Philip Whiteley's Blog

December 7, 2010

Were the media partly to blame for RBS?

Filed under: Uncategorized — felipewh @ 9:24 am

The biggest loss in British corporate history, leading to the mother of all bail-outs did not represent, according to the Financial Services Authority, a ‘failure of governance on the part of the Board’.

Superficially, it is a breathtaking conclusion, and the FSA’s report into The Royal Bank of Scotland has produced a predictably scornful backlash. This has been exacerbated by the regulator’s decision to keep the report private, and just issue a one-page statement. Lord Oakeshott, a Treasury Minister, called for the findings to be public.

The FSA, shortly to be abolished by the Coalition Government in the UK, said RBS had failed because of ‘bad decisions’, but that it could not ‘identify any instances of fraud or dishonest activity by RBS senior individuals or a failure of governance on the part of the Board’.

Critics of the FSA’s gentle treatment of the Royal Bank of Scotland are missing the bigger story, however: if the actions of RBS that proved to be so disastrous appeared quite reasonable at the time, then the entire culture, principles and assumptions about governance must be profoundly mistaken.

The ‘bad decisions’ that the regulator attributed to the executives of the bank were, and to some extent are still, considered ‘good’ in what passes for common sense in business orthodoxy. Using the balance sheet and projections of market share as a basis for a complex mega-merger nearly always gets cheered on by investors and business journalists. There is little or no analysis of the risks involved in merging two complex cultures. A recent example is Kraft-Cadbury. I do not recall much criticism of the hugely risky takeover of ABN Amro from business journalists at the time.

In the years of irrational exuberance, business journalists happily repeated the euphemism ‘leverage’ to describe high levels of corporate borrowing. And the sub-prime bubble was assisted by personal finance and business journalists, who cheer on inflationary house price rises even when they threaten to create instability.

The FSA may be right in the narrow sense – in that there was no identifiable fraud or obvious malpractice – but profoundly wrong in the bigger picture. If it is though, then so are the investment banks, the business editors, most executives and consultants who advise them.

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