The RBS report pulled its punches. There's much more to be done to stop business neglecting public interest
As the report by the FSA shows, the purchase of the Dutch bank ABN Amro by the Royal Bank of Scotland will be seen in retrospect as one of the illusions of the epoch – the high-water mark of the crony capitalism of the past decade.
Lest we forget, led by its accountant-turned-banker Fred "the Shred" Goodwin, RBS launched a spree of bank acquisitions after acquiring NatWest in 2000. It became the fifth largest bank in the world, its assets rose by over four times, profits soared, and Goodwin was given a knighthood. In 2007, he capped it all with a huge, mainly cash bid for ABN, trumping a rival bid by Barclays.
Except it was all built on sand. Goodwin had barely six years' experience as a banker when he became the CEO of RBS. His management style was autocratic enough to raise even the FSA's suspicions, as early as 2004. He built a loan portfolio so flawed as to suffer £32.5bn of impairments in 2007-10 alone. RBS had poor-quality capital, and was hopelessly over-reliant on the markets for funding.
Four years, £45bn of public money and 27,500 jobs later, RBS is still struggling to come to terms with the Goodwin legacy. Among other things, there is the small matter of the impact of the eurozone crisis on RBS's £40bn exposure to Ireland to contend with. The taxpayer has made a paper loss, so far, of £25bn. Goodwin walked away with a fortune.
The new FSA report covers the bases, but its recommendations are nothing like punchy enough. Major bank acquisitions should be approved by the regulator, with a maxim that contested bids should rarely be approved. The directors and senior managements of failed banks should not be able to work in the financial services industry again. People with little banking experience should not be allowed to run banks of any size. Regulators must have the tools to puncture asset bubbles. It's not rocket science.
However, the real story, as I show in a new paper, The Case for Real Capitalism, published this week, is the emergence of crony capitalism in the UK over the past decade. Capitalism itself is the greatest tool of economic development and social advance ever known. Crony capitalism is what happens when the constraints of law and markets and culture cease to be effective. Business activity loses any relation to the wider public interest, while business merit is separated from business reward. The effect is to disguise economic reality, shield poor management, ramp up pay and leach away value.
So far, so RBS. But crony capitalism is not restricted to the financial sector: don't forget that take-home pay for FTSE 100 CEOs has more than doubled to £2.5m since 1999, moving from 47 to 88 times that of a full-time UK employee. Stock market returns have grown far more slowly.
There is much that we can do to tackle crony capitalism: restrain bonuses, improve corporate governance, enhance competition in key markets, and toughen up supervisory bodies. But the first thing is to be clear about the facts, and the ugly fact is that the greatest scandal of the past decade did not concern RBS at all: it was the merger of Lloyds and Halifax Bank of Scotland, waved through by Gordon Brown at the height of the financial crisis. Lloyds had been the best-managed UK bank for decades. Since the merger shareholders have lost some 85% of the value of their shares.
The due diligence on HBOS by Lloyds' financial advisers was catastrophically bad, but they nevertheless collected fees of hundreds of millions of pounds. Some 24,000 employees have been laid off. Incredibly, Sir Victor Blank, the deal's architect, has been invited to guest-edit BBC4's Today programme this Christmas. So the wheel turns.