from the FT by Brian Groom and Andrew Bolger
August 8 2009 01:41
First they called themselves The Voodoo Club, a group of 20 disgruntled members of Scotland’s financial community who held a wake last January in The Voodoo Rooms, a fashionable bar/restaurant in Edinburgh. It was for their nation’s two largest banks, The Royal Bank of Scotland and Bank of Scotland, which had collapsed into the arms of the government as a result of the credit crisis.
“Scotland has a few icons: tourism, whisky, but also financial probity – and that icon has been smashed,” says Peter de Vink, a veteran corporate financier who is a leading member of the group. Many Scots who invested their savings in the banks’ shares have lost much of what they had, he says. The name did not stick: the word “voodoo” got caught in e-mail spam filters. So now the group – many of whom had been involved in a failed legal challenge to prevent HBOS, of which Bank of Scotland was part, being taken over by Lloyds TSB – has been reconstituted as the 50-member Scottish Banking Renaissance, lobbying to restore the independence and reputation of the banks.
The anger remains palpable. De Vink says: “Our two banks fell foul of the pressure to seek scale. This happened over 10 years and the directors failed to ask the correct questions. The whole boards should be called to book. It should not just be shoved under the carpet, because what has happened is an utter disaster.”
Although feelings are still raw, however, Scotland’s appetite for recriminations may finally be waning. The financial community is doing its utmost to put the catastrophe behind it. Much is at stake because Scotland is far more than a banking centre. It also has substantial operations in life assurance and pensions, investment management and asset servicing, which, although affected by recession, are in a much healthier state than the banks. After London, Edinburgh is the UK’s biggest financial centre – and it is the fourth largest in Europe in terms of equity assets under management. There are also substantial concentrations in Glasgow and other cities. In seven years to early 2007, Scotland’s financial services grew by 60 per cent – more than four times faster than the overall Scottish economy and outstripping the UK financial industry, which grew by 47% in the same period.
Apart from creating the prospect of redundancies, the banks’ collapse has political ramifications. Scotland’s minority nationalist administration, which has run the devolved government since 2007, had hoped to hold a referendum on independence next year. Alex Salmond, first minister, saw Scotland’s destiny as part of an “arc of prosperity” of small, independent countries stretching from Ireland to Iceland. Those countries’ problems, coupled with the UK taxpayer’s bail-out of RBS and Lloyds Banking Group (including HBOS), are among the factors making it unlikely that referendum will now be held.
A deeper hurt, though, is the damage done to Scotland’s pride as a land of prudence, where a considered view is taken, away from the hurly-burly of London and New York – a place where you can trust the professionals with your money. That reputation, based on notions of caution and Calvinist honesty, was built over 300 years by a financial industry that arose amid catastrophe. The Bank of Scotland was founded in 1695 to fund Scottish commerce – just before the Darien scheme (Scotland’s effort to set up a trading empire in what is now Panama), which ended in failure with many losing their lives and the nation losing one-third of its wealth. That led to the Act of Union with England in 1707 and indirectly also to the foundation of the Royal Bank in 1727.
Over the succeeding centuries Scots pioneered many familiar features of the financial world, such as the overdraft, branch banking, payment of interest on deposits and savings banks. Investment trusts were pioneered in the 1870s by Robert Fleming of Dundee. Scots financed 19th-century land purchases and railways in north America. “It was a Scot, William Paterson, who started the Bank of England. All five Canadian banks were started by Scots and all five are still standing high,” says de Vink.
Much of the blame for the banks’ collapse has been heaped on two Scots – Sir Fred Goodwin, RBS’s ousted chief executive, and Peter Cummings, HBOS’s former head of corporate lending, who lost £7bn by pouring money into property development when others were drawing back. (Although Sir James Crosby, HBOS’s Yorkshire-born former chief executive, and his successor, Andy Hornby, also took a lot of flak.) Goodwin and Cummings are both examples of what Scots call the “lad o’ pairts” – young men who made their way by talent rather than social position. Both came from modest backgrounds in the once-industrial west of Scotland, both went to state schools and both worked their way up. Cummings started by making tea and sweeping the floor in the Bank of Scotland’s local branch at 18. Thus has this tragedy dented another cherished Scottish myth.
To add to these misfortunes, Dunfermline Building Society was taken over in March after a mad burst of commercial lending just as the market turned. The society, founded in 1869, was regarded as a historic pillar of the financial establishment and some of Scotland’s best-known business leaders have sat on its board.All these events have brought pain. It is etched on the face of Sir George Mathewson, who stood down as chairman of RBS in 2006, but is still a highly respected figure who chairs Salmond’s council of economic advisers. He and Sir Peter Burt, former chief executive of Bank of Scotland, made an unsuccessful proposal in November to take over the running of HBOS as an alternative to a Lloyds TSB takeover. Mathewson masterminded RBS’s takeover of NatWest in 2000, still widely regarded as a good deal in spite of criticism of the bank’s subsequent expansion. Now he seems torn between criticising what happened under Goodwin, his chosen successor, and pointing to extenuating factors. “I am not an apologist and I think it’s a tragedy as to what’s happened to RBS,” he says. “I have seen an institution that I thought would outlive me for many, many years collapse.” With hindsight, he says, it was a mistake that RBS bought part of ABN Amro – it was so full of bad assets that “if they had got it for nothing it would still have been a disaster”.
One of the most hurtful things was discovering how far RBS had strayed from its culture of caution in investment banking. “When this sort of exposure first came out at Citibank, I thought, well, RBS will be put in a really strong position because they won’t have these. The amount of the exposure just shocked and amazed me,” Mathewson adds. He feels he could not have seen the tragedy coming, even though critics allege that failure to rein in Goodwin during his time as chairman sowed the seeds of RBS’s downfall. Yet he says there were “many other people to blame” than Goodwin and insists RBS’s problem was shared by the whole western world.
“Barclays are just as guilty as RBS, in fact more so,” he says. “John Varley [chief executive] and Bob Diamond [president] were gagging to buy it [ABN Amro]. They were prepared to give up the Barclays name to buy it. That was after they had been inside the bank for six weeks on a friendly due-diligence deal. They were going to buy all of it, not one-third. They must wake up every morning and say, ‘thank God for Fred Goodwin’. I would also like to say 94 per cent of the [RBS] shareholders voted for it.”
Like Mathewson, Burt believes that when he left Bank of Scotland it was in good shape: the deal he engineered in 2001 to merge with Halifax had created a credible future for the bank. With a small Scottish retail base, it was becoming over-dependent on wholesale funding and would have been “mopped up” if it had not merged, he says. Instead, there was a combination of Halifax’s mortgage and retail deposit base with Bank of Scotland’s expertise in corporate and specialist lending.“I retired in January 2003 and I thought it was still a well balanced business. But they seemed to go off the rails. They seemed to drive faster and faster over the next five years,” he says. For him, it felt like “one of those teenage parties where the parents go out and find the house has been trashed”.
Both Burt and Mathewson now fear for the future of Scottish banking. Burt suggests it will now revert for several years to the excessive caution of its past, and that Scotland will see a damaging loss of senior jobs as control of Lloyds is exerted from the south. “In the case of RBS, maybe a third of them will go. In the case of HBOS, how many will be left – 10 per cent?” RBS is expected eventually to regain its independence as the government sells off its stakes in the banks, but views are divided about the chances of Bank of Scotland ever re-emerging from Lloyds as an independent, Scotland-based entity. Last autumn, Sir Peter Burt (former chief executive BOS) and Sir George Mathewson put forward a package to run an independent HBOS – and lead it away from Lloyds TSB, its state-sponsored suitor. Eventually, though, the government’s wishes prevailed and Burt now fears a damaging loss of senior jobs from Scotland.
Archie Kane, representative for Scotland on the Lloyds board and its executive director of insurance, attempts to dispel the anxieties. From his Edinburgh base, Kane is now running an insurance empire with the biggest customer base in the UK, including the enlarged bank’s general insurance businesses, Scottish Widows and Clerical Medical – the life office acquired with HBOS. Kane is concerned that Scots are exaggerating the damage done to their financial institutions, and stresses that Scotland’s life assurers and fund managers have come through the financial crisis “rather well”. “Some of the institutions may be reshaped and may have a different focus, but that is the same if you were in New York or London or Frankfurt … We have to keep reminding ourselves that this is a global crisis – and it is not something we could have opted out of in Scotland,” he says.
Sir Angus Grossart, chairman of merchant bank Noble Grossart, says posterity will tell whether the damage done to Scotland’s reputation is long-term. “There has been a remarkable resilience over the 40 years I have been involved, through many ups and downs. If you have any sense of history, you see that the test is not really to avoid adversity but how you come through it.” There have been crises in the past. In 1772 several Scottish banking houses failed after the Ayr Bank collapsed. The City of Glasgow Bank failed in 1878, leaving many people penniless. In recent times, the City of London’s secondary banking crisis in 1973 had echoes in Scotland, and later some banks that financed North Sea exploration were burned by fluctuations in the oil price. But there has been nothing quite like what has just happened. Grossart thinks the crisis could prove cathartic. “We are approaching the time of classic opportunity for those who have a bit of courage and who are good and well-backed. You have to see these things in terms of a Darwinian cycle of evolution,” he says.
Politicians and business leaders have seized with alacrity on “green shoots” – a decision, for example, by Tesco to site the headquarters for its planned full-service retail bank in Edinburgh, adding more than 200 jobs to the 250 already working at its finance office in the city. It cannot have escaped notice, however, that Tesco hopes to capitalise on public disenchantment with the established banks, not least RBS and HBOS. One recent start-up is Nucleus, a company that aims to shake up the life assurance industry by allowing clients to choose financial products from a technological “wrap platform”. It employs 24 in Edinburgh. The downturn has put back its break-even point to later this year or beyond, but David Ferguson, chief executive, says the damage to Scotland’s reputation has not affected the company because it does not sell itself as a Scottish brand. He thinks others in large organisations might take the entrepreneurial route if they find their careers blunted by the crisis. “They are going to say ‘do I really want to hang around here another five or 10 years while this all sorts out, or can I invest my intellect elsewhere?’,” he suggests.
The non-banking giants of Scottish finance are at pains to distance themselves from the banks’ humiliation. “There may be a rebalancing [of the financial sector] towards the life side and asset managers as against the banks, which had come through very strongly,” says Otto Thoresen, who heads the Edinburgh-based UK arm of Aegon, a Dutch life assurer. “But I feel the sector would be none the worse for that.” Willie Watt, chief executive of Martin Currie, one of Edinburgh’s most successful fund managers, says: “I don’t think the man in the street is equating the problems that RBS and HBOS had with Scottishness – I’d be very worried if they did, but I haven’t felt that.”
The Scottish reputation for prudence, argues Owen Kelly – chief executive of Scottish Financial Enterprise, which promotes the industry – “still resonates in markets like China, where you are looking at a lot of wealth hopefully to be put under management by people with the kind of historical perspective that perhaps is valued more now than before”. Some take comfort from the fact that Scotland missed out on the hedge fund and private equity boom and thus avoided the downturn in those sectors. That can be seen as reinforcing the conservative Scottish approach, although, as Kelly points out, it was not a “consciously chosen strength”. He adds: “If you had asked two or three years ago ‘would you like that [the hedge fund industry] to be in Scotland?’, I am sure I would have said yes.”
Perhaps the most hopeful sign for Scotland comes from the experience of Sir Sandy Crombie, chief executive of Standard Life, who helped save the Edinburgh-based life assurer from a near-death experience five years ago. He sees parallels between the banking crisis and the tougher solvency regime imposed on UK life offices after the dotcom bubble burst. Crombie was parachuted into the role of chief executive of Standard Life in 2004 after it clashed with the City regulator over its solvency. The crisis forced the company to drop its long-held opposition to demutualisation, review its products, cut policyholders’ bonuses and slash its bloated cost base. The workforce has subsequently been cut from 15,000 to just over 10,000. Reputations have “undoubtedly” been affected by the banking crisis that engulfed RBS and HBOS, says Crombie, “but it is not as if what has happened here is isolated and confined to Scotland, and I think the swift action of the government has ensured that the patients have been kept alive. My experience with Standard Life is that sentiment can be made to move on quite quickly.” Crombie has now joined the RBS board as senior independent director.
Scotland, meanwhile, waits to see how deeply the crisis will damage its economy. Until recently, the recession was felt less severely there than in other parts of the UK, but unemployment is now rising rapidly. Margo MacDonald, independent member of the Scottish parliament for Edinburgh, says: “When the banks were seen to have stumbled, I think it did affect the sense of well-being in the city. It was palpable before that. People felt confident. They were more aspirational. They had finally accepted the fact that we were a European capital, albeit a small one.” MacDonald, a former leading figure in the Scottish National party, believes, however, that there is no going back to Scotland’s past subservience to the Westminster parliament. Whereas once there was a feeling that “big things” such as financial and economic management should be left to “big London”, people “don’t think like that any more”. She says faith in London has been severely dented by issues such as the scandal over MPs’ expenses and the government’s decision to take part in the Iraq war. “There is a greater appreciation of the subtleties of sovereignty in a global economy,” she says, arguing that Scotland should exert influence as part of a group including the UK, Ireland and offshore islands around their coasts.
Salmond may not have the majority to hold his referendum but, if Labour does badly in the UK general election due by next spring, the SNP is likely to benefit. A lot of Scots seem comfortable with a nationalist-led devolved government asserting Scotland’s rights even if they do not want full independence. As for Edinburgh, MacDonald thinks it could be healthy for the capital to become less dependent on financial services and exert its strengths in education, research and life sciences. Few expect the financial sector to revert quickly to the heady growth of recent years. They will expect future expansion to be built on more secure foundations.
Brian Groom is the FT’s business, regional and employment editor.
Andrew Bolger is the FT’s Scotland correspondent
