Biggest bank in world to getting bailed out by British tax payers

Biggest bank in world to getting bailed out by British tax payers

The Royal bank of Scotland started off being a part of a small economy, causing a highly competitive market. This built a lot of pressure on RBS causing the need for expansion and at the head of this expansion George Matthews and Fred Goodwin. This expansion gained so much success, it lead to the expansion into the US market and then further leading to 24.1-billion-pound loss. In this blog, I’m going to be reflecting on how RBS made such a loss and focusing on Fred Goodwin leadership style, as I feel it has a major impact of the success of the company.     

How did they make a 24.1 billion loss?

RBS started in Scotland and only had one big competitor, Bank of Scotland. As the Scottish economy was so small both bank was under big pressure to find innovative ways to beat each other. Has Nat west had recently opened a new business headquarters the share prices were very low so both banks grab at the chance to expand into a new market with a takeover. RBS won the share battle and I feel like this was a very good choice by them, as this would allow them to grow into different markets and economy were the pressure would not be as high.  When expanding a business, I feel like take over is one of the best ways as this means that they will already have a brand name that they can work with and they will also gain all the assets they have in place, making the move easier. I think this applies more to the banking industries, as people don’t really chance their banks once set up. I have personal experienced this with my chance to set up a student account, as I stayed with my previous bank as it would just be a lot easier then transferring to a different one. This will mean they will already have an establish customer base. However, I felt this growth success lead to the cause of a poor decision that was a major aspect to the decline of RBS. They decide to try and expand their American market by taking over a bank called Charter one and they did this but pay way too much. This lead to shareholders becoming uncertain about future expansion and even after the expansion, Charter one didn’t bring a lot of success. I feel like this was due to the fact that they used the methods from the British market instead of looking at how the American market differs. If I was a part of RBS, I would have invested a lot of research into how the American market is different and adjusted the method so that the takeover would have been more successful. I would have still tried to implement some of the British market strategies, but removed ones that couldn’t be applied effectively. I would have also addressed the fact that shareholders were becoming unhappy with the expansion and asked for their input to make them feel involved. The American housing market was booming so RBS wanted a part of the profits, so they invest into a risk management service called Greenwich capital and used them to make profits off house mortgages. As the demand for mortgages decrease, risky loan called subprime loans had to be taken and when the housing bubble popped, RBS suffered massively so the subprime member stop paying the loans. I feel like that the company thirst for profit and growth lead them to make poor decision that only had short term benefit and the long-term affect were undermined. I feel like RBS should have focused on the British market rather than trying to expand so much, as they made 20 deals of expansions in 4 years with a cost of 30 billion pounds. They also carried on not to listening to shareholders and I feel like they should always be a major concern when making these decisions because they are a major source of income for investment like this. With the drive to be the best bank in American blinding them further, RBS was a part of an aggrieves takeover of Dutch bank that had assets all around the world. They wanted the Lasselle part of the takeover and they were willing to do this with no diligence of its accounts. this investment cost them 27 billion euros and later came to bite them in the butt as they had major investments in subprime loans. I struggle to believe that a company would spend vast amounts of money on a business with no diligence. I would say it was due to pressure of the market, but they were in such a good position, I would have just sustained it until the pressure increased. This lead to loses of 24.1 billion pounds and a need for inorganic capital from the shareholders which they hadn’t kept happy. This is a perfect example why I believe that shareholders should be involved in all important decisions, as when thing go wrong and capital in needed to solve the problem, who does the business rely on? This inorganic capital wasn’t enough, RBS had to be bailed out by British tax payers with a 90% share loss. In evaluation, out of the three decisions that RBS made, I think that only the takeover of Nat west was a good decision. This was due to the fact that it was the only one needed at the time as the pressure of the small economy forced them to. This lead to RBS gaining the thirst for growth, causing them to make rushed decision that caused the crash in market value. I feel expansion should never be a rushed process and all risk should be analysed before taking them and RBS clearly didn’t. this would have been a perfect opportunity to use the evaluation techniques, as this would of highlighted the major down fall of the three decision and hopeful avoid the bail out.   

Fred’s morning roasts 

Employees from high levels had a really concern with Fred’s leadership style, as it came across as a very autocratic leadership style. This was seen in his morning meeting which had the nick name of morning beatings. This lead to a lot of the high-level staff being scared to put ideas forwards, due to the reaction from Fred. I feel like this could have been a major problem for the company a lot of the employees could have suggested idea that could have solve the subprime problems they were having or even put him off from invest so in the subprime market. I personal have had a lot of experience with autocratic leadership styles, as seen in my previous blog of leadership styles and a common trend been highlighted. This is that people that work in creative environment or are under pressure to think of innovative idea don’t response to well to Autocratic leadership. I think this is because they need to be some room for failure in these environments as not every idea is going to work, the autocratic leadership style doesn’t encourage this. I also feel like this autocratic style lead to Fred losing his job in the end, because his style meant he didn’t listen to shareholders. When it came to bail out, all the shareholders wanted Fred gone as well. The autocratic style means that you refuse to take input from other assets, so when a problem happens you will have to take a lot of the response for it and this is why I feel like it was a right decision to kick Fred out the company.

Overall, I have learnt that takeover is good decision for growth, but too much can lead to poor decision making and loss in profits. If I was in Fred positions at RBS I would have suggest taking the process a lot more slower and evaluate all the different outcomes of the situations before taking them. I have also learnt that marketing methods are not transferable to all other market, as each market is specific and needs a different strategy.