This piece first appeared in the Wilmington News Journal on December 18th.
I was in London last week, visiting three grandchildren and their parents, when the United Kingdom's Financial Services Authority released a 452-page report. The grandchildren were in school; I became interested. Specifically about the causes of the near-collapse of the Royal Bank of Scotland in 2008, the report dealt in a larger sense with the same financial meltdown we experienced in the United States.
The FSA report squarely placed the blame on RBS's poor management decisions, inadequate regulation, and its own flawed supervision. The parallels with the causes of our own banking crisis in 2008 were striking and obvious. What most interested me was how differently the U.K. handled its crisis.
On this side of the Atlantic, we bailed out our too-big-to-fail banks, giving them a major infusion of cash and credit through the Toxic Asset Relief Program. A recent Bloomberg News investigation revealed that, in addition, the Federal Reserve secretly propped up our major banks with loans that peaked at over $1.2 trillion on December 5, 2008. We didn't insist on management changes; one argument against doing so was that running a major bank was so complex it would be difficult to find qualified replacements. So our big bank managers got to keep all of their bonuses and continue to receive them. Nobody was held accountable for the management decisions that directly led to the crisis.
The Royal Bank of Scotland had assets of $3.8 trillion in December 2008, almost double Citibank's assets of $2.2 trillion. But the UK government wasn't cowed by the "too complex" argument. It took ownership of RBS that month with 83 percent of its stock. Fred Goodwin, the bank's CEO, was fired immediately. Within three months the Chairman and most of the Board of Directors were replaced. Goodwin was given a modest (by U.S. standards) severance of $1 million, but faced with massive criticism in the country and a possible legal challenge from the government, surrendered $300,000 of that.
One major reason for the downfall of RBS, according to the FSA, was the subprime mortgage losses piled up by an investment-banking unit based in Greenwich Connecticut. The man in charge of that unit, Johnny Cameron, was forced to retire and pledge never to run a bank again. Contrast that treatment with what happened to those who failed with similar responsibilities in U.S. banks. Most of them are still at their jobs and, yes, still collecting bonuses.
The actions the U.K. took with RBS were, in fact, very similar to what we did at the same time with General Motors. In both cases, the government took over, hired new managers, and then took a hands-off stance to allow them to operate independently. The U.K. government had to put $70 billion into RBS when it took it over. Our government initially put $50 billion into GM. In both cases, it now seems likely that the loans will ultimately result in minimal government losses.
I have never quite been able to understand how the decision was made to fire Richard Wagoner at GM but not Vikram Pandit at Citibank. Is running a huge bank really more complex than running a huge automobile manufacturer?
I would say it isn't. But if you think the answer is yes, then logically there is yet another argument for the Brown Kaufman amendment to the Dodd Frank Wall Street Reform Act.That amendment, which was defeated in the Senate last year by a 61 to 33 vote, would have reduced the size (and the complexity) of the megabanks so that the failure of one of them would not threaten the entire financial system. It would have treated them in the same way the other 99 percent of our banks are treated. Over 350 smaller banks in the United States have failed in the past three years and been taken over by the Federal Deposit Insurance Corporation, which has done an excellent job providing burial services.
There is no "good" way to save a bank that is "too big to fail." The U.S. way was probably the worst. The way the U.K. handled it and the way we handled GM produced better results.
The best solution of all is to make sure that taxpayers will never again be forced to bail out a bank. The only way to do that is to make sure there is no such thing as a "too big to fail" bank.