Jan. 23 (Bloomberg) -- Fred Goodwin, Royal Bank of Scotland Group Plc’s former chief executive officer, once said that taxes were part of his bank’s contribution to society.
“The benefits of our success stretch far outside the company,” Goodwin, 50, wrote in RBS’s 2006 corporate responsibility report. “We continued to be the largest corporate taxpayer in the U.K.,” he wrote. That helped in “supporting the government in the provision of public services such as schools, hospitals and state pensions.”
As Goodwin’s RBS contract expires next week, after more than a decade at the bank, the 20 billion-pound ($28 billion) cost of bailing out the bank surpasses the corporate taxes paid by the Edinburgh-based lender during his tenure. The shortfall shows how Goodwin’s ambitions for RBS spiraled as he expanded the lender’s balance sheet more than 20 times in a decade to 1.73 trillion pounds, making it bigger than the U.K. economy.
“Goodwin and his board wrecked a good bank and imposed, at the very least, substantial temporary costs on the country,” said Geoffrey Wood, professor of economics at the Cass Business School in London and a former Bank of England adviser on financial stability. “He got carried away by his own rhetoric and his initial successes encouraged him to take too many risks.”
RBS paid 16 billion pounds of corporate tax from 1998 to 2007, some 80 percent of the cost of the bailout. The bank recorded a combined net profit of 32.5 billion pounds in the period. RBS says it may report a 28 billion-pound loss for 2008, the biggest in U.K. history.
RBS spokeswoman Linda Harper declined to comment and also declined to pass questions to Goodwin. His home phone telephone number isn’t publicly listed.
The RBS stake “may ultimately earn a profit for the taxpayer,” Wood said. “It will take time.”
Goodwin Steps Down
Goodwin stepped down as CEO in November and agreed to remain an employee of the bank until Jan. 31 to smooth the transition for his successor Stephen Hester.
In October, Prime Minister Gordon Brown offered to invest in banks like RBS to shore up their finances. The following month, the government acquired 58 percent of the bank after investors balked at buying new shares. Last week, Brown’s government said it may raise its stake to 70 percent as prospects for the lender worsened.
“I’m angry at the Royal Bank of Scotland and what happened,” Brown said at a press conference on Jan. 19. He criticized RBS’s investments in sub-prime U.S. mortgages and its 2007 acquisition of Dutch lender ABN Amro Holding NV’s investment banking assets. “These are irresponsible risks that were taken by a bank with people’s money in the U.K.,” he said.
‘RBS Needs More’
Saving RBS may yet cost British taxpayers even more money, said investor Jon Moulton. “There’s an expectation that RBS will still need a lot more money,” the founder of London-based buyout firm Alchemy Partners LLP said in an interview. “Either we print the bloody stuff, or we raise the taxes.”
Moulton co-wrote a letter to the Financial Times on Jan. 21 with Labour lawmaker John McFall, leader of the House of Commons Treasury committee, to say the government should take complete control of RBS and Lloyds Banking Group Plc, which is 43 percent U.K.-owned following a 17 billion-pound investment.
The government’s investment in RBS helped add 22 billion pounds to the national debt, which reached 47.5 percent of gross domestic product in December, the highest since at least 1993.
Meanwhile, CEO Stephen Hester is offloading assets to replenish capital. On Jan. 13, RBS sold its $2.3 billion stake in Bank of China Ltd., China’s third-largest lender.
Past Plaudits
RBS’s problems contrast with the plaudits Goodwin won from the British state in the boom years. In 2004, Queen Elizabeth II knighted him for services to banking. The Scottish banker also advised Brown’s government on credit unions, customer-owned lenders in poorer parts of Britain.
The government takeover of RBS brings Goodwin’s career full circle. In the 1980s, as Prime Minister Margaret Thatcher introduced free-market policies, Goodwin worked as an accountant at Touche Ross & Co., now part of Deloitte Touche Tohmatsu, poring over the books of state-owned companies that were being prepared for sale to investors.
Roy McNulty was CEO of Belfast, Northern Ireland-based Short Brothers Plc, a maker of aircraft components, at the time. He recalls Goodwin reviewing then state-owned Short Brothers’s finances as an accountant.
“Government is not a good owner of businesses,” McNulty said in an interview last year when asked about RBS. “Let’s hope government ownership doesn’t last too long.”