Sometimes when we say that a financial report is a fun read we mean "in a nerdy, full of charts way," but the British Financial Services Agency report on the implosion of RBS is actually quite full of bitchy gossip, though also 450 pages long so possibly not holiday-travel plane reading. Let the Guardian fill in the brackets:
Johnny Cameron, the former head of Royal Bank of Scotland's investment banking division, has admitted he did not know how billions of pounds of complex loan structures linked to US sub-prime mortgages worked – despite pushing his staff to expand aggressively into this area. ...
Cameron told the FSA: "I don't think, even at that point [May 2007, well after sub-prime problems had begun to spiral in the US] ... I had enough information. Brian [Crowe, his deputy] may have thought I understood more than I did ... And it's around this time that I became clearer on what CDOs [collateralised debt obligations] were."
The dynamic here is kind of fun to picture: Cameron is a traditional corporate banker, used to glad-handing clients and sounding smart, in the senior role. Crowe is the harder-charging guy from a trading background. The report quotes a subordinate as saying "Johnny was the bigger thinker, more customer involvement. Brian was more focused on the markets and market risks." You can imagine Crowe saying things like "Gaussian copula" and "DV01" and "CDO," and Cameron mumbling "yes, precisely so, I agree completely, more tea my good chap?" I'm pretty sure "Brian may have thought I understood more than I did" because Cameron wouldn't dream of correcting him.
Cameron is the cartoon klutz villain of this particular report; he's the only person at RBS who's had any official penalties from the FSA, having been more or less barred from the industry for failing the what-does-"CDO"-stand-for pop quiz and buying ABN Amro on a drunken dare without any due diligence, which combined with some other stuff led to unpleasantness for RBS. The FSA considered going further up the chain to punish people for putting Jonny in charge, but decided that actually it was fine:
At the time of its investigation work, the FSA was initially concerned that as a result of Mr Cameron’s background there was an unreasonable risk that traded markets issues were not adequately managed and reported to the RBS Board. Enforcement Division therefore focused on whether the decision to appoint a Chairman (Mr Cameron) with a credit background rather than a markets background was reasonable. Ultimately, however, Enforcement Division decided this was not unreasonable.
In reaching its conclusion, Enforcement Division took account of the fact that, as chairman, Mr Cameron did not lead GBM [Global Banking and Markets] alone. As the CEO of GBM, Mr Crowe had a significant role in the management of GBM and Mr Crowe and Mr Cameron had complementary skills: Mr Cameron focusing more on the external, particularly clients, media and regulators, while Mr Crowe had primary responsibility for the internal i.e. running the business day-to-day.
Meanwhile, on the other side of the North Atlantic, that Corzine guy had primary responsibility for every damn thing, thank you very much:
In August, some directors questioned the chief executive, asking him to reduce the size of the position. Mr. Corzine calmly assured them they had little to fear.
“If you want a smaller or different position, maybe you don’t have the right guy here,” he told them, according to a person familiar with the matter. He also told one senior board member that he would “be willing to step down” if they “had lost confidence in me,” Mr. Corzine told Congress on Thursday, although he said he had not intended to make a threat.
As Felix Salmon says:
Only the board had the ability to rein Corzine in — but Corzine made it abundantly clear that as far as he was concerned, the board had only one job: to keep him in his job, or to fire him. If they wanted him to run the company, he was going to run it his way, with all the risks that entailed.
From a distance, these are two companies that came to bad ends in roughly the same way: they made large bets in credit markets that were fashionable until they weren't, and they relied excessively on short-term funding (or "-to-maturity" funding that could be withdrawn in a crunch, which sounds pretty short-term to me). When markets lost confidence in the former, they withdrew the latter, and the usual consequences occurred.
One of those credit bets was made and overseen by a superstar credit trader who fully informed the board about his activities and the risks involved and, when they suggested toning it down a bit, politely demurred. The other was overseen by a guy who had never been near a trading floor, was happiest schmoozing corporate clients, nervously hid his ignorance about whatever the hell it was he was supposed to be doing re: structured credit, and had a board that actually criticized "the defensiveness in approach that we tend to adopt" and told him to back up the truck for any CDOs he could find.
I don't know what this tells us about MF Global and RBS. I think it probably just tells us the obvious things: that getting drowned in a trading-driven solvency-liquidity spiral requires a combination of broad market jitteriness, poor communication between board and management, a weak culture of risk oversight, and bad luck. And bad decisions. To blow up a financial institution, you'll probably want one or more individual humans to make decisions that, at least in hindsight (but not too much hindsight - remember the MF Global trades would've turned out okay), look bad.
But the lesson for anyone expecting to maybe one day blow up a bank is: be careful how those bad decisions get characterized. I suspect that both Jonny Cameron and Jon Corzine are pretty smart guys, good bankers, good with clients, familiar with analyzing risk, and able - if they wanted to - to draw on the expertise of experienced subordinates and advisers. One of them, by reason of background and temperament, has been made out to look like a bumbling moron who blew up his bank through incompetence, and has suffered the consequences of not being allowed near another bank. The other has been made out to look like a quasi-criminal gambling addict rogue trader who made billion-dollar trades the way you play Brickbreaker in meetings. So far his consequences have consisted mostly of congressional harangues. We'll see if that lasts.
Jon Corzine, rogue trader [Felix Salmon/Reuters]