Fred Goodwin may have lost his job running the Royal Bank of Scotland, but he is not forgotten. Daniel Gross, a columnist on Slate magazine, has just named him the "world's worst banker." To win, Goodwin overcame some tough rivals, including Chuck "the dancer" Prince of Citigroup and Jimmy Cayne, the pot-smoking boss of Bear Stearns who sloped off to bridge tournaments while his investment bank collapsed.
No one could accuse Goodwin of slacking off. He was very much hands-on as RBS ran into the ground. Gross goes through the charge sheet which includes overpaying for acquisitions; investing massively in dodgy securities; and building a hugely expensive new headquarters just before the bubble burst. All true of course. But is it really fair to single out Goodwin? There were plenty of others who got it wrong. The list of banks that have required bailouts is hardly short.
Nonetheless, Goodwin has a strong claim—mainly because of his management style. He ran RBS as a dictator. The board was stuffed with compliant figures—many of them Scots awed by Goodwin's reputation north of the border. His subordinates were cowed by his relentless style. The failure when it came was thus all his own. And what a failure it has been. A 300-year-old institution has been wrecked. And by dumping on his fellow taxpayers the responsibility for RBS's £1.7 trillion balance sheet, Goodwin has perhaps come closer than any man since Adolf Hitler to bankrupting the British state. He may not be up there with the all-time greats—fellow Scot John Law who inflated the Mississippi bubble in the 1720s or William Paterson, the promoter of the failed Darien scheme to create a Scots empire in Latin America. But among the crunch crop, "worst" doesn't seem too wide of the mark.
Beatrix Potter's subprime solution
The celebrated economist Robert Shiller has argued that the way to avoid future subprime crises is to educate people better in financial matters.
This is an excellent idea. And if it is to be pursued, what better source text could there be for the educators of the future than Beatrix Potter's financial fable, The Tale of Ginger and Pickles. The story concerns a general store run by a cat and a dog, Ginger and Pickles, which competes for the business of passing mice and rabbits with a similar store run by another cat, Tabitha Twitchit. The difference between these two ventures is simple. Ginger and Pickles operate a highly leveraged business model, offering their customers unlimited credit, whereas Twitchit sells only for cash. To explain the bubble that ensues, Potter gives the following definition of credit.
"The meaning of credit is this—when a customer buys a bar of soap, instead of the customer pulling out a purse and paying for it—she says she will pay for it another time. And Pickles makes a low bow and says, 'With pleasure, madam,' and it is written down in a book. The customers come again and again and buy quantities. But there is no money in what is called the 'till.'" For a time, Ginger and Pickles appear to be doing well: "The sales were enormous, ten times as large as Tabitha Twitchit's." But lack of cash obliges our heroes to eat their own stock. Ultimately they are undone when Pickles is unable to renew his dog licence because it is unobtainable on credit.
In these few masterful, jargon-free sentences, Potter lays bare the mechanics of a credit bubble. The only difficulty from an educational perspective comes at the very end of the tale. Ginger and Pickles go bust and are forced to abandon the shop and take menial employment, leaving Twitchit to clean up. Pure fantasy! In real life, of course, they would have been bailed out by the state. Meanwhile, Twitchit's only reward for being prudent would have been to have her taxes jacked up to pay for the bailout.
Foolish men in east help bank
Thousands of London-based bankers have been thrown cruelly onto the scrap heap by the financial crisis. But it is not all doom and gloom in the City. The bankers of the European Bank for Reconstruction and Development (EBRD) have something to celebrate this Christmas. This is the financial institution that was set up and capitalised by governments after the fall of the Berlin wall to help finance the transition of Europe's former communist states to capitalism. Until recently, with the streets of Prague and Budapest clogging up with BMWs and Bentleys, it seemed the job was done. Several governments asked for their money back and the Australians even suggested winding up the bank. Staffers faced the grim prospect of moving to Ulaan Bator or Almaty if they wished to continue dishing out western dosh. But then—lo—in the (nearer) east, came banking crises as the crunch hit Hungary, Ukraine and then little Latvia. EBRD is now back in business in central Europe as it expands lending to help out the cash-strapped banks of the region. Moreover, unlike the rest of us, EBRD bankers have no reason to feel torn about bailing out bankers with public cash. As the EBRD is an international institution, they don't pay tax, and thus avoid contributing to the largesse they are dispensing.
