In the autumn of 2007 Royal Bank of Scotland wowed the City by announcing an operating profit of £10.3 billion, the biggest ever for a Scottish company and the equivalent of £1 million per hour.
It was hailed as Scotland’s own economic miracle, the regional bank which became the fifth largest in the world by borrowing billions to voraciously gobble up 26 other companies in the space of seven years.
Just 18 months on, the very same bank has set another record, this time by posting a loss of £28 billion, the biggest in British corporate history.
It is a truly mind-boggling reversal of fortunes which has seen share prices collapse from £6.03 in March 2007 to 11.6p last night.
But you don’t need a degree in economics – or even, for that matter, a GCSE in maths – to understand what went so spectacularly wrong.
The demise of RBS can be summed up in just one word: greed.
Under the stewardship of its former chief executive, Sir Fred Goodwin, RBS bought every bank and financial institution it could get its hands on, regardless of whether it made economic sense.
Sir Fred, 50, became obsessed with his quest to make RBS a titan of world banking, and had such an overbearing personality that none of his staff had the clout to stop him, even when some of them began to have concerns that the bank was overstretching itself.
The moment which sealed RBS’s fate came in October 2007, with the £49 billion takeover of ABN Amro, the biggest bank in the Netherlands.
Weeks earlier, Northern Rock had suffered the first run on a British bank for more than 100 years, exposing the vulnerability of our banks to the worldwide credit crunch.
Yet Sir Fred, determined to prevent his rival, Barclays, getting its hands on ABN Amro after it made the first bid for the bank, went ahead with what now has proved to be a grossly inflated offer for it, after joining forces with Spain’s Banco Santander and Belgium’s Fortis.
The deal – described by Gordon Brown yesterday as “irresponsible” – left RBS dangerously overstretched, and as the worldwide banking crisis took its toll, it became clear that many of the companies RBS had bought up, including several US-based firms, were horribly exposed to the subprime mortgage crisis, meaning they were worth only a fraction of what RBS had paid for them.
David Buik, partner at City firm BGC Partners, said the demise of RBS was: “All down to a degree of arrogance the like of which you will never see again in your lifetime”.
He added: “Fred Goodwin is a megalomaniac. RBS never had a chance to digest anything they bought and so they’ve never delivered shareholder value. It’s a combination of relentless greed and an inability to deliver shareholder value.
“They were buying companies when their share price was at its peak, rather than when shares were at rock bottom, and they clearly got involved with things they just didn’t understand.
“The ABN Amro takeover was the zenith of their stupidity but the die was cast before that. RBS took over ABN Amro because the mindset was they had to stop Barclays getting their hands on it at any cost, and consequently they paid way over the odds.
“There were people in that boardroom during the ABN Amro takeover who must have thought ‘this is madness’, but no-one was prepared to stand up to Sir Fred. I know people who worked for him, and it was a case of ‘yes Sir, no Sir, three bags full, Sir’.”
Sir Fred wielded total power in the boardroom because for years it had seemed that he could do no wrong. In 2000, the year he took over as chief executive, RBS pulled off the seemingly impossible feat of buying NatWest – which was three times its size – for £21 billion. Sir Fred was named businessman of the year by the influential Forbes magazine for what it described as a “brilliantly strategised hostile takeover” of NatWest.
Sir Fred, already known as Fred the Shred because of his ruthless cost-cutting in his previous job at the Clydesdale Bank, slashed 18,000 jobs in the newly merged company, winning huge praise from investors for delivering efficiency.
Other companies might have taken a step back at this stage, prudently paying off some of their debts before launching any other major acquisitions, but for Sir Fred, the ultimate deal junkie, it was only the beginning.
Acquisitions of Royal Insurance, Churchill Insurance and Charter One were among the major deals which followed (seven in 2003 alone) as RBS steadily climbed the league table of Big Banks.
Sir Fred’s aggressive expansionism could not have been a greater contrast to the caution of the bank’s founders; after RBS was created in 1727 it took more than a century to open an office in London, and another 100 years to begin opening branches in England in significant numbers.
Under Sir Fred’s control, RBS opened offices in Asia, continental Europe, the Irish Republic and the US. It bought a five per cent stake in the Bank of China (only half the 10 per cent Sir Fred had wanted) and signed a series of costly sports sponsorship deals, including Six Nations Rugby and the Williams Formula 1 motor racing team.
But even before the fateful takeover of ABN Amro (for which Sir Fred was rewarded with a £4 million pay package), there had been a series of warning signs over the true health of RBS.
For several years its shares had underperformed when compared with the rest of banking sector. As long ago as 2005 John-Paul Crutchley, an analyst at Merrill Lynch, published research entitled What Went Wrong With RBS? But still the buy-ups continued.
Sir Fred, knighted by Tony Blair in 2004, spent £350 million of the bank’s money on a fittingly grandiose corporate headquarters on the outskirts of Edinburgh, complete with its own Tesco, Starbucks, swimming pool and 500-seat restaurant.
The bank also acquired a £17m private jet, based in Paris, to ferry Sir Fred and his colleagues around their new global empire, and hired the golfer Jack Nicklaus, a hero of golf fanatic Sir Fred, as a global “ambassador”.
By the end of 2006 shareholders were becoming so concerned about the relentless acquisitions of other companies that Sir Fred publicly ruled out any more major deals.
Then Sir Fred heard that Barclays was negotiating to buy ABN Amro, and, despite clear signs that the worldwide money markets were beginning to dry up, went head-to-head with Barclays to deny them their prize.
Reassuring shareholders that RBS would not pay over the odds, he said that “the key to good deal-making is knowing when to walk away”, then did precisely the opposite.
By last April, six months after the ABN-Amro deal, the cracks were well and truly showing as RBS announced it needed to raise £12 billion from shareholders to shore up its finances. The bank had set yet another record, this time for the biggest rights issue in Europe’s history.
Then came the banking crisis of last October, triggered by the fall of Lehman Brothers in the US. Confidence in British banks slumped because of their exposure to the US subprime mortgage crisis, and share prices collapsed as it became clear that many of the assets against which RBS and others had borrowed money were now worth only a fraction of their previous value.
RBS was so weakened by its excessive borrowing that it had no option but to accept a Government bail-out. But it is only now that the true cost of Sir Fred’s folly has been laid bare, with the news that those acquisitions, including ABN Amro, are worth up to £20 billion less than previously thought.
As RBS threatened to drag down the entire British banking system, with banking shares plummeting across the board yesterday, Gordon Brown hit out at the “irresponsible risks” taken by RBS, adding that he was “angry” at the catastrophic dealings of the Scottish bank.
But Sir Fred Goodwin is long gone, having left RBS in November. His chairman, Sir Tom McKillop, will follow him out of the door in April. And it will be up to the British taxpayer to foot the bill for the mess they left behind.