EconomicWatch: The World's Worst Banker

In the past couple of years, the entire global lending industry has covered itself in shame. Virtually every banker was suckered by the credit and housing bubble. But who made the sorriest choices? Who forced shareholders and the public to bear the highest financial cost? Who, in short, is the Worst Banker in the World?

There's no dearth of candidates. Richard Fuld of Lehman Bros. and James Cayne of Bear Stearns presided over the remarkably disruptive failures of their respective firms. But Bear and Lehman weren't banks, properly speaking: They were hedge funds lashed to investment banks. And their demises didn't require much of a public bailout. The failures of AIG, Fannie Mae, and Freddie Mac necessitated massive bailouts, but they weren't exactly banks, either. Iceland's bankers have effectively brought their entire country to ruin. But since Iceland's population is a mere 300,000, they're off the hook. In an interview Monday, Nobel laureate Paul Krugman nominated the gang that ran Citigroup into the ground. But Citi was so big it took three CEOs-Sandy Weill, Chuck Prince, and Vikram Pandit-to bring it to the brink of disaster.

No, my nominee is someone whose name may not be familiar to American readers. He's Fred Goodwin, who until October served as CEO of the Royal Bank of Scotland. Goodwin took the helm of RBS in 2000 and proceeded to turn it into an international powerhouse. Known as "Fred the Shred" for his willingness to cut costs-and jobs-he emerged as Britain's leading banker. He was even knighted in 2004 for services to banking. But the bank, which this summer was Britain's largest, is now neither Royal nor Scottish nor much of a bank. RBS's slogan is "Make it happen." A review of the record shows that Goodwin indeed made it happen. He aced every requirement for a hubristic CEO.

Let's review the record.

Carrying off mergers and acquisitions and calling them growth? Yes. After buying British bank Natwest for about 26.4 billion pounds in 2000, Goodwin used RBS's cash and high-flying stock as a currency for more deals. Among the biggest was the $10.3 billion purchase of Charter One Financial, a Cleveland-based bank, in 2004, thus expanding the bank's footprint in the Rust Belt.

Ill-advised, history-making, massive merger precisely at the top? Yep. In November 2007, RBS and its partners, Fortis and Banco Santander, completed their acquisition of Dutch bank ABN Amro. As proud adviser Merrill Lynch noted, the $101 billion deal was "the world's largest bank takeover and one of the most complex M&A transactions ever." And it closed almost precisely when the air started to come out of the global lending bubble.

Massive commitment of capital to investment banking, trading in funky securities, and poor credit controls? Yes, yes, and yes. As this excellent Bloomberg postmortem notes, by June 2008, RBS had become Europe's largest lender. "Under Goodwin's tutelage, RBS also became Europe's biggest backer of leveraged buyouts," reporter Simon Clark notes. Goodwin also jacked up the bank's trading, "boosting derivatives assets 44 percent to 483 billion pounds in the first half of 2008," which was greater than the bank's net deposits. "Meanwhile, its reserves of Tier 1 capital, a measure of financial strength and the vital reserve set aside to cover losses, was the lowest among its U.K. rivals at the start of 2008." In other words, Goodwin designed a house that would teeter when the slightest ill wind began to blow.

Building an expensive, self-indulgent new headquarters building just in time for the collapse? Right-o. In 2006, RBS started construction on a huge new headquarters in Stamford, Conn., which would house its expanding U.S. investment banking and trading operations. The centerpiece of the 12-story, $500 million building is one of the largest trading floors in the world. It should be ready for occupancy (or, given recent job cuts, partial occupancy) next year.

Telling shareholders you don't need more capital, and then raising it-and then having that capital lose value rapidly? Yep. In February 2008, Goodwin said, "There are no plans for any inorganic capital raisings or anything of the sort." But in June, RBS sold 12.3 billion pounds (about $20 billion) in shares at 200 pence per share, which was a significant discount to the then-market price. By October, as this chart shows, the stock was slumping.

And finally: Dump problems on fellow citizens by messing things up so badly the bank has to be nationalized? Bingo. With the stock continuing to slip, RBS staged another rights offering, giving brutalized shareholders an opportunity to add to their sharply discounted holdings at a sharp discount-in this case at 65.5 pence per share. But shareholders passed, and the government last Friday had to step in as buyer of last resort, ponying up 20 billion pounds and assuming an ownership stake of about 60 percent. (The Guardian tells the grim tale.)

The result? RBS's stock (here's a two-year chart) has lost 91 percent of its value since March 2007 and retains value thanks only to massive government intervention. A job well-done, Sir Fred!

Lisa

Wikipedia, Wall Street Journal