0:00:03 > 0:00:09The outlook is always a difficult subject. Predicting the future is a
0:00:09 > 0:00:16hazardous occupation at the best of times and these are not the best of
0:00:16 > 0:00:20times. Sir Fred Goodwin, Knight of the Realm for services to banking,
0:00:20 > 0:00:30was the chief executive of the Royal Bank of Scotland when it ran
0:00:30 > 0:00:31
0:00:31 > 0:00:35up the biggest, corporate loss in history. A loss of �24.1 billion.
0:00:35 > 0:00:42In the good times, the Royal Bank of Scotland grew faster than any
0:00:42 > 0:00:48other British bank. It pulled off a record-breaking deals. It made
0:00:48 > 0:00:55billions of pounds in investment banking. Its top executives drove
0:00:55 > 0:01:03the bank forward to become at one point the world's biggest bank, and
0:01:03 > 0:01:07collected fabulous bonuses along the way. Then in October 2008, RBS
0:01:07 > 0:01:13came within hours of running out of money. Any news on the banking
0:01:14 > 0:01:19bail-out? It had to be bailed out by the British taxpayer. It is
0:01:20 > 0:01:24decision time. RBS was not the only bad to be rescued, but by the time
0:01:24 > 0:01:34of the financial crash it was the most toxic bank in Britain. I knew
0:01:34 > 0:01:41
0:01:41 > 0:01:46sorry? That is something that did I am Andrew Johnson from the Daily
0:01:46 > 0:01:51Express. Would you give us some idea why you are the right man to
0:01:51 > 0:01:55lead the bank out of the situation, given that what has happened has
0:01:55 > 0:02:01been a failure of risk management, which is one of the core
0:02:01 > 0:02:05competencies they bank is supposed to have? It is not me solely that
0:02:05 > 0:02:12runs the bank. There are a few people who run the bank and we are
0:02:12 > 0:02:16of one mind to go forward. We are in the middle of a crisis which has
0:02:16 > 0:02:22been the worst for a generation, for 70 years, and it is certainly
0:02:22 > 0:02:32the case the industry is in a tight place and as a major participant we
0:02:32 > 0:02:36
0:02:36 > 0:02:42are in a tight place. Do you not think you have been in the job too
0:02:42 > 0:02:46long? There have been studies where they show chief executives start
0:02:47 > 0:02:50losing effectiveness after seven years. With individuals it is very
0:02:50 > 0:02:56hard to pin things down. I do not know how long reporters have to
0:02:56 > 0:03:01report before they lose their effectiveness. Too long. I will not
0:03:01 > 0:03:07do this job forever, but right now you find me galvanised to the task
0:03:07 > 0:03:17at hand. We have got a big task and we are of one mind and of one focus
0:03:17 > 0:03:18
0:03:18 > 0:03:22to get through this. This is a film about Scotland's largest bank, up-
0:03:22 > 0:03:27to-date and looking after every aspect of your business life. It is
0:03:27 > 0:03:32a friendly bank, it is the Royal Bank. It was seen as a Scottish
0:03:32 > 0:03:36back with a Scottish identity, but one that was looking to do things
0:03:36 > 0:03:42differently and was not the same as the run of the male, slightly
0:03:42 > 0:03:47larger banks that dominated the scene across the UK at the time.
0:03:47 > 0:03:56The Royal Bank of Scotland was a Scottish institution, prudent,
0:03:56 > 0:03:59effective and ambitious. In 1998, its iMac -- dynamic and successful
0:03:59 > 0:04:06Jeep executive George Mathewson was looking for new blood to lead the
0:04:06 > 0:04:10bank forward. I was looking for a finance director, but we would like
0:04:10 > 0:04:16one who had potential to become chief executive because replacing
0:04:16 > 0:04:26meat was on my mind as well as other people's minds. I thought,
0:04:26 > 0:04:36wait a minute, we have Fred Goodwin right here in Scotland. He did
0:04:36 > 0:04:36
0:04:36 > 0:04:41strike me as someone who could lead. I just felt he had a lot to offer.
0:04:41 > 0:04:44Fred Goodwin was the rising star of Scottish banking, a chartered
0:04:44 > 0:04:49accountant in charge of the Clydesdale Bank before he was 40.
0:04:49 > 0:04:54He had earned a reputation for cost-cutting and acquired his
0:04:54 > 0:05:00enduring nickname. The Fred the Shred reputation was there. He was
0:05:00 > 0:05:05a tough, hard man. No one doubted his intelligence and his
0:05:05 > 0:05:12determination, but he had that reputation for being quite
0:05:12 > 0:05:17difficult as a boss and quite hard on staff. My first hearing that
0:05:17 > 0:05:20Fred Goodwin was coming on board from the Clydesdale Bank was that
0:05:20 > 0:05:25they had been celebrating his departure for three days and they
0:05:25 > 0:05:34wished us all the very best of luck. That was my first introduction to
0:05:34 > 0:05:38the name Fred Goodwin. I will not forget it. With George and Fred at
0:05:38 > 0:05:44the helm, Scotland was no longer big enough to contain RBS's
0:05:44 > 0:05:53ambitions. They aimed to grow RBS into an international banking for
0:05:53 > 0:05:58us. But they were not the only ambitious, Scottish bank. The Bank
0:05:58 > 0:06:04of Scotland was also hungry for growth. Both of them faced the same
0:06:04 > 0:06:08obstacle. They both had the same problem, they were anchored in a
0:06:08 > 0:06:13small economy in the home market. Both took the view they had to make
0:06:13 > 0:06:19a jump to something bigger to avoid their over-dependence on the
0:06:19 > 0:06:24Scottish economy. The quickest and the boldest way to achieve this was
0:06:24 > 0:06:29by carrying out a takeover. Traditionally in banking takeovers
0:06:29 > 0:06:37involved bigger banks buying up smaller ones. That is not what RBS
0:06:37 > 0:06:44had in mind. First, RBS audaciously sniffed around Barclays. But they
0:06:44 > 0:06:50were warned off by the City. Then, they both began to look at another
0:06:50 > 0:06:56venerable City institution, Nat West. It was a bank more than twice
0:06:56 > 0:07:00their size. They say when a company builds a new head of us, gets a
0:07:00 > 0:07:07corporate jet and has a fountain and a flagpole, it is time to sell
0:07:07 > 0:07:12the chairs -- shares. Nat West built the NatWest Tower. NatWest
0:07:13 > 0:07:20Bank was huge, but ailing. Its share price was low and it was Bank
0:07:20 > 0:07:23of Scotland that moved first. we see with NatWest is a hugely
0:07:24 > 0:07:30undervalued opportunity, it is undervalued and underperforming. We
0:07:30 > 0:07:35believe we can help turn it around. I was at the Ryder Cup and my phone
0:07:36 > 0:07:41went illegally and they said you have to come back, the Bank of
0:07:41 > 0:07:48Scotland have just bid for NatWest. At a meeting in London they were
0:07:48 > 0:07:53all saying, you must bid. I said, no. We will bid when we know as
0:07:53 > 0:08:00much as it is possible to know. few weeks later, RBS joined the
0:08:00 > 0:08:05takeover battle, promising bigger savings. George did the strategy,
0:08:05 > 0:08:11Fred mustered the detail and set about convincing the City that RBS
0:08:11 > 0:08:16could pull it off. The bulk of the cost savings relayed to back off as
0:08:16 > 0:08:20processing, to head office, they do not relate to customer facing staff.
0:08:21 > 0:08:26There was incredulity that two small banks could actually have the
0:08:26 > 0:08:30nerve to go for this bastion of the British banking industry. Some of
0:08:30 > 0:08:35the management felt let down by the City, that they could take
0:08:35 > 0:08:41seriously a bid of this nature. there were doubters, but the
0:08:41 > 0:08:50general feeling at the time in the City was that anything other than
0:08:50 > 0:08:55the current NatWest management. After a hard fought takeover battle,
0:08:55 > 0:09:01NatWest shareholders had to decide where their bank's future lay.
0:09:01 > 0:09:05was a close-run thing. In fact, at lunchtime on the last day, I
0:09:05 > 0:09:15thought we had one and then the tide swung against us in the
0:09:15 > 0:09:16
0:09:16 > 0:09:21afternoon. I was very fed up. At the end of the day, it was the
0:09:21 > 0:09:29shareholders' decision. There was elation for about 10 minutes, no,
0:09:29 > 0:09:35it was about two days. At that stage I stepped back to become
0:09:35 > 0:09:45deputy chairman. There was never any question of whether Fred
0:09:45 > 0:09:46
0:09:46 > 0:09:51Goodman was not the right man to take over the new RBS. Fred and
0:09:52 > 0:09:56George had arrived on the big stage. As the savings, including 18,000
0:09:56 > 0:10:01job cuts and integration as were made, it became clear that not only
0:10:01 > 0:10:09had they done the biggest hostile takeover in UK history, but they
0:10:09 > 0:10:14had done it brilliantly. Fred got a bonus of �800,000 and George one of
0:10:14 > 0:10:21�750,000, which he insisted would barely give him bragging rights in
0:10:21 > 0:10:26a Soho wine bar. It was an extraordinary exercise in putting
0:10:26 > 0:10:30together two banks. They had a very strong following in the city. It
0:10:30 > 0:10:34means your share price looks better because investors want to buy your
0:10:34 > 0:10:39shares and people believe in your story, so they encourage you to do
0:10:39 > 0:10:47more deals because that is what is working. The share price dipped a
0:10:47 > 0:10:52little, then it jumped up. RBS now had access to the future vaults of
0:10:52 > 0:11:00NatWest savings and deposits. The question was what to do with them?
0:11:00 > 0:11:06The answer was spend them. They bought another insurance company, a
0:11:06 > 0:11:11credit card operation in Germany and a second hand car franchise.
0:11:11 > 0:11:16What can I say about acquisitions that has not been said before?
0:11:16 > 0:11:21Goodwin picked up a knighthood along the way. We do not do
0:11:21 > 0:11:31acquisitions for fun. He was acclaimed by Forbes Global magazine
0:11:31 > 0:11:42
0:11:42 > 0:11:47as the Businessman of the Year. The place that made most sense for
0:11:48 > 0:11:56RBS to do at positions was the USA. It was the biggest market in the
0:11:56 > 0:12:06world. -- acquisitions. Thousands of little banks sat waiting to be
0:12:06 > 0:12:11
0:12:11 > 0:12:16gobbled up and RBS already had Citizens. Citizens was run,
0:12:16 > 0:12:22prudently, by Larry Fish. We are very proud of our credit record
0:12:22 > 0:12:31over a long period of time, so we have avoided unsecured lending to
0:12:31 > 0:12:35the consumer and the corporate sector. Larry Fish probably said in
0:12:35 > 0:12:41the morning, I will take deposits, and in the afternoon I will take
0:12:41 > 0:12:46little deposits and later on if he was brave, I will lend money. It
0:12:46 > 0:12:51was a community bank. It was the third largest bank in Rhode Island,
0:12:51 > 0:13:01not a major claim to fame, but it was very community-based. It was
0:13:01 > 0:13:03
0:13:03 > 0:13:08big in small areas. But RBS wanted Citizens to be big in bigger areas.
0:13:08 > 0:13:13Larry embarked on an acquisitions spree of his own, a prudent
0:13:13 > 0:13:17acquisition spree, buying up other small banks dotted around New
0:13:17 > 0:13:25England and stripping out costs and selling new, financial products to
0:13:25 > 0:13:30the customers. In 2001, Larry Fish raised the stakes and expanded
0:13:30 > 0:13:35Citizens West into the huge Philadelphia market, spending $2
0:13:35 > 0:13:41billion on a bank called Mel and financial. This deal made Citizens
0:13:41 > 0:13:48bake in a much bigger area and earned it a starring role in RBS's
0:13:48 > 0:13:58next corporate video, alongside its many other impressive purchases and
0:13:58 > 0:14:10
0:14:10 > 0:14:15Just three years on from the NatWest deal, RBS was by some
0:14:16 > 0:14:25measures the fifth-biggest bank in the world. Edinburgh was the
0:14:25 > 0:14:35headquarters of an international banking group. But there was a
0:14:35 > 0:14:38
0:14:38 > 0:14:45price to all this growth. The culture inside the bank had changed.
0:14:45 > 0:14:49We lost a lot of the collegiate atmosphere. Under George he very
0:14:49 > 0:14:59much wanted to hear what people had to say and he wanted to bring
0:14:59 > 0:15:00
0:15:00 > 0:15:08George was very charismatic. He was extremely well-liked and respected
0:15:08 > 0:15:17by many who worked for him. Fred was more efficient. Probably the
0:15:17 > 0:15:25best description. He can be a little too acerbic. He is not very
0:15:25 > 0:15:29good at suffering fools gladly. In fact, he could be quite forbidding.
0:15:29 > 0:15:33Fred had a very impressive intellect but he used it to bully
0:15:33 > 0:15:39those around him. People were intimidated from speaking their own
0:15:39 > 0:15:43mind because they feared his reaction. This created an
0:15:43 > 0:15:51atmosphere around him which inhibited even the most senior
0:15:51 > 0:15:59people in the bank from expressing their views. This atmosphere was
0:16:00 > 0:16:05apparent at the highest level in the bank. The morning meeting was a
0:16:05 > 0:16:11particular innovation they brought in to Nat West. A team would get
0:16:12 > 0:16:16together and they would sit for as long as it took to thrash out the
0:16:16 > 0:16:22problems of the day. The morning meetings quickly became known as
0:16:22 > 0:16:29the morning beatings. Fred seemed to just a brand and decide which
0:16:29 > 0:16:35senior executive was going to be roasted that day. It was nice --
0:16:36 > 0:16:41not nice to be part. But you would say, at least it was not made. Suck
0:16:41 > 0:16:48it up was the phrase that was used. That is life at the -- in the big
0:16:48 > 0:16:58city. He was asleep at the wheel. always believed that there were
0:16:58 > 0:16:58
0:16:58 > 0:17:08many ways and spinning as far as leadership was concerned. Fred had
0:17:08 > 0:17:09
0:17:09 > 0:17:17his way and for a long time it was very effective. Fred proved to be
0:17:17 > 0:17:24particularly effective for RBS shareholders. Despite, or be hap --
0:17:24 > 0:17:32perhaps of, his robust management by at -- style, he got results. He
0:17:32 > 0:17:42delivered profits year after year as the bank grew. In May 2004, the
0:17:42 > 0:17:43
0:17:43 > 0:17:47moment RBS had been waiting for A deal that would transform
0:17:47 > 0:17:57Citizens from a big regional bank into one of the biggest banks in
0:17:57 > 0:17:57
0:17:57 > 0:18:06America. The target was a bank called Charter One. Charter One was
0:18:06 > 0:18:12be -- brought to as by Larry Fish. You had seen all of the
0:18:12 > 0:18:18acquisitions we had done previously. We had a very successful
0:18:18 > 0:18:24acquisition and integration record. He believed in at low risk. Charge
0:18:24 > 0:18:31a one would expand Larry Fish's empire into the huge Chicago market,
0:18:31 > 0:18:37with its millions of households and potential customers. It was a very
0:18:37 > 0:18:46logical geographical extension. It is a significant increase in scale.
0:18:46 > 0:18:52Overall we think that there was a low risk acquisition to execute.
0:18:52 > 0:18:59Fred and the border backed the deal and RBS made a huge offer of $10.5
0:18:59 > 0:19:09million. -- Fred and the board. RBS became the 7th biggest bank in the
0:19:09 > 0:19:10
0:19:10 > 0:19:19USA but they did not stop there. Shortly after this, RBS bought a �1
0:19:19 > 0:19:29billion state in China. -- stake in China. RBS was now a global
0:19:29 > 0:19:35
0:19:35 > 0:19:4114th December 2005 was a big day in the history of RBS. A new purpose-
0:19:41 > 0:19:50built headquarters in Edinburgh was being opened by the Queen. Just as
0:19:50 > 0:20:00she had opened the NatWest Tower 24 years earlier. The new headquarters
0:20:00 > 0:20:03was a work of wonder. It certainly had a fountain and it has built
0:20:03 > 0:20:11next to the airport where the senior executives could use the
0:20:11 > 0:20:16private jet. While RBS bosses mingled with royalty, City analysts
0:20:16 > 0:20:23were less impressed, and wondering if the time had come to share RBS
0:20:23 > 0:20:27shares. The bank's share price was not performing as well as expected.
0:20:27 > 0:20:33The problem was Charter One. RBS was struggling to make its usual
0:20:33 > 0:20:39savings and grow its usual profits and the City pot Fred and his bank
0:20:39 > 0:20:47had paid far too much. -- thought Fred and his bank. It's was not a
0:20:47 > 0:20:57good deal. It was over sold to us. The city but into the deal but they
0:20:57 > 0:21:05
0:21:05 > 0:21:12were sceptical. They never thought The City's scepticism at the buying
0:21:12 > 0:21:18spree came out at an analyst conference at this time. I think
0:21:18 > 0:21:28there is the perception among some investors have that Fred is a
0:21:28 > 0:21:30
0:21:30 > 0:21:39That is not the first time I have heard that. I am sure there are a
0:21:39 > 0:21:46lot of people who think that. I do not think it stands a lot of
0:21:46 > 0:21:50scrutiny in terms of what we have done. The results demonstrate a
0:21:50 > 0:21:57coherent strategy and one that we have executed with considerable
0:21:57 > 0:22:06internal discipline. I up until Charter One, Fred had had free rein
0:22:06 > 0:22:11on anything he wanted to do. What Charter One did was make the city
0:22:11 > 0:22:15step back and think about the price that RBS was paying and, crucially,
0:22:15 > 0:22:22people started to look at the underlying business and the actual
0:22:22 > 0:22:28growth that was taking place in the existing businesses. By 2005,
0:22:28 > 0:22:38Fred's RBS had acquired 25 businesses and had spent nearly �30
0:22:38 > 0:22:46
0:22:47 > 0:22:54billion. But its shareholders now RBS could still expand by making
0:22:54 > 0:23:03money out of money. This was another way of saying Corporate and
0:23:03 > 0:23:08investment banking. In 2005, RBS Investment Bank was run by Johnny
0:23:08 > 0:23:15Cameron, the son of one of the bank's former vice-chairman and a
0:23:15 > 0:23:20financial wizard in his own right. I will make a huge effort to walk
0:23:20 > 0:23:24the walk. We may be successful but we are still restless. We talk
0:23:25 > 0:23:31about keeping the magic. There is some magic about what got us here
0:23:31 > 0:23:37and about our culture. We need to retain that even while growing this
0:23:37 > 0:23:43international business. Johnny Cameron's investment bank took
0:23:43 > 0:23:53money from Nat West and RBS accounts and invested it in a whole
0:23:53 > 0:23:57
0:23:57 > 0:24:01Sitting within the investment bank was a small specialist outfit
0:24:01 > 0:24:09called RBS Greenwich Capital, tucked away in a quiet corner of
0:24:09 > 0:24:17Connecticut. We had inherited a RBS Greenwich Capital with NatWest and
0:24:17 > 0:24:23I went there and it was full of very clever people. It also had
0:24:23 > 0:24:30some of the best risk-management I had seen anywhere at the time. You
0:24:30 > 0:24:35had instant results. You could see how they were managing their risks
0:24:35 > 0:24:41and all of the rest of it. I thought there was a reasonable
0:24:41 > 0:24:48chance we could well out losses. RBS Greenwich Capital made money
0:24:48 > 0:24:53out of mortgages, not as a lender to house buyers, but as a trader.
0:24:54 > 0:24:59It but huge bundles of thousands of ordinary domestic mortgages from
0:25:00 > 0:25:09banks and other lenders across the USA. Then, it packaged these up,
0:25:10 > 0:25:15
0:25:15 > 0:25:21sliced, diced and sold them on to The investors were taking Straw and
0:25:21 > 0:25:24turning it into gold by slicing and dicing. As they kept slicing and by
0:25:24 > 0:25:27saying they were skimming off profits and RBS Greenwich Capital
0:25:27 > 0:25:31was at the forefront of taking those mortgages and trying to find
0:25:31 > 0:25:41a new and innovative ways of essentially making money for the
0:25:41 > 0:25:43
0:25:43 > 0:25:47In the early years of Johnny's reign, the American housing market
0:25:47 > 0:25:57was booming, and mortgage trading was where the big money could be
0:25:57 > 0:26:01
0:26:01 > 0:26:07It became a bubble. As time went on, banks began to branch out of money
0:26:07 > 0:26:12to lend to. -- run out of money to lend to. There are only so many
0:26:12 > 0:26:15times you can do that. Most people with a lot of income and good
0:26:15 > 0:26:19credit are already owned a house so if you were looking for new
0:26:19 > 0:26:29customers, where did you go? You looked at people who did not have a
0:26:29 > 0:26:34
0:26:34 > 0:26:41house or credit and people who, in These people were known as subprime
0:26:41 > 0:26:46borrowers. Although these mortgages were more risky, they were still
0:26:46 > 0:26:53sliced, diced and traded. As long as they kept paying their mortgages,
0:26:53 > 0:26:58traders and investors would keep getting rich. This was a business
0:26:58 > 0:27:05that was built on that. It was that layered on that covered with debt,
0:27:05 > 0:27:11sprinkled with debt. That was built into it every layer. -- debt was
0:27:11 > 0:27:14built into it every layer. Greenwich Capital moved up the
0:27:14 > 0:27:24leader table of mortgage traders, competing with the biggest Wall
0:27:24 > 0:27:26
0:27:26 > 0:27:34Some of its trading was prime, sum up subprime, and some exotic
0:27:35 > 0:27:44cocktails of both all mixed up together. -- some subprime. It was
0:27:45 > 0:27:45
0:27:45 > 0:27:49The single most important impression I want to leave you with
0:27:49 > 0:27:54is this is a great business. had some of the smartest people in
0:27:54 > 0:28:00the world working on this, top mathematicians and physicists. They
0:28:00 > 0:28:04were not working in nuclear establishment, they were working
0:28:04 > 0:28:09financial borders to see how they could model risk and predict the
0:28:09 > 0:28:19future. That is where the income was. You packed it up with the big
0:28:19 > 0:28:23
0:28:23 > 0:28:29numbers and you could make tens of In 2004, the profits of Johnny
0:28:29 > 0:28:35Cameron's part of the bank grew by nearly 18 % from the previous year.
0:28:35 > 0:28:45In 2005, its profits were up another 22 %, and it accounted for
0:28:45 > 0:28:55
0:28:55 > 0:29:02almost two-thirds of the entire RBS Good morning, ladies and gentlemen,
0:29:02 > 0:29:07and welcome to the 2006 Interim Results Presentation. It is a
0:29:07 > 0:29:13special pleasure for me to welcome you today as this is the first set
0:29:13 > 0:29:19of results since my taking over as chairman. In 2006, the success
0:29:19 > 0:29:23story continued, and with Sir George Mathewson retiring as
0:29:23 > 0:29:32chairman, it was down to Sir Tom McKillop to deliver the good news.
0:29:32 > 0:29:40Total income for the first half rose by 10 % to �13.6 billion.
0:29:40 > 0:29:45resulted in group operating profit rising by 15 % to over �4.6 billion.
0:29:45 > 0:29:52I believe that today's results, based as they are, purely on
0:29:52 > 0:29:57organic growth, demonstrate these fundamental strengths of the group
0:29:57 > 0:30:07and the sustainability of hour operations. Over half of the profit
0:30:07 > 0:30:09
0:30:09 > 0:30:12that year came directly from I am happy with the platform we
0:30:13 > 0:30:16have built in GBM. I think our results are first class for the
0:30:16 > 0:30:26business we are in, but there are things we can do more and we will
0:30:26 > 0:30:28
0:30:28 > 0:30:36do more. That is part of the excitement. Following on from these
0:30:36 > 0:30:42results, the city began to believe once more in the RBS story. And the
0:30:42 > 0:30:52Bank's share price inched back up. RBS allowed itself another glitzy
0:30:52 > 0:31:09
0:31:09 > 0:31:15If we were wanting to build what we have today from today, it really
0:31:15 > 0:31:24could not be done. The bank's senior managers targeted more
0:31:24 > 0:31:31growth. In terms of what is happening at the moment I remain
0:31:31 > 0:31:35extremely excited about what is happening in front of us. Everyone
0:31:35 > 0:31:39seems to be benefiting from this magical, a new form of banking and
0:31:39 > 0:31:44nobody likes to admit they do not understand things and there is a
0:31:44 > 0:31:48sense of pride involved in it. As a result the barrier -- bankers were
0:31:48 > 0:31:58allowed to carry on what they were doing largely unsupervised and they
0:31:58 > 0:32:09
0:32:09 > 0:32:14did not understand the risks their Just as everything was looking rosy
0:32:14 > 0:32:24for RBS, the engine driving the growth of the entire banking
0:32:24 > 0:32:24
0:32:24 > 0:32:31industry ran out of steam. In late 2006, the American housing bubble
0:32:31 > 0:32:35well and truly burst. As American interest rates went up, many of
0:32:35 > 0:32:45those with sub-prime mortgages could no longer afford their loans,
0:32:45 > 0:32:48
0:32:48 > 0:32:58so they stopped paying. Anxiety spread throughout the markets and
0:32:58 > 0:32:59
0:32:59 > 0:33:04across continents. It is a big wake-up call for the UK, the
0:33:04 > 0:33:10analysts and investors. There was a profit warning from HSBC at the
0:33:10 > 0:33:13beginning of 2007 where they revealed they had suffered heavier
0:33:13 > 0:33:19losses than expected on his portfolio of sub-prime mortgage
0:33:19 > 0:33:25loans in the US. At that point they started looking around saying, who
0:33:25 > 0:33:31else has got these kind of loans? RBS reassured the City there were
0:33:31 > 0:33:39not in sub-prime lending. We have portfolios at Citizens where we do
0:33:39 > 0:33:46not do sub-prime lending. It is another land mine we have kept away
0:33:46 > 0:33:50from. We have seen evidence that is a good place not to be. But all
0:33:50 > 0:33:54that slicing and dicing of mortgage debt meant there was no escape.
0:33:54 > 0:34:00What happened in the system is sub- prime became such a big part of
0:34:00 > 0:34:07what banks did, not just originate it, but buying it, lending to the
0:34:07 > 0:34:15people who did it, packaging it, selling it, structuring it, trading
0:34:15 > 0:34:20it. Every bank did sub-prime. is the housing exposure you have
0:34:20 > 0:34:26got? Analysts wanted to know how much sub-prime RBS held in its
0:34:26 > 0:34:30investment banks. The amount of sub-prime, sub-investment grade
0:34:30 > 0:34:40exposure we have across warehouses and collateral lending is really
0:34:40 > 0:34:42
0:34:42 > 0:34:47very, very small. It is a miniscule amount. Good morning... With a
0:34:47 > 0:34:53miniscule, sub-prime problem, the investment banks were in great
0:34:54 > 0:35:00shape and Fred was optimistic about the future. We faced 2007 with some
0:35:00 > 0:35:04confidence. But if the American housing market was in decline, how
0:35:04 > 0:35:10would our beards grow now? I as long as I have been writing about
0:35:10 > 0:35:14RBS, people have been speculating about RBS making a big acquisition.
0:35:14 > 0:35:19There was a sense that when possible, when the conditions
0:35:19 > 0:35:24allowed it, that Fred Goodwin was really keen to do another big deal.
0:35:24 > 0:35:29To could you give us some sense of how you feel at the moment about
0:35:29 > 0:35:34the possibility of acquisitions? Whether you think you are out of
0:35:34 > 0:35:39the sin bin when it comes to future deals? I think we are out of the
0:35:39 > 0:35:45sin bin, but that does not equate to making acquisitions. We have
0:35:45 > 0:35:48been clear all along about our guidance on acquisitions. The
0:35:48 > 0:35:56outlook is conditioned by availability. I do not think there
0:35:56 > 0:36:01is anything out there at the moment that seems desirable or affordable.
0:36:01 > 0:36:06I and everybody else interpreted it as a sign there were no big
0:36:06 > 0:36:16acquisitions on the horizon. In retrospect, that turned out to be
0:36:16 > 0:36:19
0:36:19 > 0:36:24not the case. Five weeks later, Fred Goodwin announced the biggest
0:36:24 > 0:36:31banking takeover in history. The target was a Dutch bank, one of
0:36:31 > 0:36:38Europe's the largest called ABN AMRO. It contained an American bank,
0:36:38 > 0:36:46a Brazilian bank, banks in Italy, Holland, India, an investment bank
0:36:46 > 0:36:51which sprawled across the globe. It was big, unwieldy and badly run.
0:36:51 > 0:36:56For the second time in less than a decade, RBS entered a huge, hostile
0:36:56 > 0:37:03takeover battle after a competitor moved first. This time it was
0:37:03 > 0:37:08Barclays Bank that announced a friendly merger with ABN AMRO. So,
0:37:08 > 0:37:16Fred and his advisers put together a consortium of three banks to
0:37:16 > 0:37:21launch a not so friendly takeover. The most important thing is that
0:37:21 > 0:37:27Barclays was going to buy the whole of ABN AMRO. They talked at the
0:37:27 > 0:37:34time of a merger of equals. The bed of the consortium was not friendly,
0:37:34 > 0:37:43it was aggressive. RBS, Santander and 40s. They all wanted separate
0:37:43 > 0:37:48parts and they wanted to tear it up in two parts. RBS's share of the
0:37:48 > 0:37:55spoils would include the investment bank and the American operation, a
0:37:55 > 0:38:03large bank based in Chicago called LaSalle. It would give RBS access
0:38:03 > 0:38:09to the lucrative, American, corporate market. But ABN AMRO's
0:38:09 > 0:38:15management was fighting for survival. To scupper the consortium
0:38:15 > 0:38:19they sold off LaSalle. Quite a few people were convinced RBS would
0:38:19 > 0:38:24throw in the towel after the announcement LaSalle was going to
0:38:24 > 0:38:28be sold. We all knew the Investment Bank was not that successful, so
0:38:28 > 0:38:34why would RBS want to spend so much money on something that is not so
0:38:34 > 0:38:39successful? ABN AMRO has many good businesses, many attractive
0:38:39 > 0:38:44franchises and operates in many attractive markets. That got a bit
0:38:44 > 0:38:51lost in the rhetoric around the subject. RBS pressed ahead
0:38:51 > 0:38:57regardless. In a conference called to analysts, Fred announced there
0:38:57 > 0:39:07would be no major scrutiny of the ABN AMRO books. It is a process
0:39:07 > 0:39:27
0:39:27 > 0:39:32You need to do due diligence in order to make sure you know what
0:39:32 > 0:39:40you are buying, what the Bank promises to be. Therefore, it
0:39:40 > 0:39:46surprised me they did not do due diligence. It is unbelievable. Come
0:39:46 > 0:39:51on, you are spending so much money. You take a big risk. I do not think
0:39:51 > 0:39:55they had any idea what they were buying. Almost every question you
0:39:55 > 0:40:00asked on that respect, the answer came back that when we did NatWest,
0:40:00 > 0:40:05we did it like this and this is what we are going to do again.
0:40:05 > 0:40:09is worth comparing it to our experience with NatWest. We had
0:40:09 > 0:40:16limited to diligence. But that interview when I went over there
0:40:16 > 0:40:22filled me with enormous confidence. RBS was filled with such confidence
0:40:22 > 0:40:29that they offered 27 billion euros for their share of the massive deal.
0:40:29 > 0:40:36However, while the Dutch regulators were delaying the deal being signed
0:40:37 > 0:40:46off, it became clear that the sub- prime problem was not going away.
0:40:47 > 0:40:50
0:40:50 > 0:40:58In fact, it was getting worse. The crisis was spreading from lenders
0:40:58 > 0:41:04up the food chain and penetrating investment banks. There was no
0:41:04 > 0:41:10knowing where it might end. By the time RBS was buying ABN AMRO, there
0:41:10 > 0:41:16were people saying this deal is completely mad. There was
0:41:16 > 0:41:19definitely pressure put on RBS by ABN AMRO investors, from its
0:41:19 > 0:41:25partners in the consortium, particularly Santander. There was
0:41:25 > 0:41:33pressure to put on them to see the deal through. There was probably
0:41:33 > 0:41:38also an element of pride on Fred Goodwin's part. I had no idea why
0:41:38 > 0:41:43the Royal Bank did not walk away. They could have walked away. Life
0:41:43 > 0:41:48was obviously getting tougher, and yet they still continued to pay top
0:41:48 > 0:41:54dollar. There would have been a penalty for walking away from it,
0:41:54 > 0:42:01but it would have been a very cheap penalty! The board of RBS
0:42:01 > 0:42:07unanimously approved the deal. RBS went ahead with the biggest banking
0:42:07 > 0:42:12takeover in history. It took the unusual step of paying mostly in
0:42:13 > 0:42:20cash from the Bank's reserves. Welcome to our interim results
0:42:20 > 0:42:28presentation. But the next RBS results meeting and optimism
0:42:28 > 0:42:33prevailed. Business is very good indeed. We are one step removed
0:42:33 > 0:42:38from it. We have never lent directly to people who are involved
0:42:38 > 0:42:44in sub-prime. We stand back from that. We have a business in the US
0:42:44 > 0:42:48that is involved in the packaging of those debts. We see what is
0:42:48 > 0:42:54happening, it is affecting the market in which we operate, but it
0:42:54 > 0:43:03is not impacting as in a direct way. Johnny, you had something you
0:43:03 > 0:43:07wanted to add. The complexity of the products were part of the
0:43:07 > 0:43:13problem and the interpretation you could put on his statements about
0:43:13 > 0:43:17not doing sub-prime and not having ownership of those assets, would be
0:43:17 > 0:43:22the interpretation he did not understand that fully himself. They
0:43:22 > 0:43:26were certainly complicated products. I think perhaps only one or two of
0:43:26 > 0:43:31the directors might have understood that properly. Six months ago,
0:43:32 > 0:43:35there was a lot of speculation ahead of our annual results and
0:43:35 > 0:43:39presentation that we would be adversely affected by the sub-prime
0:43:39 > 0:43:49situation and it did not happen. We said it would not happen, and you
0:43:49 > 0:43:54have seen it again today. We are not operating in that space.
0:43:54 > 0:44:02directors reassured the City that RBS's Investment Bank was still in
0:44:02 > 0:44:06good health. We cut back a lot since the year-end of 2006 in our
0:44:06 > 0:44:13exposure to these markets and I told you then they were very modest.
0:44:13 > 0:44:17We have not taken any credit losses on our portfolio. Generally
0:44:17 > 0:44:26Worleston volatility has made for some difficulties, it has made for
0:44:26 > 0:44:30some opportunities as well. September, the sub-prime crisis
0:44:30 > 0:44:37finally spread to Britain's High Street. Northern Rock experienced
0:44:37 > 0:44:45the first run on a bank in the UK for nearly 150 years. Markets went
0:44:45 > 0:44:50into turmoil. Surely after words, and to its dismay, RBS was finally
0:44:50 > 0:44:57able to discover just what ABN AMRO had on its books. It was not good
0:44:57 > 0:45:04news. It contained exposure to hundreds of millions of pounds to
0:45:04 > 0:45:11sub-prime related investments which were turning toxic. RBS could
0:45:11 > 0:45:21reassure the City no longer. Johnny's own investment bank was
0:45:21 > 0:45:33
0:45:33 > 0:45:42Fed announced that RBS was writing off �1.5 billion. -- Fred announced.
0:45:42 > 0:45:48When we saw him in 2007, it was clearly the creation of a lot of
0:45:48 > 0:45:54other banks. The big mystery for me that has not become clear is why
0:45:54 > 0:45:59this man who paid such attention to detail knew so little about what
0:45:59 > 0:46:05was going on in this giant investment bank. What people saw
0:46:05 > 0:46:10was this huge global bank sitting on the doorstep which had grown
0:46:10 > 0:46:17from humble beginnings to become a powerhouse globally and it was
0:46:17 > 0:46:24difficult to equate that with a bank that could have problems.
0:46:24 > 0:46:29losses did not sold -- stop there. In February, billions were wiped
0:46:29 > 0:46:37off of RBS's investments. They had been sliced, diced and finally
0:46:37 > 0:46:43trashed. Its cash reserved, drained by the purchase of ABN Amro -- ABN
0:46:44 > 0:46:47Amro, were struggling to strain. One vital measure of its financial
0:46:47 > 0:46:55health, its so-called Core Equity Tier One Ratio, was getting
0:46:55 > 0:47:00dangerously low. Analysts wanted to know just how low. Are there any
0:47:00 > 0:47:07questions you might have. Can you tell us what is the Core Equity
0:47:07 > 0:47:11Tier One Ratio on a look through basis? Are you saying it is a
0:47:11 > 0:47:18number that you know that you cannot share with us or you do not
0:47:18 > 0:47:23know it? It is a number that you can work out but it is not a number
0:47:23 > 0:47:31that we can realise because we will not get to the point to do that. It
0:47:31 > 0:47:36begins with a four and a seven. much as we would like to say at
0:47:36 > 0:47:43this point... I am sorry, you can work it out or we can work it out?
0:47:43 > 0:47:49It is not a meaningful number in terms of how we operate right now
0:47:49 > 0:47:54because the group is the group. City analysts grew increasingly
0:47:54 > 0:48:03convinced that RBS would have to ask shareholders for more cash. In
0:48:03 > 0:48:08financial jargon, and inorganic capital raising. There are no plans
0:48:08 > 0:48:13for any inorganic capital raisings or anything of the sword.
0:48:13 > 0:48:19remember Fred Goodwin being asked about it repeatedly. The --
0:48:19 > 0:48:26anything of the sort. The were no plans for any inorganic planning
0:48:26 > 0:48:32exercises. -- Derek were no plans. That turned out not to be the case
0:48:32 > 0:48:42several weeks later. As the losses mounted, RBS did ask shareholders
0:48:42 > 0:48:44
0:48:44 > 0:48:52for help. P ball stopped believing what he said. -- people. When
0:48:52 > 0:49:02people stop believing what you say that is fatal. RBS was running out
0:49:02 > 0:49:09More heavy losses came in the spring. By April, there were �6
0:49:09 > 0:49:19billion of them. The bank pleaded for double that, for �12 billion to
0:49:19 > 0:49:22
0:49:22 > 0:49:32Shareholders were reassured that this could Secure the Bank's future
0:49:32 > 0:49:48
0:49:48 > 0:49:54As you all know, this morning we I hope you have got a sense to
0:49:54 > 0:50:01date... I have a range of emotions about all of this and I am numbed
0:50:01 > 0:50:08by this. -- a sense today. I feel this has overshadowed the strength
0:50:08 > 0:50:13of this business. I hope you get a sense of my determination to get us
0:50:13 > 0:50:17out of this place. My colleagues and I do not enjoy being in this
0:50:17 > 0:50:23place but we have a business that is strong and resilient and we are
0:50:23 > 0:50:30taking it forward to get us out of this situation. Maybe you need to
0:50:30 > 0:50:36be a bit of a masochist. It is when things are dire that you can see
0:50:36 > 0:50:42organisations perform. In the midst of this there are still lots of
0:50:42 > 0:50:52opportunities out there. If we can drive the businesses properly for a
0:50:52 > 0:51:02word, this can be differentiating. I am a great believer in sorting
0:51:02 > 0:51:03
0:51:03 > 0:51:08out who the long-term winners will RBS had grown and tell it could
0:51:08 > 0:51:14grow no more. It became, briefly, the biggest bank in the world by
0:51:14 > 0:51:19assets. At its bloated size, it left the bank or vulnerable. The
0:51:20 > 0:51:27one golden rule of banking is that the banks must be able to cover
0:51:27 > 0:51:33their balance sheet through cash for loans from other banks. The ABN
0:51:33 > 0:51:43Amro take over double the size of RBS's balance sheet, took it to
0:51:43 > 0:51:49
0:51:49 > 0:51:55nearly two -- �2 million in debt at The credit crunch turned into a
0:51:56 > 0:52:02financial crisis and the markets seized up. RBS had run out of
0:52:02 > 0:52:09options. Its cash reserves were trained on ABN Amro and its share
0:52:09 > 0:52:16price dropped like a stone. But other banks held on to it. The Bank
0:52:16 > 0:52:22of England was keeping it afloat. Confidence was evaporated. For a
0:52:22 > 0:52:28few days, the entire baking system teetered on the brink. -- banking
0:52:28 > 0:52:32system. RBS came within two hours of running out of money and taking
0:52:32 > 0:52:37down the British financial institution with it. I am angry
0:52:37 > 0:52:45with what has happened. Almost all of the losses in the subprime
0:52:45 > 0:52:51market in America are related to the acquisition of ABN Amro.
0:52:51 > 0:53:01was forced to accept a �20 billion bailout from the UK government paid
0:53:01 > 0:53:07
0:53:07 > 0:53:17One condition of the Bank being bailed out was that Fred Goodwin
0:53:17 > 0:53:18
0:53:18 > 0:53:23leave the company. Are you sorry? Before he left, he had to face
0:53:23 > 0:53:28RBS's shareholders one last time, shareholders who had seen over 90 %
0:53:28 > 0:53:33of the value of their shares finish during his reign. A lot of people
0:53:33 > 0:53:39have been waiting for this. I know you speak on behalf of the board
0:53:39 > 0:53:49but this is an opportunity. A lot of people would like to hear him
0:53:49 > 0:53:55
0:53:56 > 0:54:01say sorry. I can only ask Sir Fred I do not want there to be any doubt
0:54:01 > 0:54:08in anyone's mind. I am entirely Surrey on behalf of I'll of the
0:54:08 > 0:54:17board. -- I am entirely apologetic on behalf of the entire board. I am
0:54:17 > 0:54:27sad to leave the company under these extremely difficult times.
0:54:27 > 0:54:35
0:54:35 > 0:54:42There are probably 20,000 people in Scotland who built up a little nest
0:54:42 > 0:54:49egg. That nest egg was blown out of the water. But there are lots and
0:54:50 > 0:54:57lots of people who had been affected. That hurts me, actually.
0:54:57 > 0:55:02I do not think that needed to happen. It did not have to happen
0:55:02 > 0:55:06this way. We did not have to try and become the biggest bank in the
0:55:06 > 0:55:16globe. If we had been more prudent and careful we could have avoided
0:55:16 > 0:55:20
0:55:20 > 0:55:30the storm. We should have avoided Incredibly sad. Incredibly sad.
0:55:30 > 0:55:33
0:55:33 > 0:55:38Bemused as to how it could actually happen. When my father died, he
0:55:38 > 0:55:48felt, as a Glaswegian, this was the place he felt safe. I felt this was
0:55:48 > 0:56:03
0:56:03 > 0:56:13not just a tragedy not just for the As a human being, were you
0:56:13 > 0:56:15
0:56:15 > 0:56:25disappointed? Angry or upset? obviously disappointed. I was
0:56:25 > 0:56:28
0:56:28 > 0:56:36obviously upset. Angry... Not When it all played out, Fred was
0:56:36 > 0:56:42not alone in leaving the bank. Johnny Cameron's banks incurred
0:56:42 > 0:56:47losses of millions of pounds and he resigned, forgoing a pay-off, and
0:56:47 > 0:56:53eventually agreed not to hold a full-time financial office again.
0:56:53 > 0:57:01Tom McKillop followed a few months later, also without a pay-off.
0:57:01 > 0:57:09Larry Fish retired. He had not done subprime mortgages. He had built up
0:57:09 > 0:57:19a portfolio of other investments worth around $10 billion which
0:57:19 > 0:57:20
0:57:20 > 0:57:30later turned toxic. He left RDS with a pension pot of $27 million.
0:57:30 > 0:57:31
0:57:31 > 0:57:35And Fred? Well, everyone knows about Fred's pension. His pension
0:57:35 > 0:57:41entitlement has widely been reported at hundreds of thousands
0:57:41 > 0:57:51of pounds but the actual number is 693. The media speculation is
0:57:51 > 0:58:00slightly lower than the actual Fred eventually agreed to reduce
0:58:00 > 0:58:06his pension to �340,000 per year. A fine reward for running a total
0:58:06 > 0:58:16losses of �24.1 billion. And there, in a nutshell, is what happened
0:58:16 > 0:58:19