You Can't Read This Book: Censorship in an Age of Freedom (19 page)

In 2002,
Forbes
named him its businessman of the year – not bad for a boy from Paisley who had been working for an Edinburgh bank in a backwater of global capitalism. As his fame grew, all the psychological flaws of the egotistic authoritarian personality feasted on his mind. He had no time for collaborative decision-making, or respect for collective wisdom. He was the meritocratic master, the proven winner, who instinctively knew what was right. ‘I always work on the five-second rule,’ he told
Forbes
. ‘How a job offer makes you feel in the first five seconds when you hear the idea, before you spend ages agonising, is what you should do.’ He required his subordinates to obey without question. At 9.30 a.m. he held his ‘prayer meetings’, at which he would caustically review the performance of his lieutenants, and assert his power with exercises in public humiliation. ‘Executives would hate going to meetings with him,’ a senior manager told me. ‘They would sit at the table, eyes down, chin on chest, thinking, “I hope he doesn’t pick on me this time.”’ Goodwin was adept at using his control of targets to frighten those below him. ‘People would work for months on plans for the next year, trying to get costs down and profits up. Then he would tear up what they had done in front of their faces and say that the plans were too timid. Costs must always go down; profits must always go up, even if the targets were impossible. So back we would go, and try again.’ The culture of the quick buck and the fast deal demoralised the corporation. Anyone who raised doubts about the tiny amounts of capital backing lending, or the failure to invest in computer systems that could cope with the bank’s trades, heard managers tell them in threatening voices that they were ‘Business Prevention Officers’. Carry on getting in the way, and the hierarchy would mark them as fifth columnists whose naysaying was destroying the bank’s viability and the chance for bonuses for everyone working in it.

Let one vignette stand for the whole man. RBS was about to move staff into an office on Bishopsgate in the City. Goodwin inspected it just before it opened, and noticed that the carpet colour was not quite right. The minor breach with corporate branding did not matter: Bishopsgate was a home for administrative workers, not a place for customers. The exception was Goodwin’s suite, which filled the eleventh and twelfth floors, and had an express lift so he and his guests could reach his private hospitality lounge without encountering the riff-raff. Linking the eleventh and twelfth floors was a sweeping staircase, which Goodwin descended to greet important guests as if he were a star in his own movie (the ‘Fred Astaires’, his underlings called it). Goodwin had previously insisted that every RBS branch in the world must have matching fixtures and fittings, that every RBS executive must wear a white shirt with a tie sporting the RBS logo, and that every plate of biscuits for RBS executives must include digestives, but not pink wafers. One of his guests might notice that the carpet was slightly wrong, so Goodwin ordered it to be ripped up and replaced, at a cost of £100 per square yard. His employees were reminded that he was their capricious lord, whose lives were his to control.

As an amateur psychologist could have predicted, Goodwin believed he could find fortune in the future by sticking to the strategies that had turned him from a provincial banker into a global player. The result was a bank collapse that made the failure of Bank of Credit and Commerce International seem like a blip.

Goodwin’s insistence on making deals had transformed the culture of his corporation. RBS was once a bank whose conservatism was a source of pride to Scots. Before Goodwin, it specialised in ‘value’ banking. It would try to spot the best asset-financing opportunities – by setting up the Tesco Bank, say, or developing Canary Wharf – and profit when the deals came good. The trouble with value banking in a bonus-hungry City was that even if a bank invested early in a good venture, it would take years for the profits to come through. Equally depressingly, it would have to set capital aside as a regulatory cost in case the deal turned sour. Dealing in derivatives and using securities as collateral was much more satisfying. Bankers at RBS and everywhere else could claim their deals created no regulatory costs, and their banks did not have to hold capital against default because AAA securities were free of credit risk. Hence they could increase paper profits – and boost the bonus pot. The deals depended on everyone forgetting that the securities in question were ultimately dependent on saps in American trailer parks who had fallen for introductory teaser rates on sub-prime mortgages they would never be able to repay to buy condos whose keys they would have to return. RBS said it had ‘stress tested’ its securities, but like the geniuses in so many other banks, its geniuses never worked out that the securities might be worth 50p, 5p or 0p in the £1, and that they did not have the regulatory capital set aside to absorb the bad debts. ‘Don’t get high on your supply,’ say drug dealers. As elsewhere, bankers at RBS ignored the wise advice of their colleagues in the opium-derivative markets. They did not offload the risk by selling on securities to the greater fool, but treated them as their own capital and held on to them.

Goodwin continued with his takeover binge. The battle for NatWest had made him famous, and he carried on expanding into Asia and the US at a frenetic rate. At the top of the market, just when liquidity was vanishing, he won a takeover battle against Barclays and paid £48 billion for the Dutch bank ABN AMRO, which he thought would give him a ‘global platform’. The crash revealed what RBS should have known: bad debts weighed ABN down. Far from being a global platform, it was a sprawling mess of a bank with fifty-seven IT structures in eighty countries that would take years for a properly run business to integrate or even understand.

Goodwin’s career ended in a scene so perfect it might have been taken from fiction. On 7 October 2008, three weeks after the collapse of Lehman Brothers had frozen the global financial markets, he stood in front of a roomful of investors in the ballroom of the Landmark Hotel near London’s Marylebone station. In a thirty-minute presentation, he described the company’s broad portfolio of businesses, strong balance sheet and opportunities for growth in Asia. Despite the turmoil in the markets, RBS remained as solid and reliable as it had always been. As he talked, word reached the hotel that the market had fallen again. A fund manager put up his hand. ‘In the time that you have been speaking, your share price has fallen 35 per cent. What is going on?’

Goodwin went pale, and mumbled an answer. He cancelled his remaining meetings and rushed back to RBS’s offices. A few days later the state nationalised the bank, and pumped in £37 billion from the British taxpayer. Goodwin retired with a pension pot of £16.5 million, also from the British taxpayer.

Keep Mum, it’s not so Dumb

Insiders knew. The greatest crash in the financial markets since 1929 did not come without warning. In the wake of the catastrophic loss of the jobs and homes of millions of workers, whose employers had never paid them a bonus in their lives, the previously somnolent media belatedly paid tribute to those who had tried to raise the alarm. In 2005, Raghuram Rajan of the International Monetary Fund addressed a meeting of central bankers. In the audience were Alan Greenspan of the US Federal Reserve, and Larry Summers, who along with Greenspan had done Wall Street’s dirty work for it by preventing a few honourable officials in the Clinton administration from regulating the new derivatives market. Rajan’s speech was prescient. He warned that derivatives and credit default swaps were providing lucrative financial incentives to bankers to take risks in the mistaken belief that the deals would never unwind.

Also mentioned in dispatches was Nouriel Roubini of New York University, who warned in 2006 that changes in economic fundamentals – real income, migration, interest rates and demographics – could not account for the surge in US property prices. America was in the grip of a speculative bubble pumped up by hot money and extraordinarily risky lending that would end with a ‘nasty fall’, he said. Again, his prescience was faultless.

But singling out the few – shamefully few – financiers, business journalists and economists who emerged from the early 2000s with their reputations intact is to miss a wider point. Thousands of people in banking knew the deals they were closing were dangerous, and suspected that money and egomania had turned their masters’ heads. They may not have been able to predict a global liquidity crisis, but they knew that in their firms a lust for self-enrichment had replaced the principles of prudent banking. Goldman Sachs persuaded its gullible customers to invest in sub-prime securities that the company’s investment bankers privately dismissed as ‘crap’ and ‘shitty deals’. They knew. In Iceland, where a tiny population sat on a heap of volcanic rock, three banks ran up loan books of $110 billion – 850 per cent of Iceland’s GDP. The official inquiry into the Icelandic financial collapse, which left every Icelandic man, woman and child nominally liable for $330,000, said that insiders were withdrawing their funds days before the bubble banks went bust. I think it is fair to say that they knew too. At RBS, everyone except Fred Goodwin knew that they were paying over the odds for ABN AMRO. As early as 2005, City analysts diagnosed that their chief was suffering from ‘megalomania’. His staff did not need outsiders to tell them that. They knew from experience that he was also a sociopath, who was capable of leading their bank to ruin.

Goodwin’s sociopathic tendencies seem exceptional, but if Barclays rather than NatWest had won the battle for ABN AMRO, Barclays would have collapsed, and journalists would now be writing about the character flaws of its executives. One cannot reduce the failures of management to the failures of a few bad apples that somehow ended up at the top of the sack. Instead, you have to look at the structural weaknesses of managerialism that encourage delusion. A fundamental flaw of modern capitalism is that businesses promote bombastic people. As Cameron Anderson and Sébastien Brion of the University of California, Berkeley, showed experimentally, ‘In conditions where there is any ambiguity in competence and performance (which is common in organisations), overconfident individuals will be perceived as more competent by others, and attain higher levels of status, compared to individuals with more accurate self-perceptions of competence.’ They think even better of themselves when they are promoted – ‘If my employers say I’m a top dog, I must be’ – and their elevation gives them the hiring power to surround themselves with sycophants, or ‘my team’, as they describe them.

The question therefore ought not to be who knew, but why so few spoke out. The answer reveals why financial institutions pose greater potential dangers to society than any other private business. The strongest link between the inequalities of wealth at the top and the destruction of the living standards of those underneath lies in the incentives the hierarchical system gives its participants to self-censor.

All bubble markets carry perverse incentives. During the dotcom bubble of the 1990s, analysts and fund managers on Wall Street and in the City who warned that worthless companies had issued bubble stocks were not thanked by their employers for their honesty, or congratulated when the crash in the dotcom market vindicated their scepticism. By staying out of the bubble, they missed the chance to profit as the bull market roared ahead. The investors who made money suspended their disbelief, feigned ecstasy about the market’s prospects, and sold on before the crash. It was not enough to be right. One had to be right at the right time. The bonus culture of the first decade of the twenty-first century institutionalised financial false consciousness. Everyone in the City I interviewed emphasised that you should not just look at the money made by the alleged stars of the dealing rooms and the CEOs. All employees in a position of power or knowledge within the organisation were caught up by the determination to run risks and to jack up their bonuses. ‘An ordinary risk manager or accountant at a bank can make £100,000 basic and £100,000 bonus,’ said one. ‘There is no way he can get that kind of money anywhere else. He is going to be as keen as the CEO on authorising risky trades.’

Suppose, though, that junior employees or indeed senior bankers realise that their managers are making catastrophic mistakes. They still have no reason to speak out. In the good years they will have pocketed salaries and bonuses. The state will not confiscate their homes and empty their accounts if their bank collapses, but will allow them to hold on to their assets and their winnings. If they have not caused trouble, they should be able to find another job in another bank. If the state coerces the taxpayer into bailing out the failed institution, they can carry on in their old job as if nothing had happened – but now drawing their salaries and bonuses at public expense. Within three years of the taxpayer bailing out RBS, two hundred of its staff were receiving million-pound bonuses. The recession, unemployment, higher taxes, reduced public services fell hard on everyone except the originators of the banking crash.

Silence in a banker’s private interest brings no penalty. Speaking out in the public interest, however, would mean that he would never work in banking again. Even if he could use whistleblowing legislation – and as we have seen, that is no easy matter – the compensation he would receive would usually be one year’s wages – pin money in comparison to the wealth the bank or the taxpayer would give him if he bit his tongue. Perhaps the banker could go to the regulatory authorities privately. Even assuming that they were not slumbering, his employers would find ways to force him out if they found out what he had done. And executives in rival hierarchies would ensure that he would
never work in banking again
. Therein lies the ultimate sanction. Whistleblowing in banking, and many another trade, does not mean you lose just your job, but
all other possible jobs
in your field. No rival manager would want you on his ‘team’, because you might expose him as you exposed his predecessor. In banking, business and the public sector, challenge one hierarchy and you challenge them all. Speaking out within the firm is equally dangerous. ‘A risk manager once told me that to raise an issue that undermined the bank’s multi-billion-dollar profits would have been to “sign his own death warrant”,’ said a Wall Street derivatives trader after the crash. ‘This inability to challenge trading desks generating billions in phantom profits was endemic.’