All nations have their national myths and a favourite Scottish one is that their bankers have always had a great reputation as thrifty and prudent men of business. The actual truth is rather less flattering and much more interesting.
The first Scottish banker in a recognisable guise was William Paterson, born in Tinwald, Dumfries, a man of many ideas, not all of them good. He is credited with founding the Bank of England in 1694. He certainly in 1691 proposed a Bank to manage England’s national debt, and while others executed his plan, he was a founding Director. Another of his grand ideas was less happy. He persuaded a large body of Scots investors that Scotland should establish a colony in Panama, which faulty information had told him was a very agreeable destination. The resultant Darien Scheme of 1698 proved a disaster and cost the sponsoring company the then astronomical sum of £232,000. Lack of due diligence, and reliance on business instinct, may well be an endemic Scottish failing. The Darien Scheme ruined many Scots and was a powerful spur towards the safer haven of the 1707 Act of Union with England.
Another persuasive early Scots banker was William Law, but he did not ruin his native land but instead ruined France. A native of Lauriston, Fife, a gambler with an acute calculating mind, Law was a fugitive from England after killing a love-rival in a duel. After 10 years of continental travel, Law gained the confidence of the Regent of France and was appointed Controller General of Finances. He set up the private Banque General in 1716, acquired by the French nation and becoming the Banque Royale in 1718. He organised tax-farming, imposed tolls, stimulated overseas trade introduced paper money and had notions on credit which his biographer Antoin Murphy generously claimed were 300 years ahead of their time (so not much practical use) and “captured many key conceptual points which are very much a part of modern monetary theorizing.”
Law’s career ended ignominiously when he sponsored the Mississippi Company, underpinned by the alleged riches of Louisiana. A speculative bubble developed in 1719 leading to the precipitate collapse of his bank, losing the savings of many thousands, firmly prejudicing the French against banks and in no way arresting the long slide to Revolution. The South Sea Bubble exploded at much the same time in London – no Scotsman spotted this time!
Scottish banking did settle down in the 18th and 19th centuries. The Bank of Scotland (founded by Englishman John Holland in 1695) - it had given the Darien Scheme a wide berth - and the Royal Bank (founded 1727) competed abrasively. The Bank of Scotland was allegedly Jacobite in sympathy (spun by the Royal?) and was out of favour with the London government. Edinburgh goldsmith Andrew Drummond established his private bank in 1717 in London, becoming the Royal’s first acquisition south of the border in 1924. Thomas Coutts, whose family hailed from Montrose, took the helm in 1775 of the private London bank originally named Campbells, and built up a glittering clientele, as Coutts & Co, together with a personal fortune.
More modest customers were attracted by the world’s first Savings bank founded by the Rev Dr Henry Duncan in his parish of Ruthwell, Dumfries in 1810, the forerunner of the TSB and many other such institutions. Although Scotland itself remained chronically overbanked, opportunities in the Empire and the East beckoned. James Wilson, a hat-maker from Hawick, opened the first branches of the Chartered Bank in India in 1856, while John Paterson from Aberdeen started the Standard Bank in South Africa in 1862. They flourish together as Standard Chartered today. Thomas Sutherland, also from Aberdeen founded in 1865 the Hong Kong and Shanghai Bank, soon to be joined by Ewan Cameron from Inverness, forbear of Prime Minister David Cameron. The Hong Kong Bank evolved over the years into a huge enterprise, acquiring the Midland in 1990 and, as HSBC, became one of the largest banks in the world.
There was a golden age for Scottish bankers in the 19th and 20th centuries, indeed for all bankers, although there were the occasional nasty set-backs. The City of Glasgow Bank failed in 1878; false accounting was uncovered; 1200 shareholders with unlimited liability were impoverished and the entire Board was jailed. In 1906 the collapse of Arbuthnot & Co, mainly operating in Madras, was ascribed to fraudulent trading; London depositors lost heavily and the senior partner, Aberdeenshire born Sir George Arbuthnot, received 18 months hard labour.
Nemesis was on hand in the early 21st century. The banks gloried in the Thatcher, Major and Blair years of prosperity and globalisation, not least the Bank of Scotland and the Royal Bank. Rivals as ever, both bid for the much larger NatWest Bank and the Royal won the prize in 2000. Sprawling NatWest was a turkey ripe for the plucking and the task was gleefully undertaken by Fred “the Shred” Goodwin, a native of Paisley, whose accountancy career had included the liquidation of the fraudulent BCCI and who moved through National Australia Bank and Clydesdale Bank to the Royal. The talented and dynamic Goodwin became CEO in 2001, quickly axed costs at NatWest and was a City favourite.
Goodwin then embarked on a further massive acquisition programme. Insurance brokers were bought, US subsidiary banks expanded and an excessive $10.5bn paid for Charter One Financial of Cleveland. When $1.6bn was paid for a mere minority interest in the Bank of China, alarmed institutional shareholders, worried by the growing leverage, exacted a pledge from Goodwin that there would be a halt on acquisitions. RBS had assets of £1.9 trillion, making it the largest company in the world by that measure, but its lending had increased greatly and it was very dependent on wholesale money market funding. Moreover its US investment banking operation RBS Greenwich had been encouraged to expand and it had a large position in collateralised debt obligations (no, don’t ask), soon to turn toxic.
A common ailment of bankers is deal fever, when the visionary clouds part and the blood runs warm at the sheer grandeur of their plans. Goodwin may have had a bout of this fever when he was stung to frustrate Barclays, who were poised to buy ABN-Amro in 2007. He devised a complex 3-way bid led by RBS, splitting the target with Fortis and Santander. He agreed a deal totalling €71bn. His Board, stiff with the supposedly prudent panjandrums of Scottish banking, were apparently ineffectual and the deal completed. Timing could not have been worse, as October 2007 saw confidence quickly dissolve in the City following the US subprime crisis. The inter-bank market froze and RBS faced a funding crisis.
Two rights issues were made but it was too late. RBS was too big to fail and a taxpayer rescue had to be organised with the state taking 70% and later 84% of the equity. In due course a record-breaking £24.1bn loss was announced. Over-lent Halifax Bank of Scotland was also in a desperate position and after a nudge from Prime Minister Gordon Brown, hitherto prudent Lloyds Bank bought HBOS in haste, a transaction it repented at leisure after the full horror of the loan book emerged. The state had to inject funds and Lloyds became 43% taxpayer owned.
Thus two great Scottish banks were laid low by mismanagement and over-ambition. Their ultimate fate is uncertain. Scots are no better than the English, French or Spaniards at banking; all humans make misjudgements, but global banking magnifies the consequences of error. So when an eloquent Scots voice waxes lyrical about the new business empire to be conquered and expatiates upon the profits to be made, give him a steadying glass but do not give him a free hand.
SMD
8.12.10
Copyright Sidney Donald 2010
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