Over the last couple of days, we really have hit a new low as far as UK government’s incompetence in face of flagrant demonstration of corporate greed goes. I am, of course, talking about the scandalous pension due to be paid to Sir Fred Goodwin, previously the CEO of RBS, and the way the government has been handling this debacle.

A disaster in the making: RBS will go down in financial history as the bank that made the worst-timed and most ill-advised takeover. Having bought ABN Amro in October 2007 for £50bn – Europe’s biggest ever banking takeover – it paid an incredible 70% premium over the fair value of its assets, which raised eyebrows even then. Of course it has since been discovered that ABN Amro’s balance sheet consisted of is now commonly referred to as toxic assets, turning the purchase into an unmitigated disaster.

Yesterday RBS announced a 2008 pre-tax loss of £24bn, the largest loss in UK corporate history. Included in that is a £16bn write-down related to the value of ABN, which is almost half of the premium that RBS paid for it 20 months ago. As most followers of financial news can appreciate, this does not guarantee that all the expected losses have been accounted for – more write-offs are bound to materialise during 2009, as no-one in the world of banking can presently quantify the overall toxic assets exposure out there.

Rewarding failure: Sir Fred Goodwin is the person naturally credited with bringing RBS – an old and once veryprudent Scottish institution – to the brink of collapse and into almost full nationalisation as part of UK’s rescue efforts. The most recent revelations about the size of Goodwin’s pension (an annual eyewatering £700K ) negotiated as part of his leaving package has scandalised the whole country. What this tells us is that corporate greed knows no bounds, and rewarding utter failure can be the name of the game as high-stakes games are being successfully played out by shrewd and shameless senior financiers. They are truly a law unto themselves. In this case however, our government is also blatantly letting them get away with it.

American banking culture: The culture of boundless corporate greed and arrogance in its current form was imported into British banking, a rather gentlemenly club earlier in the 20th century, from America. American bankers, through working for their ultra-competitive corporations, have been perfecting this culture for decades: putting it bluntly, they don’t give a xxxx about anything but bonuses paid at the year end. One can at least partially attribute the rise of this culture to the Glass-Seagall Act 1933 which separated out commercial (retail) and investment banking and allowed  the latter to become a separate “patch” with their own rules and very financial stakes.

This ruthless, bullying, competitive and short-termist culture has been slowly encroaching into the culture of British banks starting with their investment banking divisions until it really took hold.

Money can bring out the worst in people, and big money doubly so. The insular, inward-looking attitudes practiced by investment bankers gave rise to a employee selection process that only allowed for like-minded tough and ruthless individuals to flourish; the rest could not survive in that environment. In a deregulated banking environment on the cusp of the two centuries, it was a way of working where testosterone ruled and men dominated. Not many women could compete on terms set by the A-males.

Self-destruct mechanism: But intestingly, what bankers might have considered to be a sort of effective natural evolution process ensuring the survival of the fittest and best-suited individual ultimately was a fatally flawed mechanism which brought their firms down to their knees. The banking executives bred by this system had so little regard for risk and so little prudence that the unjustifiable risks they amassed tipped the system over the edge.

Sadly, our friend Sir Goodwin currently represents the UK face of this self-destructive culture of greed. By holding on to his unjustifiable pension in the face of a public outcry he is demonstrating contempt for doing the decent thing and settling for a reduction. And yes, we know that RBS now have a contractual obligation to pay him this money, so legally he is quite justified in his attitude. Here is where legal contracts and morals clash; and I have very little faith in Sir Goodwin doing the morally right thing in this scenario. He seems too far gone on the road of being a prisoner to his money; shame does not seem to apply anymore. I guess the price of conscience is about £700K per annum.

Government incompetence: We know the basics: the ministers knew about the pension and did nothing to stop it becoming contractually binding when the time was right. It is too late now to make any changes now, they let Fred Goodwin off with his money. What a total humiliating embarassment to the Labour government; what utter incompetence and lack of common basic due diligence. Tell me something new though!

Aren’t we proud as a nation to have such a capable government and such decent highly skilled and motivated financiers in our midst?

 

Copyright 2009 by CuriouslyInspired

Advertisements