Stephen Hester, chief executive of RBS, gives evidence to the Parliamentary Commission on Banking Standards less than a week after the bank was fined £390m by US and UK regulators for rigging the Libor rate. By Lina Saigol and Ben Fenton
3 RBS senior executives are giving evidence to the commission: John Hourican, who resigned as CEO of markets and international banking, Peter Nielsen, CEO of markets and Johnny Cameron, who resigned 4 years ago as chairman of global banking and markets.
Hourican and Nielsen have told the commission they took responsibility for the wrongdoing over Libor. Hourican resigned; Nielsen didn’t. Hourican said he told Stephen Hester, the CEO of RBS, that “stakeholders would be better off” if Nielsen stayed in his post.
Cameron says he appointed a lay preacher as a senior executive “now a fully-fledged vicar” as he tried to instill an ethical culture in RBS.
“It’s shattering to us because we tried to hire good people and lead well,” Cameron says.
Hourican agrees there was a “wholesale failure of systems and controls” over Libor-rigging.
Cameron: “You can’t impose moral standards on people who don’t want to be moral.”
Nielsen tells the commission that it is impossible for RBS to know whether or not the Libor-rigging made any profit at all for the bank, but it is possible that it did not make any.
Cameron says he and his team didn’t think there was a risk of Libor being rigged, but in fact there was a cartel across a number of banks that was rigging it.
The bank had a cardiac arrest after the take-over of ABN AMRO, overleveraged and undercapitalised, Hourican says.
“It is utterly reprehensible that individuals chose that moment to behave like this, but we didn’t spot it.”
(Hourican is saying that the problems elsewhere in RBS meant that senior executives were too busy trying to save its life to notice the malfeasance of relatively junior employees on the Libor desks.)
For those who want to read more about Johnny Cameron’s role, here’s the FSA report into RBS’ failure:http://www.fsa.gov.uk/pubs/other/rbs.pdf
Jennifer Thompson, the FT’s retail banking correspondent, sends this from Westminster
So far, few surprises. The outgoing head of RBS’ investment bank has agreed with the view that the Libor scandal has caused massive reputational damage and caused a fresh loss of confidence in the bank.
“I do accept responsibility for the failings of our staff,” John Hourican told the commission. Although there is no suggestion that he was involved in or knew of the Libor abuses, Mr Hourican’s tenure coincided with the period when abuses took place.
Last week he resigned over the scandal and will leave within a year.
The focus is now why Peter Nielsen, markets chief, has not done the same. As with Mr Hourican there is no suggestion that Mr Nielsen knew of the Libor abuses but he was head of the global rates business under which Libor responsibility fell.
Mr Nielsen has told the panel he considered resigning, but Mr Hourican said he believed the bank would be in a stronger position if he stayed.
MPs are now asking why RBS failed to pick up the “wash trades” – the rewards paid by Libor traders to brokers with illegal bogus trades. Hourican says it was just the 21 individuals who were found responsible for Libor-rigging.
“We did fail to pick up the wash trades,” Hourican says.
Lord Oakeshott, the Liberal Democrat peer, asks a question which may well get asked later in the afternoon:
Hourican and Nielsen say they knew nothing of Libor problems until US reglators told them in April 2010. There were some issues identified as problems by March 2011, Hourican says, but not all.
Nielsen says they started off looking at dollar-based problems identified by the US regulator (CFTC) first of all, so other problems weren’t seen immediately.
The FT’s leader on why now is no time to mess with RBS:
RBS’s reputation may be at a low and there is little prospect of improvement soon. It will report more losses this month, making exit seem difficult. But now is a risky time to make politically driven statements about its future.
In recent months the shares have rallied, even rising after the Libor fines. There are signs investors believe the strategy devised by Stephen Hester, who was charged in 2008 with cleaning up the mess, might be working. By the end of 2013, its toxic assets will have been neutralised. By the end of next year it might even restart dividends as losses ebb and profits from the retail and corporate businesses rise to the surface. The investment bank, always the most politically difficult, now accounts for just 20 per cent of capital, down from 60 per cent. This should fall further. But some markets presence is needed if RBS is to retain its lead in UK corporate banking.
Nielsen admits that the bank reacted “too slowly” to being told about the failings in the bank.
“Once we found problems that we found in Yen and Swiss trades in July 2011, which we brought to attention of regulators, we did so extraordinarily fast” – Nielsen
The Financial Services Authority “just…just avoided accusing the bank of dishonesty” over Libor, the three bankers are told. They look very serious, but do not reply.
Nielsen: we are guilty of lots of things, but if we had that to do over again, if we take 10 or 20 per cent of effort that we made, then we had focused on that cultural situation, we would be in better shape.
Hourican: I think the cultural shudder we have sent down the spine of our organisation by taking responsibility is an important thing. I have told people not to ‘waste my death’ (resignation).
Hourican says it is “incredibly important” that the bank feels and recognises the anger towards Libor rigging and acts accordingly.
Commission chairman Andrew Tyrie asks if, given that these three are responsible for the original failures of RBS, the commission should trust their judgment over what has happened since and that they, particularly Nielsen, who is still there, are the people to clear it all up.
Having been a backmarker, we are and have been a forward marker since Stephen Hester took over in 2009, Nielsen tells the commission.
The Archbishop of Canterbury is now asking the questions. Hourican agrees with his suggestion that RBS was too big, with 52 countries in its global business, to manage.
The commission hears that RBS at its peak was engaged in “strategic tourism” when it grew as much as it did in the years before its financial collapse.
The Wheatley report, hastily prepared in September by the UK Financial Services Authority, and endorsed with equal haste by policy makers, can be read here:http://cdn.hm-trea…lreport_280912.pdf
Cameron says it is a very tricky philosophical question about how do you test for a moral compass.
He says the answer is that it was not envisaged that a cartel of traders would be able to rig Libor. Nobody in “risk” recognised the big hole in the system.
Archbishop asks how it will be possible in the future to stop this happening again. Cameron says it isn’t easy and he hopes the commission will come up with answers. His colleagues don’t really agree with that and Hourican says one answer was to pay bonuses in deferred manner.
(I don’t think the RBS execs would like the commission to take up Johnny Cameron’s invitation to dictate how the culture of banks is improved)
Hey, all of you out there falling asleep, a reminder of RBS’ Libor emails might wake you up:
“If u cud see ur way to a small drop there might be a steak dinner in it for ya, ha ha,” one broker – who was a former RBS trader – wrote to one of the bank’s submitters
Nielsen asked what steps have been taken about the 21 people involved in Libor rigging, particularly, have potential future employers been warned. He says the FSA has been told about them. They find it very hard to be re-certified, he says.
Nielsen and Hourican have not been interviewed by the FSA over Libor. Cameron was investigated by them for a year after he applied for a job “somewhere else” in March 09.
Here’s the UK regulator’s Final Notice, with plenty of detail on Libor-related wash trades and the incentives for the RBS money market book: http://www.fsa.gov…pubs/final/rbs.pdf
eeerrrrrrrrrrrrrrrrrrrrrr, uummmm, eeerrrr.
Ah the stutter every time they get a hard question.
Cameron asked by Tyrie: why are banks unable to remember mistakes of the past? You are old enough to remember the last property crash.
Cameron says it comes down to “Would you rather lend to Woolworth or to the owner of the property that Woolworths is sitting on?”
Cameron is unable to reassure Tyrie that regulators and bankers will recognise the next big problem before it happens.
Cameron: “The job of regulators is to lean against the wind. The question is to what extent. Can they stop people doing things as opposed to just advising them.
Tyrie asks Hourican whether he feels like the “human shield” who took the hit over Libor.
Hourican says you have to take responsibility sometimes and that this is the right thing for the bank and the right thing for me because I have to stick to my principles.
The commission has now finished questioning the less senior executives and after a 15-minute hiatus will begin its interrogation of Stephen Hester, the CEO of RBS and Sir Philip Hampton, the chairman.
Here is a quick read on how the position of Stephen Hester has changed in the past couple of years, from the FT’s Jennifer Thompson
And a reminder of the way in which the FT reported the full scale of RBS’s behaviour] and its subsequent [http://www.ft.com/cms/s/0/fc3dbb14-7060-11e2-ab31-00144feab49a.html come-uppance over Libor rigging.
Then, if you still have time before the teams come out for the second half, here is the FT video on the dilemma faced by the UK government, who play the role of supporters for both sides in this Calcutta Cup of bank regulation:
Rory Phillips, council to the commission, starts off by reminding
Hester he said he wouldn’t duck the difficult questions.
Phillips says misconduct at the bank continued for 2 and half years after Hester became CEO.
Hester is speaking very quietly, trying to be humble and contrite as he admits significant failings over control and risk by management.
Hester says the CFTC investigation was reported to the board’s audit committee, but it was only an investigation at that stage, rather than an uncovering of wrongdoing.
The FT’s Megan Murphy has been reading RBS submissions to the commission:
Phillips is trying to establish who knew what when at RBS, but Hester says the first time RBS learnt of the Libor wrongdoing was the Spring 2011.
Hester says the most serious failings were fixed within a handful of weaks, but different levels of fixing Libor are still going on.
Hester says: ” I’ve been the captain on the bridge since the end of November 2008 and so am responsible for all the things going on at RBS.”
The Commission seems bewildered as to why Hourican has left, but Nielsen hasn’t taken any accountability.
The Commission is asking for reassurance that this won’t happen again. Hester says that as long as he is in the post, he will do his best to eliminate control and reputational failures of this kind, but says it is impossible to provide guarantees it won’t happen again.
Confused about Hampton’s use of language on who is to blame? Here are some dictionary definitions:
culpability: blameworthiness: a state of guilt.
accountability: responsibility to someone or for some activity.
responsibility: The state or fact of being accountable or to blame for something.
All clear now about the difference between accountability and responsibility? Us neither.
Liberal Democrat Baroness Susan Kramer asking the questions now and is pushing Hester again on whether the bank failed to escalate internally what was going on with Libor.
Hester says it was not a conspiracy to hide the Libor wrongdoing.
Hester says it took 11 million documents to discover the wrongdoing and it wasn’t easy to do.
Hester: I feel at least as much, if not more, anxiety as you do. Every day I live with the risk that we have not found things.
Hester’s lament: “I wish we could have discovered everything quicker and changed it quicker but what happened is what happened.”
Sir Philip Hampton says the bank took “brutal action” on those directly involved and that Hourican had to go because he was the “captain of that particular bridge”.
We’ve all got shortcomings.
The RBS chairman says the board took the view that “there had to be a serious, senior, captain-on-the-bridge departure”.
Tyrie says “well we have had a canter round that point” and now moves on to the question of Hester’s bonus.
Ahhhhh, finally the questions on Hester’s bonus.
Just to help consideration of the matter, here is the official position of the Labour party on Hester’s bonus, courtesy of Treasury spokeswoman Cathy Jamieson:
Labour’s Treasury spokeswoman Cathy Jamieson said about Hester’s bonus:
The idea that one of the country’s most senior bankers will accept this huge bonus at the height of Libor scandal will disgust ordinary people struggling to make ends meet as a result of the banking crisis.
We all hoped that lessons would be learned by the top bankers when they had to be bailed out by taxpayers but it appears to be business as usual.
Hester’s bonus defence:
We have done huge things to rescue the bank for society and for its stakeholders and reduced the risk the bank has been exposed to. It is entirely appropriate we should be judged on what we have done. There was never any prospect we could have found and fixed everything immediately.
The Sun’s business editor is listening hard:
HAMPTON: RBS was the biggest banking failure in the world and Stephen took it on. Stephen’s basic is £1.2m a year and he is one of the least well paid relative to others doing these jobs.
Hampton and Hester are beginning to look very uncomfortable as Hester confirms the fine will be clawed back from the RBS bonus pool.
Hampton says Hester has been one of least well-paid and “relatively low paid”. (Not sure this line of response wins many friends in the outside world.) Tyrie rather gleefully tots up what a basic salary of £1.2m plus twice salary for a bonus and a long-term investment plan of 3.5 times salary adds up to. His estimate of £5m is a bit short: it is in fact £7.8m.
Hampton points out that Hester will not receive anything like this because the incentives “do not trigger”.
Hester says he doesn’t know how much his bonus should have fallen – says it is for the remuneration committee to decide.
Tyrie says he wants the bank to publish what the bonus pool for 2012 would have been if it did not include a “clawback” to pay for Libor fines which are owed to US regulator.
RBS close to deciding bonus pool – says it was going to make significant clawbacks anyway
Steve Hawkes at The Sun is not impressed with Hester’s knowledge of his own business:
This is what Labour former trade minister Pat McFadden said about Hester’s bonus last week:
“There would be enormous anger if UK taxpayers pick up the tab for the individual sins of traders who were trying to rig Libor rates”.
Pat McFadden, Labour MP, says he very much doubts the UK taxpayer would agree with Hampton that the £300m set aside from the bonus pool to pay Libor fines was “enough”.
The most common phrases from RBS in this hearing have been:
It was before I arrived
I didn’t know
It wasn’t me.
McFadden asks if RBS is too big to manage?
RBS of that time was too big for its capacity to manage. Not impossible for a bank of that size to be managed, nor that small banks can’t be badly managed, but that RBS at that time, with the addition of ABN-AMRO, was too big for its management to manage.
Hampton says the FSA is particularly focused on the control processes of RBS, but the bank is not on its own in that respect.
Here is Jennifer Thompson’s summary of the first part of the hearing with John Hourican, Johnny Cameron and Peter Nielsen.
Hampton confirms that RBS is considering asking to former RBS directors to ask them to give back some of the bonuses they received during the period when Libor and other mismanagement took place, but he says he does not think that it would be worthwhile in terms of “bang for buck”.
Andy Love, another Labour MP on the commission, says he assumes that includes writing to former CEO Fred Goodwin (who of course has already lost his knighthood) but Hampton decides not to answer that implied question.
Here’s a refresher on George Osborne’s blueprint for banking reform.
We have no contractual right to ask ex-directors for rewards back, so we can only put pressure on their ‘good nature’
(Astonishing how many times the Commission has asked why Peter Nielsen didn’t leave.)
Hester goes back to the culpability-accountability-responsibility thing See entry for 5.11pm for dictionary definitions demonstrating that there is no difference between accountability and responsibility.
The degree of self-servedness in the banking industry got to a wrong place.
“crookedness driven by excessive selfishness” – Hester defines the Libor-scandal when questioned by Lord Lawson, former Chancellor of the Exchequer.
Hester says the amounts of money people were playing with – and therefore the temptation – is greater than if you were selling credit cards.
Hester says the banking sector as a whole had developed “an excessively selfish and self-centred culture”.
One of the first things Hester said he did at RBS was refocus the company around customers. Banks are there to serve customers.
Hester says the banking industry needs to be taken closer to the ideal of serving customers first. Whatever proportion of bankers is doing that already, it is not high enough.
Lawson makes the point that people like Libor traders don’t actually have any customers.
You have to ensure the ethos of the bank, whoever it is, their job is to have an institution that serves customers well. It is a big task and we are part of the way to doing it.
Which? policy adviser Dominic Lindley asks:
Lawson asks if RBS could survive as a retail bank without any markets activity.
Hester says that to be credible to companies, the bank needed some markets, but nothing on the scale it used to be.
John McFall, the former chairman of the Treasury Select Committee, is worried that legal and compliance do not act on their own and are merely servants of the RBS board.
Hampton, asked by McFall to compare customer service between RBS and his former company, Sainsbury, says they are chalk and cheese.
People don’t chop and change their bank accounts everyday. They may change their supermarket in a day.
Hester adds that banking relationships may last for decades.
Hester says every time he’s looked at alternative structural solutions for the bank, they have been worse for customers and shareholders than the structure now.
There is no part of RBS we should be religious about. We are duty bound to assess all outcomes for every part of the bank.
We are custodians of this bank for stakeholders.
Andrew Tyrie, the commission chairman, has already issued a verdict on the evidence RBS offered on the payment of Libor fines from its bonus pool.
“RBS intends to pay its fines for fixing LIBOR and other important rates from past, current and future bonuses. It is logical to do so.
“We were not given sufficient confidence today that the arrangement for funding the fines from bonuses will do what it says on the tin.
“This must be more than an exercise in creative accounting. It would be all too easy to artificially adjust a bonus pool, the size of which is yet to be decided.
“RBS today undertook to show clearly where the fines are being paid from and who is bearing the losses. The Commission will look closely at these figures when they are published next month to establish whether adequate clarity has been provided.”
Mark Garnier, conservative MP, asks for reassurance that RBS won’t increase its bonus pool.
Garnier says Hampton could pay all of the Libor fine out of the bonuses they deferred last year.
Hampton says clawback should be focused on people most directly linked to the wrongdoing.
Our commenter Hamster81 has raised an interesting question about whether there is a correlation between bald men and banking calamity. Rest assured that the FT will be investigating this as a matter of urgency. (Although not perhaps tonight.)
Hampton refusing to criticize the role of the FSA in the Libor scandal, despite fact that the banking regulator did not write to him about it.
Hester gets a laugh from the Commission when he says he doesn’t have a “network of secret informers”.
The Commission has finished questioning.
There was no major news revealed in that session, but the Commission members seemed concerned about how far they could trust RBS to manage their bonus pool in the wake of the £390 Libor fine.