Why banking went from broke to woke after the financial crisis

This is Iain Martin’s weekly newsletter, exclusively for Reaction subscribers.

After writing a book a decade ago about the financial crisis – and the rise and fall of RBS, once Royal Bank of Scotland, now NatWest – I was asked many times at book festivals and in interviews to define the main lesson. 

Was the crash primarily a story of greed? There was some of that, of course, because human beings were involved and greed is a more than occasional  feature of human behaviour. Why did no-one go to jail, other than a few traders jailed wrongly, it now appears, in the unrelated Libor scandal? The answer is almost everything that was done, no matter how annoying or bewildering, was legal.

Financial crises will continue to happen because as a species our optimism bias is so pronounced. When things are going well, and lots of money is being made in new ways or new versions of the old ways, people don’t want to lose out. So inside financial institutions they join in, suppress doubts and go along with the management consensus until it is too late. 

Indeed, the aspect of the crisis to which I kept returning was the destructive role of groupthink.

The Cambridge Dictionary defines it as follows: “The process in which bad decisions are made by a group because its members do not want to express opinions, suggest new ideas, etc. that others may disagree with.”

The Harvard Business Review defined groupthink in a paper last year as “quick agreement around status quo solutions with little discussion or deliberation.” 

It should be noted that Harvard Business School praised RBS extravagantly in a study when the bank was run by Sir Fred Goodwin. This was when RBS was on its way to becoming, briefly, the biggest bank in the world. Then in 2008 Goodwin’s bank blew up. No institution is infallible, not even the mighty Harvard Business School.

Avoiding groupthink entirely in any organisation is impossible, of course. Trying to get the balance right – between order on the one hand and disputatious creativity on the other – is one of the most difficult tasks undertaken by any business or organisation, large or small.

A successful business can be spoiled by the imposition as leader of an autocratic personality who will not tolerate questions, but an organisation in which everything is challenged by members of the team, in which there is no leadership or hierarchy of authority, will not survive or prosper long either.

Equally, a successful business can atrophy if everyone grows too comfortable and there is a lack of energy.

Good and enduring institutions, like the best political systems, are designed with this complexity in mind, in the hope they will find some form of equilibrium, albeit imperfectly.

At RBS, groupthink led to disaster because Goodwin was a talented but overly strong boss contemptuous of dissent. The bank grew way too fast and its management team succumbed to hubris. Executives were scared to speak up, and making too much money to risk losing it. Before 2008, safeguards such as the board and the regulators failed to spot the danger.

Today, groupthink is back in finance. This time it is a form of groupthink centred on morality and sanctimony.

While the last crisis rested on CDOs, or Collateralised Debt Obligations, a financial instrument sold to investors backed by pools of debts and assets that then turned out to be worth less than thought, this time the groupthink relates to a new pair of acronyms – ESG and DEI.

ESG – environmental, social and corporate governance – is the movement designed to force financial institutions to invest only in ways that protect the environment and improve society. Good luck defining that to everyone’s satisfaction.

DEI stands for diversity, equity and inclusion. 

The rise of the ESG movement originated before the financial crisis, but when RBS and numerous other financial firms fell into disgrace the banks became enormously unpopular. Their bosses looked around for a way to prove to taxpayers they cared.

How could they show they were socially responsible, that they had a purpose beyond making money for their shareholders? The answer was to adopt ESG, and then assertive DEI policies, to take what they regarded as a moral stand embodying virtue.

In the last decade this became the dominant ethos in banking and parts of the City. It should be pointed out there are institutions where the bosses are highly sceptical of these developments, though they sensibly don’t say so in public. Such is the potential for a witch-hunt. Who wants to have their office invaded or spray-painted by the eco cult Just Stop Oil if it can be avoided?

There is another factor – the role of HR, human resources departments. They became increasingly powerful as guardians of a firm’s reputation after the financial crisis.

Graduates joining such firms after the financial crisis emerged from university departments that had been captured by politically correct nostrums. They may even have studied a decolonised curriculum and in the social sciences and humanities been exposed to critical race theory. If they found their way into HR – the new hub of power – they could get to work enforcing the bank’s new found values and policies. Even though this would not be the entirety of their work, the scope for a motivated politically correct individual is obvious. It would be a very brave older, senior executive who challenged such thinking.

Did a manager dare make sceptical comments about an aspect of climate change policy? Who signed up to be a diversity champion and who didn’t? Has someone been retweeting JK Rowling? When the Stonewall crew are invited in to lecture, or the racket that is the road show of diversity experts denouncing “white privilege” is paid by management to turn up for a day of indoctrination, who with any sense as an employee with a mortgage or ambitions would dare raise their hand to ask questions that puncture the bubble of groupthink?

In Britain, sceptics in finance also needed to watch out for the regulators overseen by the Bank of England. The BoE was at the forefront of the ESG and DEI movement. Mark Carney, the Goldman graduate from Canada who was appointed as governor in 2012, was an enthusiastic advocate of such policies. On climate change he is evangelical. Any large regulated organisation would need to remember this when choosing a new CEO if they wanted a good relationship with the regulators who can cause them serious problems.

In June 2019, Carney as Governor of the BoE gave a speech calling for greater diversity in banking to prevent groupthink.

The problem with this is not that banking should be shielded from the requirement to be more varied in its recruitment and promotion. Of course its leaders and staff should reflect, and increasingly do reflect, how society looks. Employment and discrimination laws are in place already.

The difficulty is that ESG and DEI became a corporate religion. Although I’m not wild about the word woke, it is the most easily understood name for the new faith. And once something is a religion, with its obligations and sacred tracts, the inclination grows to locate and punish heretics who do not subscribe to the true beliefs.

Enter, stage right, Nigel Farage.

The former UKIP leader revealed recently that his bank account had been closed by Coutts, the exclusive bank owned by NatWest, the renamed RBS. The closure of the account triggered a chain reaction. The BBC reported wrongly that, contrary to Farage’s claims, he had not been picked on because of his political views. It was a commercial decision because he had fallen below the wealth threshold, it was claimed.

Coutts – which now emblazons the front of its offices with politically correct slogans in rainbow colours – requires customers to have £3m in savings with the bank or £1m in loans or borrowing. This approach used to be fine, when the bank stuck to the policy that served its customers well since 1692 – discretion. Now it is in the business of lecturing the rest of us, it stands accused of hypocrisy. 

Farage pressed on. No matter what you think of him, the man is a tenacious campaigner. Cleverly, he put in requests for access to papers revealing what the bank’s staff had said about him and then – why on earth? – committed to paper. The unearthed papers revealed he had been cancelled at Coutts because of his beliefs. So much for diversity of thought.

In the key document, Coutts staff called him a grifter and made all manner of suggestions. It will, I suspect, end up being an expensive document in terms of compensation and replenish Farage’s bank account, wherever the account ends up. 

Rose apologised on behalf of NatWest last week, although that may not be enough.

Thousands of others, cancelled by banks and inspired by Farage’s example, are submitting requests. This will go on for years and although NatWest is getting all the flak for now, it will spread. Many other British institutions will face difficult questions.

In this way, Farage has detonated a bomb underneath the shaky edifice of woke corporate culture.

In a crisis there is opportunity. Hopefully, there will now be the restoration of some sanity in the field of finance. It might encourage worried executives and investors to start speaking out about the dangers, and worshippers of the new corporate religion to engage in some genuinely critical thinking.

ESG groupthink even started to creep dangerously into defence investment: the defence industry has been warning about this for several years. Weapons are bad and war is terrible – right? – so socially responsible investors should cite ESG policy to avoid defence stocks. Some started to. 

And then Russia launched its full scale invasion of Ukraine last year.

War is, indeed, terrible, and defence is a messy business, but if free societies want to defend themselves or deter against autocrats and tyrants bent on death and domination, then you are going to need weapons. Where do weapons come from? They are produced by commercial defence firms that depend on private investment and government purchasing.

The same applies to investment in energy. The fashion is for eliminating fossil fuels from investment portfolios in a time frame that is simply delusional.

Last week, I wrote about the implausibility of the current net zero policy. Renewables themselves are highly extractive yet they are treated as though they emerge from fresh air. If we want a thriving economy and rising prosperity to return then we are going to need a great deal of oil and gas for decades to come to make the transition. The willingness of politicians to believe the opposite – to believe the unbelievable – reminds me of Jonathan Swift’s satire Gulliver’s Travels.  

There are early signs that some voters have seen through it and are prepared to rebel when they are presented with the costs. The Tories held on in the Uxbridge and South Ruislip by-election on Thursday, although they were thrashed in two other seats.

Voters in Uxbridge, in outer London, disliked Ulez, the mayor of London’s scheme to punish those driving older petrol and diesel vehicles. This is not a net zero measure. It is designed to reduce air pollution, a worthy aim. It is an environmental tax though, of which there are many more planned. Since Thursday, Labour has started backing away from excessive greenery and there is a possibility both main parties will start to talk in more realistic terms about the transition to cleaner energy. 

The hope must be that the government and financial institutions observing all this can spot the connections and dial back on the groupthink about energy, defence and wokery. Let’s aim for companies that serve their customers and avoid giving us lectures. Let’s have banks that are neither broke nor woke.

Walking back to happiness

I’m in Scotland seeing family in Paisley, which is why the newsletter is late and landing on Sunday evening this weekend. We took the chance of a break in the weather to get out and walk. There was no time to drive north in search of more serious hills, so we headed for the seaside town of Largs (Paisley-on-Sea it was nicknamed in the 1950s) where our family spent childhood holidays before France called.

Largs nestles below a ridge of hills, the best of which is on the old Brisbane estate. Born in 1773, Sir Thomas Makdougall Brisbane was a distinguished soldier who fought in North America, Flanders and Spain. As a product of the Scottish Enlightenment, his interests were improvement, astronomy and agriculture.

Sir Thomas was a friend of the Duke of Wellington, who recommended him as governor of New South Wales. The city of Brisbane in Australia is named after him. He had a tough time in Sydney and fell victim to political shenanigans, before returning to Scotland in 1825. He died in 1860 and is buried in Largs.

When we reached the top of the hill, the sun came out and the Firth of Clyde opened up below us, seen in a panorama, with the island of Cumbrae and Arran beyond. Thirty miles to the north is a line of mountain peaks and we could just about make out the Cobbler, one of the mountains at Arrochar.

On the water, sailing boats darted about. There were even ferries to be seen in operation. In Scotland, where the SNP has mismanaged the ferries so appallingly, this almost counts as a news story.

Down towards the shore, north of Largs itself, is an old and grand house. From a turret, the owner (I think I know who) is flying a Union flag. For years, throughout the Nationalist terror in Edinburgh, Unionists have felt afraid of making such demonstrative gestures.

Now the SNP is retreating in disarray and I can hardly believe it. Former First Minister Nicola Sturgeon waits to discover the outcome of a Police Scotland investigation into allegations of fraud and potential embezzlement at the party she and her husband ran. This week Sturgeon made a trip to Harrogate (I am not making this up) to attend a crime writer’s festival.

What I’m listening to

At the time of writing, the radio. Test Match Special. The Ashes fourth test. Waiting in vain for play to resume after too much rain. It appears to be all over. Drat.