What was RBS board thinking when it backed ABN Amro takeover? It wasn't

What was RBS board thinking when it backed ABN Amro takeover? It wasn't

when it backed ABN Amro takeover? It wasn't

One of the big unanswered questions around the failure of Royal Bank of Scotland has always been: what on earth was the board thinking in sanctioning the disastrous takeover of ABN Amro in 2007? Today we have an answer: the board wasn't thinking in any meaningful sense. The directors – some of the best-paid and supposedly most experienced banking and business people in the country – relied for their due diligence on two lever arch folders and a CD. Extraordinary.

The gory details can be found in the section titled "management, governance and culture" – which is the most revelatory in Monday's report. The Financial Services Authority emerges elsewhere with no credit whatsoever (just six supervisors on RBS's tail, little independence of mind and a self-satisfied and slavish devotion to Gordon Brown's "light touch" view of financial regulation). But the directors of RBS – led by chief executive Sir Fred Goodwin and chairman Sir Tom McKillop – surely deserve most opprobrium.

The account provided by Johnny Cameron, head of the investment banking division, of the ABN Amro deal is jaw-dropping and deserves quoting at length:

"One of the things that went wrong for RBS was that, and I say this to many people, we bought NatWest as a hostile acquisition. We did no due diligence. We couldn't because it was hostile. After we bought NatWest, we had lots of surprises, but almost all of them were pleasant. And I think that lulled us into a sense of complacency around that. The fact is that the acquisition of ABN was also hostile. We got bits and pieces of information but fundamentally it was hostile. There's this issue of did we do sufficient due diligence. Absolutely not. We were not able to do due diligence that was part of doing a hostile acquisition."

Let's get this clear: the hostile takeover of NatWest in 1999 yielded pleasant surprises so the board therefore believed that all hostile takeovers yield pleasant surprises. A six-year-old could spot the flaw in that logic.

There were 17 members of the RBS board at the time and one confessed to the FSA that none ever said he or she was worried by the ABN deal. As the report coyly puts it: "It is very difficult to reconcile this approach with the degree of rigorous testing, questioning and challenge that would be expected in an effective board process dealing with such a large and strategic proposition."

How did such a culture of complacency come about? The non-executives don't claim to have been intimidated by Goodwin, even if they don't appear to have challenged executives on many occasions (the scaling down of an investment in Bank of China in 2005 and the reduction of some proposed bonuses are given as examples).

Instead, the non-executives appear to have swallowed whole the view that RBS primarily should be pursuing growth in revenue and profits. Fundamentals of banking – such as a focus on risk, liquidity and capital – became secondary. Page 236 of the report says the RBS board did not formally approve a group liquidity policy. The monthly risk report at the beginning of 2007 recorded past and current risks rather than being forward-looking; nobody seems to have stopped to question the usefulness of a backward-looking risk report.

What was RBS board thinking when it backed ABN Amro takeover? It wasn't