Lessons from Fred Goodwin

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What should we learn from Fred Goodwin?

By Andrew White

Nobody but the Co-op is going to save the Co-op, so they will probably do anything and everything in their power to make themselves better, and a new CEO and half the board losing their jobs was a good start.

Last week City Future welcomed Iain Martin to the Houses of Parliament to discuss his recently published book, Making It Happen: Fred Goodwin, RBS and the Men Who Blew up the British Economy.

Martin’s book is an engrossing portrait of the characters and personalities of the men, taking the decisions which led us over the cliff. The insight that he provides into the methods, and the mind, of Fred Goodwin is a fascinating, occasionally humorous study in hubris. Fred Goodwin ruled through fear and brooked no opposition breeding an atmosphere which resolved around a single narrative. This is always a dangerous situation to get into; remember Gordon Brown ending the era of boom and bust?

RBS believed in its ability to grow by acquiring more and more assets. It bought NatWest in 2000, for less than the Bank of Scotland offered, on the back of an incredibly detailed plan on how to streamline its operations with RBS’s. RBS then beat the profit forecasts by a wide margin. This purchase came with investment banking operations RBS never had before. It also came with an American operation called Citizens, which RBS began to grow by buying more and more provincial banks in the American north east and adding them to RBS’s systems. The acquisitions finished with the buying of the Dutch bank ABN Amro, several months after the crisis had started. American house prices were nose-diving, banks were consolidating and RBS paid tens of billions of pounds for a bank which was essentially bust.

Martin describes this final purchase as the largest state-to-state transfer of wealth in history.

RBS was not the only bank to go bust, and neither were they the only people involved in the collapse of the financial system. Hubris is the theme that draws all of the various actors together. Far too many people were willing to buy their own snake oil. The government, the FSA, the banks, the traders, the buy-to-let landlords, all of them had a stake in pretending the ride wouldn’t end. The problem with all of this is that once it was all bought and sold someone else picked up the bill.

The question is what lessons should we learn from all this? In a narrow sense what Fred Goodwin teaches us is that it is not good business to run a company based on fear. That any well run organisation has to make room for dissent and has to properly take on board criticism when it is put forth on a rational basis.

In a wider sense we need to better understand the fragility of economic systems and not be so drawn in to the positive spin that people are always likely to put on their own achievements. Far too many people have taken the message that the banking industry must be trussed up and stopped from expanding. What we really need is to create a system where financial services, just like any other industry, is able to innovate and fail without decimating the whole economy. We need to stand up for the capitalism which has produced the prosperity on which so much of our national living standards are based.

We will never get away from hubris or failure. The Co-op bank represents everything of what the regulation lobby from within the UK and in Europe want to turn a bank into. It markets itself as an ethical bank, it is based far away from the City of London in Manchester, it relies on an old fashioned business model involving extending loans to people and businesses primarily through its own branch network and it doesn’t rely on star traders making huge bonuses.  It is also losing £700m a year and would be bust already if not for being bailed out by the rest of the Co-op group.

The important difference is that in the current climate the Co-op bank will either make itself more disciplined in its operations and more efficient or it will die and be replaced by a firm that is. Turning a £700m loss into profit is not easy but it is only by doing the difficult things needed to achieve this that we progress as an economy. Nobody but the Co-op is going to save the Co-op, so they will probably do anything and everything in their power to make themselves better, and a new CEO and half the board losing their jobs was a good start.

This is how we progress best economically. This is also how we manage to pay for all public services that people use. Unless and until the Co-op bank makes a profit, or someone else does by stealing her business, no teachers or doctors will have their salary paid by them.

This is how capitalism works properly, and this is how it should have been working before.

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