and people aged 30 to 39 are today earning 7.2 per cent (£2,100) a year less than the same age group in 2008.

As Cambridge economist Ha-Joon Chang says: ‘Steep cuts in welfare spending have hit many of the poorest hard. Increasing job insecurity, symbolised by the rise of zero-hours contracts, has been making workers’ lives more stressful. The spread of food banks, the popularity of poverty recipes in cookery, and the advance of German discount supermarket chains, such as Aldi and Lidl, are the more visible manifestations of this pressure on the living standards of citizens.’3

Interest rates were stuck at 0.5 per cent from March 2009 until August 2016. Coupled with ‘quantitative easing’, this created a nightmare scenario for many pensioners and savers, while also weakening sterling. Despite the pain and suffering they have caused at home, the United Kingdom’s austerity policies were not enough to dissuade credit rating agencies Moody’s and Fitch from stripping the country of its AAA status in 2013, which has pushed up the cost of government borrowing. Overall, the collapse of RBS and other British banks cost the UK economy £2.4 trillion in terms of lost output over the ensuing ten years, according to a methodology used by Bank of England chief economist Andy Haldane. That equates to an astonishing £88,000 per household. The banking crisis also caused the United Kingdom’s net government debt to near treble, from £665 billion in September 2008 to £1.8 trillion today, meaning an increase of £40,000 per household.

The shrinkage of RBS’s balance sheet that occurred under Stephen Hester was impressive but it came at a huge cost in terms of the destruction of whole swathes of the UK’s small and medium-sized enterprise base and it failed to resolve the crisis at the bank because it was not accompanied by internal cultural change.

If there’s one lesson from the financial crisis, it is that gigantic, world-straddling, ‘universal’ banks like the one RBS became under Fred Goodwin make little or no economic sense. Rather than helping the broader economy, they tend to exploit implicit government subsidies in order to ‘rent seek’, with their main raison d’être being to enrich their own management. Not only are they too big to fail, they are also too big to manage, too big to regulate and too big to prosecute.

The best long-term solution for such financial behemoths is to break them up into more manageable chunks. That way, they are more likely to focus on serving the needs of the real economy in the geographies on which they focus and less likely to prioritise negative behaviour like rent seeking and empire building. (Rent seeking is what happens when a company uses its resources to obtain an economic gain or ‘rent’ from others but fails to give any reciprocal benefits back to society through wealth creation.) Smaller banks find it difficult to hold a gun to the government’s head over the re-regulation of the banking sector or to hold the government to ransom should they get into difficulties.

RBS has shrunk considerably since the crisis, offloading Direct Line, Churchill, Citizens Financial Group, RBS Aviation, Sempra Commodities, big chunks of the investment bank and the bulk of its international operations. But, with total assests of £694.2 billion, equivalent to 35 per cent of the UK’s gross domestic product, the bank still has not shrunk enough.

If there’s another lesson from the RBS saga, it’s that any government that rescues reckless bankers from the consequences of their own folly, misconduct and greed; pampers the bankers and grants them impunity, while making ordinary citizens shoulder the burden of bailing out their unloved institutions through, for example, austerity cuts, is playing with fire. This is more or less what has happened in the UK, and it has generated a lot of public anger, caused many voters to conclude the existing system must be rotten, and driven people into the arms of populist and anti-establishment parties and policies, including Brexit.

Ian Fraser

April 2014

March 2019

Preface

One of the most frustrating aspects of updating a book like this is that RBS is such a fast-moving story. No sooner had I brought the manuscript up to date – or thought I had done so – than a massive new scandal erupted. On 29 January 2019, The Times and the BBC revealed that the British government had its fingerprints all over the damage and destruction that the Royal Bank of Scotland inflicted on tens of thousands of British businesses through its now defunct global restructuring group.

It emerged that the Asset Protection Agency, an arm of the UK Treasury established by Chancellor Alistair Darling was, between 2009 and 2012, pushing RBS to be even more aggressive in seeking out and orchestrating asset seizures than was the already notoriously rapacious GRG. The documents revealed that, under the chancellorship of George Osborne, the Asset Protection Agency was intimately involved in what one Labour MP has described as the ‘largest theft anywhere, ever’. Three weeks after an initial article exposing the government’s role, The Times’s James Hurley also revealed that senior executives in both RBS and its GRG unit were receiving substantial bonuses based on whether or not they were meeting ‘performance targets’ laid down by the government’s APA. The development makes it far difficult for the powers-that-be to pretend there were only a few ‘isolated’ instances of bad behaviour in GRG, but perhaps easier for the bank to blame its strategy of ‘killing off viable small firms for profit’ on its majority owner.

Ali Akram, managing partner of the independent law firm Lex Law, believes the allegations of government collusion in the alleged crimes of GRG could be a game changer for victims of the unit. The revelations also triggered renewed calls from senior MPs and others for a public inquiry into the whole global restructuring group scandal and the government’s alleged role in it. However, for more detail on this, and whether anyone in the Treasury or the bank will be held accountable, I’m afraid you’re going to have to wait for the next edition . . .

This new paperback edition has been substantially revised and updated throughout. It includes four new chapters – 35 ‘McEwan’s uncertain remedy’ (which replaces an earlier chapter of this name), 36 ‘Normalisation of sorts’, 37 ‘Komodo dragon’ and 38 ‘Largest theft anywhere, ever’ – covering all the major developments at the bank between 2014 to 2019, as well as a new epilogue weighing up the extent to which RBS has been transformed over the past decade entitled ‘Flight of fancy?’. The new chapters and epilogue embrace all but three months of the period that New Zealand-born Ross McEwan has been the bank’s chief executive, and the entire period that former McKinsey management consultant Sir Howard Davies has been chairman.

The overarching theme of the new chapters and epilogue is that, whilst Davies and McEwan have made impressive strides in ‘normalising’ RBS – including returning it to profit and recommencing dividend payments – big questions still hang over how this has been achieved and whether they have done enough to ensure that RBS has a long-term future as a standalone institution.

Ian Fraser

March 2019

1

The battle Royal

The Royal Bank of Scotland owes its origins to the collapse of another failed international business venture that was built on hubris, self-delusion and inadequate planning. Between 1695 and 1700, amid unprecedented Anglophobia and patriotic fervour, the Scots piled one quarter of their national wealth into the shares of the Company of Scotland. The corporation was founded in 1695 by William Paterson, a Dumfriesborn visionary financier who also founded the Bank of England, in order to promote Scottish international trade and challenge the might of the London-based East India Company. The Company of Scotland secured the rights to establish a colony, Scotland’s first, in Panama and its promoters insisted that business would be brisk and offer investors spectacular financial returns on the back of burgeoning international trade. Scottish investors became intoxicated. The company became one of the biggest speculative and delusional bubbles in financial history. The project was under-researched and poorly planned. The Company of Scotland failed to appreciate that the Panamanian coast was an inhospitable, malaria-ridden swamp. It failed to foresee strong Spanish and English hostility towards the project, which would lead these powers to seek to scupper it using dirty tricks, diplomacy and force. After just two years, the so-called Darien Scheme lay in tatters. Of the 3,700 settlers and crew who sailed to ‘New Caledonia’, 3,000 lay dead and 11 of the 14 ships that had been commissioned by the Company had been sunk or lost.

Some £153,000 sterling, nearly a quarter of Scotland’s liquid capital, had gone up in smoke. The warm embrace of political union with England, sweetened by financial compensation for the company’s backers, began to have some appeal. In 1707, after many centuries of discord and mutual distrust, Scotland and England signed the Treaty of Union. And Article XV – known as ‘the Equivalent’ – of the treaty was the kernel that, eventually, gave rise to the Royal Bank of Scotland. In Article XV, England agreed to pay Scotland a very large sum of money, which was ostensibly to compensate Scotland for taking on a share of England’s national debt. In the end, however, the sum of £398,085 and 10 shillings sterling (worth some £44 million today) was extended to the Scots (mainly members of Scotland’s upper middle classes and aristocracy) who had lost their shirts in Darien. Whether it was overt bribery is open to debate but Scotland’s national poet, Robert Burns, certainly thought it was. In 1791, he wrote that the Scottish people had been:

bought and sold for English gold –

Such a parcel of rogues in a nation.

Many of those who received compensation under the Equivalent, known as debenture holders, formed the Equivalent Society to pool their compensation payments and distribute dividends. In 1724, this became the Equivalent Company, founded by royal charter. Soon afterwards, a group of its shareholders, led by the Duke of Argyll, a staunch anti-Jacobite who was one of Scotland’s most powerful men at the time, decided the Equivalent Company should branch out into banking. The Bank of Scotland had been established in 1695 and still had a monopoly of banking services in Scotland at the time. But it was seen as suspect by Scotland’s Whig establishment as not only had it rebuffed a merger proposal from the Equivalent Company, it was also widely seen as having Jacobite leanings, which, to many Whigs, was little short of treasonous. The Jacobites favoured the restoration of a Stuart king – James Francis Edward Stuart (‘The Old Pretender’) – to the thrones of England, Scotland and Ireland. James, the only son of the deposed James II and Mary of Modena, was brought up as a Catholic in exile, at the chateau of Saint-Germain-en-Laye near Paris. However, the Jacobite Rising that the Earl of Mar started in his name in 1715 ended in ignominious failure.

In May 1727, the Equivalent Company was instrumental in the foundation of the Royal Bank of Scotland – and the main reason it was launched was as a bulwark against Jacobitism. The new bank, well capitalised from day one, was established by a royal charter approved by the Whig prime minister, Robert Walpole, and the Hanoverian monarch, King George I. In its early years, the ‘New Bank’ operated from a house in Ship Close on Edinburgh’s High Street with a staff of just eight and a total authorised share capital of £111,348 sterling. With many of its directors and officers also sitting on the board of the Equivalent Company (which continued to exist), it was right at the heart of Scotland’s burgeoning Whig establishment and aimed to back the country’s pro-trade and industry entrepreneurial classes. Its first governor was Archibald Campbell, the Earl of Ilay, who later became Duke of Argyll and was, at the time, Lord Register of Scotland and Keeper of the Privy Seal. The bank’s first deputy governor, Sir Hew Dalrymple, was Scotland’s most senior judge and many of its inaugural board of directors were either Edinburgh lawyers or members of the judiciary (so if there was to be any litigation against it, the bank was likely to have the upper hand).

For most of the bank’s life, its board of directors resembled a roll call of Scotland’s ‘great and good’. From 1776 to 1812 and for a 130-year stretch between 1838 and 1968, the Royal Bank of Scotland had a duke of Buccleuch and Queensberry as governor – later chairman, really a titular head. Successive dukes of Buccleuch and Queensberry – whose family name is Montagu-Douglas-Scott and whose estates at Bowhill, Dalkeith, Drumlanrig and Broughton put them among the biggest landowners in Europe – were given the governorship on a hereditary basis, with each succeeding as governor at the time of their father’s death. The tradition ended with Walter John Montagu-Douglas-Scott, 8th Duke of Buccleuch, who became the sixth Buccleuch to hold the governor’s role in 1935. Walter’s sympathies for the Nazis, which saw him join the Anglo-German Fellowship and attend Adolf Hitler’s fiftieth birthday celebrations in Berlin in April 1939, were too much for George VI, who relieved him of his post as Lord Steward of the Royal Household in 1940. But Royal Bank of Scotland, which insiders describe as a virulently anti-Semitic organisation until as recently as the 1980s, was not too bothered and let him stay on as governor until 1968.

One of the Royal Bank of Scotland’s earliest goals was to put the Bank of Scotland (‘The Old Bank’) out of business. A number of skulduggerous means were used, including hoarding its rival’s banknotes. However, six years after the defeat of Charles Edward Stuart (‘The Young Pretender’) at the Battle of Culloden in 1746, which ended the Jacobite dream of a Stuart restoration, the feuding banks buried the hatchet. At a clandestine meeting in 1752, they entered a ‘non-compete agreement’ – really, a cartel – which saw them accept each other’s banknotes for the first time, agree to defend each other from outside aggressors and effectively carve up the Scottish market between them. The Bank of Scotland agreed to steer clear of Glasgow, a city that was on the cusp of a boom for which the Royal Bank of Scotland had high hopes, while RBS agreed to steer clear of the rest of Scotland, giving free rein to the ‘Old Bank’ in the provinces. Under a system called ‘free banking’, which meant there was no central bank or ‘lender of last resort’ in Scotland, the two leading Scottish banks were to play a critical part in the development of the Scottish economy during the 18th and 19th centuries. The Royal was the more innovative from an early stage, inventing the overdraft – or ‘cash credit’ – which enabled trusted Scottish merchants to punch above their financial weight. Writing in An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, Adam Smith praised Scotland’s banking system, which he said had expanded considerably since 1750 with ‘new banking companies in almost every considerable town’.1 Smith wrote:

The business of the country is almost entirely carried on by means of the paper of those different banking companies . . . the country has evidently derived great benefit from their trade. I have heard it asserted, that the trade of the city of Glasgow doubled in about fifteen years after the first erection of the banks there; and that the trade of Scotland has more than quadrupled since the first erection of the two public banks [RBS and Bank of Scotland] at Edinburgh.2

In February 1793, seventeen years after Smith published Wealth of Nations and three and a half years after the storming of the Bastille in Paris, the Royal Bank came close to collapse. News of the outbreak of war with Revolutionary France sent jitters around the Scottish economy, fuelling demand for cash and triggering a slowdown in trade. However, RBS, was unabashed, extending a very large line of credit to one of its Glasgow borrowers. The loan came on the back of lavish, even reckless, lending to Glasgow merchants and manufacturers that had followed the opening of its Glasgow branch in 1783. ‘General commercial collapse was a very real and terrifying possibility, and the Royal Bank stood right at the sharp end’, say the bank’s archives. One of the bank’s senior directors travelled to Westminster to plead with the government of Prime Minister William Pitt the Younger for a bailout. Eventually, the government came up with a neat way of salvaging the failing institution. The RBS archives say, ‘The proposal to issue Exchequer bills was passed on 29 April and given Royal Assent on 9 May 1793. On 15 May the Royal Bank resolved to apply for £200,000 of Exchequer bills . . . The British economy in general, and the Royal Bank of Scotland in particular, had been saved by government intervention.’3 It was not to be the first time.

There was a murkier side to the bailout though. According to American economist Murray Rothbard, in its aftermath Scottish banks, including Royal Bank, treated their customers high-handedly as they struggled to rebuild their tattered balance sheets. Rothbard says that, in 1797, Scotland’s banks followed the Bank of England in suspending ‘specie’ payments – they stopped honouring requests to exchange banknotes for gold and silver coins on demand, even though the refusal meant they were breaking the law. Rothbard added, ‘Before the Scottish banks suspended payment, all Scottish bank offices were crowded with depositors demanding gold and small-note holders demanding silver in payment. They were treated with contempt and loathing by the bankers, who denounced them as the lowest and most ignorant classes of society, presumably for the high crime of wanting their money out of the shaky and inherently bankrupt banking system.’4

Rothbard believes the turning of a blind eye to such wrongdoing led bankers to assume they were above the law. But curiously, the banks’ ability to unilaterally suspend specie payments – which Professor Sydney G. Checkland says was never mentioned in public inquiries – also played a major part in Scottish banking’s success.5 It meant there were fewer bank failures in Scotland than in other countries. Rothbard concluded, ‘The less-than-noble tradition of nonredeemability in Scottish banks continued, unsurprisingly, after Britain resumed specie payments in 1821.’6

In the 1810s, the Royal Bank was losing credibility with its customers. Its directors were accused of cliquishness and prioritising their own interests and those of a select band of cronies. The manager of the Glasgow branch was found guilty of large-scale fraud, costing the bank £55,000 in bad debts.

In a bid to improve corporate governance and clean up its image, the bank introduced Rules, Orders and Bye-Laws for the Good Government of the Corporation of the Royal Bank of Scotland on 2 March 1819. The sixteen-page document was reprinted and circulated, with little revision, for over a century. It was read out to the board every year, immediately after directors had been elected or re-elected. According to the bank’s website, the ‘important thing about these rules was not so much that they were laid down, but that they were printed and circulated, accessible to anyone with an interest in the bank and its operation . . . [The document] sets out in clear English how the bank will make sure that its assets are kept safe; that its officers are honest; that its board supervises properly; and that branches are appropriately managed. It dictates rules for granting loans, to make sure that directors cannot bypass proper process in their own interests, and to guarantee that all loans are transacted in the best and safest manner for the bank, avoiding all manner of partiality with the borrowers.’7

One reason the Commercial Bank of Scotland was founded in 1810 was that Scots were so disenchanted with the nation’s three existing players – Royal Bank of Scotland, Bank of Scotland and British Linen Bank. James Anderson, historian of the Commercial Bank of Scotland, says, ‘It was felt by many of the Scottish people that the three old Banks had become too . . . devoted to their own interests . . . to be the real promoters of the general good.’8 (Commercial Bank of Scotland merged with National Bank of Scotland in 1958 and with RBS in 1969–70). The onset of greater competition during the Victorian era was a force for good in Scottish banking, which became more accessible and democratic than in any other country of the world at the time. It was also a time when the bank’s shareholders had a strong vested interest in ensuring that its management behaved responsibly. As the Bank of England’s Andy Haldane put it, ‘Banking was a low-concentration, low-leverage, high-liquidity business . . . Due to unlimited liability, control rights were exercised by investors whose personal wealth was literally on the line. That generated potent incentives to be prudent with depositors’ money.’9

After the First World War, the Royal Bank’s board decided Scotland had become too crowded a market and embarked on southward expansion. It didn’t help that the Scottish economy was on its knees after Chancellor of the Exchequer Winston Churchill ‘imprisoned industry in a golden cage’ by returning Britain to the gold standard in 1925. Under chief cashier and general manager Alexander Kemp Wright, RBS acquired four English banks over the next 15 years: Drummond’s, which had its origins in Aberdeenshire (1924); Williams Deacon’s (1930); and two doyens of private banking – Child & Co (1939) and Glyn, Mills & Co (1939).10 RBS was on a roll. At a banquet to celebrate its bicentenary in Edinburgh’s North British Hotel on 3 June 1927, self-congratulation was the dish of the day. RBS chairman the Duke of Buccleuch said:

The banking system of Scotland [is] probably the greatest and most original work which the practical genius of the Scottish people [has] produced . . . There is no question that Scotland’s system of banking is one of the country’s greatest assets . . . In the peaceful development of the country after the risings of the ’15 and ’45, the banks, although then in the earliest stage of development, played an important part in developing trade and commerce, and thus acted as a civilising and moderating influence . . . The cash credit system, which as all students of the subject know, was introduced by the Royal Bank so far back as 1728, in itself was an evidence of Scotland’s more settled outlook, because the principle behind it was faith and trust between man and man.11

Important guests, including the Bank of England governor Montagu Norman, controller of finance in the Treasury Sir Otto Niemeyer, Field Marshal Earl Haig and Brendan Bracken, editor of The Banker, also spoke of the bank’s many achievements.

However, over the next half decade, the Royal Bank of Scotland and, indeed, the whole British banking sector lost their way. Thanks to the Bretton Woods agreement of 1944 – which tied the value of the US dollar to gold, fixed exchange rates and controlled global capital flows – there was a stable economic backdrop as economies sought to rebuild themselves after the Second World War. But a lack of competition in the banking sector caused banks to become complacent. They increasingly became instruments of government policy, helping to impose ‘demand management’ macroeconomic policies intended to keep inflation in check and alleviate the balance of payments crisis, as opposed to vehicles for serving their customers’ financial needs. The resultant credit squeeze seriously weakened the banks, undermining their ability to compete with overseas players. With the decline of traditional heavy industries in the 1960s and 1970s, the Scottish economy and banking sector were in the doldrums. Royal Bank responded by merging with the larger National Commercial Bank of Scotland in 1969–70. The combined entity became Scotland’s biggest bank, with a 40 per cent market share and nearly 700 branches. In England, it merged its operations, which had a total of 326 branches, under the new Williams & Glyn’s brand. Williams & Glyn’s was more adventurous than its Edinburgh-based parent, becoming the first bank in the UK to offer free-if-in-credit current account banking to its retail customers in 1974. While the Royal Bank became the dominant brand on branches, banknotes and chequebooks, the National Commercial Bank of Scotland name lived on at the holding company level and the merged entity was run from the National Commercial’s head office at 42 St Andrew Square. Conveniently, this was just around the corner from the Royal Bank’s existing head office at number 36. The enlarged group suffered from a lack of dynamism, arcane internal processes and hierarchical career paths. It was also starving critical parts of the economy of funding. In the mid 1970s, the bank’s chairman, Sir James Ogilvy Blair-Cunynghame, told a convention in Aviemore that the enlarged group saw little merit in supporting the manufacturing sector. The bank’s employees were almost exclusively male, white, Anglo-Saxon Protestants and it did not employ its first Roman Catholic in Glasgow until the 1970s. But there was less inequality where pay was concerned than today. In the 1970s and 1980s, RBS’s chief executive earned between six and ten times the pay of the bank’s average employee. By 2007, Fred Goodwin was earning 180 times the pay of the average employee.

When the board of Royal Bank of Scotland, led by chairman Sir Michael Herries, agreed to a £334-million takeover offer by Standard Chartered Bank in March 1981, it had not banked on two things that would ultimately kill their planned ‘white knight’ deal. The first was the vociferous opposition of many Scots who were not prepared to sit idly by and see their biggest financial institution become a branch of a larger, London-based aggressor. The second was that, within three weeks, the Hong Kong and Shanghai Banking Corporation (HSBC) would jump in with a much higher offer for Royal Bank. Chaired by Michael Sandberg, HSBC leapt into the fray on 6 April with a £500-million offer for Royal Bank of Scotland – 49.7 per cent higher than Standard Chartered’s bid. At this point, the willingness of Herries and his co-directors to sell the pride of Scottish finance on the cheap made them seem inept. A large number of companies headquartered in Scotland had been taken over by English and overseas firms in the preceding years and there was deep scepticism that the pledges made by Standard Chartered and HSBC that Royal Bank would have autonomy under their ownership would be kept.

Critics of the proposed Standard Chartered deal were largely unaware that, since the late 1970s, Lloyds Bank had been actively pursuing a take over of Royal Bank, that other banks including Germany’s Deutsche Bank were circling and that the main reason Herries had been willing to accept such a low offer from Standard Chartered was to thwart their advances. Lloyds was already part of the way there, with a 16 per cent equity stake in the Edinburgh-based institution. When Standard Chartered’s chairman Lord Anthony Barber, whose personal assistant was the future prime minister John Major, first approached Herries at an IMF conference in Manila in October 1979, he was pushing at an open door. Not only would a deal with Standard Chartered enable Royal Bank of Scotland to escape the clutches of the rapacious Lloyds, it would also mean the bank was doing a deal with a near equal, on its own terms.

Eight directors from the Royal Bank would have made it on to the board of the merged entity. The Edinburgh-based bank would also suddenly have gained access to Standard Chartered’s international network, with strong connections in the ‘Third World’, and some rapidly emerging markets too.

Soon after the initial bids, Standard Chartered raised its offer to £500 million to match that of HSBC, and a campaign was launched under the banner ‘The Battle Royal’ by The Scotsman newspaper. The core message was that Scotland was at risk of becoming a ‘branch economy’ and even an economic wasteland, bereft of high-paying and professional services jobs, if Royal Bank were to be sold. Politicians north of the Border, including Secretary of State for Scotland George Younger and Parliamentary Under-Secretary of State for Scotland Alex Fletcher, lobbied Mrs Thatcher and Trade and Industry Secretary John Biffen with a view to getting the takeover bids referred to the Monopolies and Mergers Commission.

It did not take long for them to get their way. On 1 May 1981, the Thatcher government referred both the bids to the Monopolies and Mergers Commission. This triggered six months of intense lobbying, during which the Commission took evidence from a wide range of organisations and individuals and interested parties, including rival banks, business organisations, lobby groups, trade unions etc.

Some of the warnings made to the Commission were stark. The Fraser of Allander Institute said that if the Royal Bank lost its independence Scotland would become ‘a society of hewers of wood and drawers of water’.12 The Campaign for a Scottish Assembly said that economic and financial centralisation of the UK ‘has been the curse of Scotland that so many of its best brains have left rather than stay in their own country and make it the land of opportunity. We are not interested in a worldwide freemasonry of rich men who wear a tartan tie once a year and go to pathetic reunions for Burnschmaltz’.13 The Scottish Development Agency, whose chief executive was George Mathewson, came out vociferously against both bids, saying they were against the public interest and would have ‘severe and far-reaching adverse consequences for the Scottish economy’.

But the support for RBS was far from universal. Some in Scottish business and finance believed the bank deserved to be taken over, owing to its lack of dynamism and inadequate products and services. One senior Scottish financier told The Scotsman, ‘The expanding and outward looking part of the financial sector in Edinburgh is in no way dependent on the Royal and never has been . . . The innovative developments that have taken place in Scottish finance have not derived from the presence of the Royal, but in spite of its presence.’14

The day before the Monopolies and Mergers Commission published its report, the Royal Bank held a tetchy annual general meeting at the North British Hotel in Edinburgh. Herries and the board came under sustained fire from shareholders, with non-executive director Peter Balfour narrowly avoiding being voted off the board. There was an even bigger humiliation for Herries the next day, 15 January 1982, when the MMC report – which had been widely trailed as likely to block both bids – was published. The 104-page report was unequivocal. Neither Standard Chartered nor HSBC should be allowed to acquire or merge with the Royal Bank. The report argued that any transfer of control outside Scotland would ‘be a serious detriment to Scottish morale and the Scottish economy . . . [A] distant management, however intelligent and unprejudiced, may not give the same weight to local concerns as would a manager who is part of the local community and has full responsibility on the spot’.15 The report concluded that loss of control would ‘diminish confidence and morale in Scottish business. It would also, by reducing the number of key independent positions in Edinburgh, weaken the public life and leadership of the city and the country’.16

To the surprise of many, given its belief in open borders and free market capitalism, the government of Margaret Thatcher accepted the Monopolies and Mergers Commission’s advice and blocked both bids. Some believe this was because Thatcher – distracted and distraught after her son, Mark, went missing in the Sahara desert during the Paris–Dakar rally – delegated the decision to her more malleable Trade and Industry Secretary, John Biffen.

In many companies, the chairman would resign in circumstances like this but Herries and many of his co-directors limped on. Having had ‘independence forced upon them’, the directors desperately needed a viable alternative strategy for the bank – ‘plan B’, as they called it.17 The Bank of England had also suffered a huge loss of prestige as its plan to broker a marriage between Standard Chartered and Royal lay in tatters and it had scrapped the old demarcations between UK clearing banks and international banks for no reason.

There were mixed views about the ‘tartan ring fence’ that had effectively sprung up around Scottish banks, protecting them from takeover. To many, it seemed a dangerous anachronism that would lead to banks becoming complacent, lazy and potentially exploitative of their customers.

When US president Richard Nixon unilaterally tore up the Bretton Woods agreement in August 1971, it set the financial markets free, enabling billions of dollars, pounds, Deutschmarks and yen to flow unimpeded around the world. While this would instil greater fiscal discipline among deficit nations, it also created much greater economic volatility – and irrevocably changed global banking. UK inflation peaked at 28 per cent in 1975 and a sterling crisis forced the government of Harold Wilson to go cap in hand to the Washington-based International Monetary Fund for a bailout. Industry and the public sector were plagued by strikes, and inefficiency, culminating in the ‘winter of discontent’ of 1978–79. The trade unions were blamed for the economic mayhem of the 1970s but the post-bailout austerity and the powerful forces that were unleashed by the end of Bretton Woods also played a considerable part.

Soon after entering Downing Street with a pledge to ‘bring harmony’ in May 1979, Prime Minister Margaret Thatcher set about trying to rebuild Britain’s battered economy. She believed monetarism, lower taxes, less government spending, the privatisation of state-owned assets, the sale of council houses and ‘rolling back the frontiers of the state’ would restore the country’s economic fortunes. She was pinning her hopes on the ability of individualism and unfettered market forces to cure the UK’s economic ills. In October 1979, her inaugural Chancellor of the Exchequer, Geoffrey Howe, quietly abolished exchange controls. A belated response to Bretton Woods, this enabled sterling to float freely, which meant individuals and companies could take as much money as they liked into and out of the country. Soon afterwards, the Treasury scrapped the ‘Corset’ (also known as the Supplementary Special Deposit Scheme) which restricted the amount of credit that was allowed in the economy. The move enabled Royal Bank of Scotland and other clearing banks to enter the UK mortgage market for the first time, ending mortgage rationing and blowing a first few puffs of hot air into the UK’s housing price bubble.18 Thatcher’s economic policies included very high interest rates (they ranged between 10 and 17 per cent between 1979 and 1987), and spending cuts including the scrapping of the industrial subsidies that her predecessors, Edward Heath and Harold Wilson, had used to prop up ‘lame duck’ industries. This helped decimate the industrial base of Scotland and the north of England. Unemployment soared, peaking at three million in 1982, leading to pitched battles in the streets. There were calls for Thatcher to resign. However, Thatcher regained popular support after the British armed forces defeated Argentina in the Falklands War and went on to triumph in her battles with both inflation and the coal-miners. Emboldened, the Iron Lady introduced a raft of free market reforms with a view to promoting ‘responsible capitalism’ and a more meritocratic society.

Sensing opportunities on the back of Thatcher’s reforms, the Royal Bank of Scotland acquired Lockerbie Savings Bank in 1982 and Annan Savings Bank in 1985. The latter included the Dumfriesshire-based Ruthwell Savings Bank, which was established by parish minister Reverend Henry Duncan in 1810, to give his humble parishioners access to deposit accounts. In 1985, the Royal Bank invested £20 million in the direct-to-consumer insurance start-up Direct Line. The bank also sought to cash in on the opportunities thrown up by ‘Big Bang’ – a radical series of reforms introduced on 27 October 1986 which aimed to free up finance and enable London to regain its position as the world’s pre-eminent international financial centre. The old-fashioned boundaries that once separated different types of activity in the City of London were swept away, jobbers joined forces with stockbrokers to former ‘dual capacity firms’ and the cosy cartel of fixed commissions was swept away, as financial markets were liberalised. Royal Bank responded by buying merchant bank Charterhouse in 1985 and Liverpool-based stockbrokers Tilney in May 1986. Speaking about these deals the following year, Royal Bank of Scotland chief executive Charlie Winter said, ‘In some respects I regret what is happening but you cannot bury your head in the sand.’19 The bank was well on the road to becoming a financial services supermarket, offering a broad range of services under one roof. In the mid 1980s, Winter also saw virtue in building an international network and laid the groundwork for the purchase of Citizens Bank in Providence, Rhode Island. Other groundbreaking initiatives in the mid 1980s included setting up Royal Bank Development Capital, whose goal was to fund indigenous growth businesses.

However, Royal Bank of Scotland was handicapped by ponderous management, inefficiency and under-investment in its main retail and commercial banking businesses. In this area, it was consistently outflanked by its rival the Bank of Scotland. Under Bruce Pattullo’s leadership, the ‘old’ bank had been restructured with a management board and devolved decision-making. Bank of Scotland had